Welfare works – new research makes federal Budget look rather short-sighted

Babies are a problem for economics.

Economics says we must reward people for effort. If you train to become a teacher then work hard, society rewards you. This is both morally sound and economically important.

The flipside: if you could work but sit on the couch, you get nothing. This is both morally sound and economically important.

The moral and economic imperatives are aligned perfectly. Right up until birth.

Children crack the perfection of this theory. A child born into a poor household will be punished by material poverty they do not “deserve”. A child born into a rich household will be rewarded in ways they have not earned.

So we muddy the moral and economic imperatives for generation 1, in order to secure the moral and economic imperative for generation 2. A trade-off. 

Decisions about this trade-off are shaped by a number of beliefs.

1. Does providing welfare hurt incentives for work?

2. Does raising taxes to pay for welfare hurt the economy?

3. Does welfare really help the second generation, or foster a culture of entitlement and dependency?

The recent Budget by Messrs Hockey and Abbott reflects beliefs on all of these. It took an axe to welfare payments of all sorts.

So it was extremely timely to see new research (released May 12 by the US National Bureau of Economic Research) on the third point above – the effect of welfare payments on the second generation.

Researchers exploited a natural experiment to see the long run effect of cash payments to poor single-parent families in the United States. They compared the offspring of mothers accepted into a payment program with those rejected.

A stark effect is revealed:

“Male children of accepted applicants lived one year longer than those of rejected mothers. Male children of accepted mothers received one-third more years of schooling, were less likely to be underweight, and had higher income in adulthood than children of rejected mothers.”

The positive differential comes despite the boys who were rejected from the program being slightly better off on average prior to the government intervention. That means the effects are, if anything, likely to be an understimate. (The research is unable to track results for females over the long run because of their tendency to change their names. The use of a very old program allows them to more fully collect data on longevity.)

“While conditions today differ significantly from those at the beginning of the twentieth century, three important similarities remain. Then and now, women raising children alone (whether divorced, unmarried, widowed, abandoned, etc.) represent the most impoverished type of family. In fact, the income gap between children in two-parent versus single-mother families has only grown over time”

This research is very timely.

The 2014 federal Budget cuts a payment that goes to single parents: Family Tax Benefit Part B. The government has not only capped the rate of the payment from 2014 but reduced eligibility. Parents will now be cut off when their youngest child turns 6, not when it turns 18.

The Budget replaces Family Tax Benefit Part B with a new allowance, worth $750 per child per year. That will work out as less for many smaller single parent families. Family Tax Benefit Part B was worth up to $4,172 a year.

Single parent families will “manage” – buying cheaper groceries, scrimping on clothes and driving less. But these impacts add up. The cut to their incomes will likely be felt by their children for a long time, in educational attainment, income, and even longevity.