Tuesday, November 8, 2016

Growing the Welfare State in Wyoming

On this the fateful election day of 2016, when the country ponders whether to part completely with the founding principles of our constitutional republic, or to give those principles another chance, it is a good time to think a bit about what Wyoming would look like if the proponents of unabridged government actually ran this state. 

To many Americans in general, and to Wyomingites in particular, the Scandinavian welfare state seems like a very distant fairy tale that has little if anything to do with our daily lives here out on the prairie. But the truth is, that welfare-state model has already made big inroads into our state, both in terms of strictly federal programs such as Social Security and Medicare, and in the form of all the entitlement programs that the federal government and the state pay for together. 

The federal funds flowing into the state budget easily exceed $1 billion in any regular fiscal year. Of that money, approximately 80 percent is dedicated to entitlement programs of one kind or another. If we add to that what the state itself spends on the same programs (to match the federal funds and maintain federal commitment) the total amount spent on entitlement programs in Wyoming runs close to $3 billion per year.

It is important to remember that entitlements are not just cash programs such as Temporary Assistance to Needy Families. An entitlement program is any kind of government spending that:

a) provides a cash handout or a service based on individual eligibility;
b) defines eligibility as a person's living conditions but not her efforts toward self sufficiency; and
c) caps eligibility independently of, or adversely to, her income.

In plain English, an entitlement gives money or a service either to poor people or to everyone.

Under this definition, K-12 education is an entitlement. So is Medicaid. The common denominator for all entitlement programs is that they are provided under the eligibility definition above and funded independently of who benefits from the entitlement. Therefore, the ideological meaning of an entitlement program is that it redistributes income or consumption between individual citizens. 

Economic redistribution is the hallmark of egalitarianism. Hence, the welfare state is an egalitarian political project. With almost $3 billion of the state's total annual spending going toward economic redistribution, it is fair to say that the egalitarian welfare state is alive and well in Wyoming today. 

In fact, if we look at a checklist for what the welfare state normally provides for its citizenry, we are closer to the completion of a Scandinavian welfare state than we are different. The state of Wyoming provides:
  • Universal, public K-12 education to all children;
  • Income security based on a relative poverty concept*;
  • Health care to low-income citizens; and
  • Public housing.
On top of that, the federal government provides comprehensive retirement security. This leaves relatively few programs to add to the welfare state in order to "complete" the Scandinavian model:
  • Universal, mandatory child care;
  • Universal, single-payer health care; and
  • General, paid family leave.
All these three programs are on the federal agenda if Hillary Clinton becomes our next president. Not only has she made the commitment to them at different points throughout her career, but as president she would hire, as her chief economist, a woman by the name Heather Boushey, who is one of the most radical economists in Washington, DC. Boushey is an adamant proponent of the Scandinavian welfare state.

There are two models for how an egalitarian-minded president would want to complete the Scandinavian welfare state in the United States: by federal programs, or by offering new federal funds to states and let the states build the programs themselves. 

Ever since Lyndon Johnson's War on Poverty, the federal government has preferred the latter model. Let us assume that this would be the model for the three entitlement programs that Scandinavia has but Wyoming has not yet made the acquaintance with. 
It is probable that a federal push to complete the welfare state would begin with the paid-family-leave program. Variations of it have already been put in place, or are being considered in a few states, among them New York. The District of Columbia has developed a pilot program with "enthusiastic" support from the Obama administration; since that model has support from the federal government, let us use that as a template for what a paid-family-leave program would look like in Wyoming.

Here are the components:

1. Every employed person in Wyoming would be eligible for eight weeks of paid leave per year, for reasons such as personal sick leave; to care for a sick child or other family member, including an elderly parent; or for other personal or family-life related reasons defined by government.
2. During the paid-leave period government takes over compensation of the individual, who gets 100 percent of the first $1,000 in weekly earnings, then 50 percent of any earnings above that amount.
3. The program is funded by a payroll tax equal to one percent of a person's wage or salary.

To start with the tax, one percent of all wages and salaries earned in Wyoming would amount to $142.6 million per year (using earnings data from 2015). This is the amount that the state of Wyoming would collect each year from all employers, private or public. (We assume that government employees are enrolled on the same terms as private employees, an assumption that has been debated among American proponents of this system but is in accordance with the "template" model from Scandinavia.)

The idea, now, is that the $142.6 million is going to cover the expenses that the state will have for people's applications for paid family leave. 

There is just one problem. Bear with me as we drill down to its core. Under the terms of the DC paid-leave program, which again is our template, all workers within a jurisdiction are eligible. That means people who live in other states would both be paying the tax that funds the program, and enjoy its benefits. This puts the total amount of eligible persons at 302,286 (again 2015 numbers). 

Dividing total wages and salaries by the number of eligible persons, we get an average weekly income of $907. This is the amount that, on average, the paid-family-leave program is supposed to cover for a period up to eight weeks per eligible individual.

When you design entitlement programs and you try to estimate their costs, you have to find the defined entitlement value. This is the maximum amount of money that an eligible person has the right to collect from the entitlement program. In the case of a paid-leave program in Wyoming, the defined entitlement value is $7,257 per eligible individual, or $2.19 billion per year. 

This is, again, the maximum cost of the program. Realistically, not everyone will take eight weeks off - though we have to assume they do in order to make sure the program is properly funded - but even if we keep that in mind, we end up with a problem when it comes to funding this entitlement program: the defined entitlement value is more than 15 times higher than the estimated tax revenue that is going to fund the program.

In other words, a new entitlement program granting all employed persons in Wyoming eight weeks of paid family leave will be monumentally under-funded. How do we solve this? 

Federal funds. In order to run a paid-family leave program, Wyoming would have to receive up to $2 billion per year in new federal funds. Even if people only cashed in half of the paid leave they are eligible for, Uncle Sam would have to pony up $1 billion in new federal funds for Wyoming.

At the national level, the defined entitlement value of a paid-leave program, as described here, less the one-percent payroll tax, would cost taxpayers almost $900 billion per year. 

Even though this is - for now - a hypothetical reform, it is important to consider for us here in Wyoming. Sooner than we expect, we could find ourselves having to cope with a major new item in the state budget, with repercussions for state finances, taxpayers and employers that we have not yet even begun to explore. 

Every time a Democrat president has taken office in the past half century, he has made new efforts to expand the welfare state. Republican presidents have certainly helped them; Reagan signed several bills to expand entitlement programs, and Bush Jr. fought hard for the single biggest Medicare expansion since the program was created. Given this trajectory of a steadily expanding welfare state, it is only reasonable to expect new programs coming our way. And to be prepared for what they mean, fiscally, socially and politically.

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