How the American Middle Class is Being Ripped Off by Entitlement Programs

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Niccolo and Donkey
Is America's Entitlement System Ripping off the Middle Class?

The Atlantic Wire

Uri Friedman

December 10, 2010

Does a one-parent family of three, making the minimum wage of $14,500 a year, have more disposable income than a family earning $60,000 a year?

That's the provocative claim made by pseudonymous blogger Tyler Durden at the popular finance blog Zero Hedge. Durden produces a chart that compares inputs like income, payroll and federal income taxes, child care costs, and welfare benefits from programs like Medicaid and the Children's Health Insurance Program for theoretical families of various income levels in Mississippi.

The calculation yields an "economic benefit" of $37,777 a year for the family making minimum wage but only $34,366 for the family making $60,000 a year. The analysis also indicates that a family provider working only one week per month at minimum wage will make 92 percent as much as the provider earning $60,000 a year as a result of savings on child care and Medicaid's low deductibles and copays.

Durden concludes:

America is now a country which punishes those middle-class people who not only try to work hard, but avoid scamming the system. Not surprisingly, it is not only the richest and most audacious thieves that prosper--it is also the penny scammers at the very bottom of the economic ladder that rip off the middle class each and every day, courtesy of the world's most generous entitlement system.​

Curiously, Durden attributes the analysis to a Wyatt Emmerich at Mississippi's Clevelend Current but doesn't link to the original piece, and the Wire could not locate it. A search of The Cleveland Current's website yields no record of either the article or the author. Nevertheless, economists and statisticians are dissecting Durden's bold claim:
  • The Calculations Appear Incorrect, states economist Tyler Cowen at Marginal Revolution: "Should the Medicaid and CHIP benefits of the poorer household actually be valued--to the user-- t $16,500 a year? (Is that number coming from some kind of cost basis? If so, is it adjusted for the age of the Medicaid recipients to rule out nursing home expenditures?) Is the $60,000 per year family receiving employer-supplied health insurance? The assumption seems to be that they do not." Yet Cowen admits that "even if you make adjustments this is a scary comparison. I'd like to see a more exact calculation of the implicit marginal tax rates of the poor, as they climb from say 15k a year through the 60k range."
  • If Durden's Right, Why Aren't Middle-Class People Taking Low-Income Jobs? asks the statistician Kaiser Fung at Numbers Rule Your World: "If we concede that the middle-income person would end up with less disposable income than the lower-income person, then we'd expect that the middle-income people will take lower-paying jobs so as to increase their disposable income. But I have not seen reports of such reverse social mobility. Theory needs to fit reality." Fung also questions Durden's implicit assumption that "poverty is a problem of misconstrued incentives" and that "poor people would not exist if we had the right incentives in place." Most low-income people, Fung submits, don't exploit every loophole in the system to get government money.
Well, People Can't Typically Choose Between a Minimum-Wage Job and a $60,000 Job, counters Andrew Gelman, a Columbia University statistics professor: "The short answer to, Why don't people quit their jobs and work at minimum wage?, is that their working conditions would be less pleasant." Gelman adds that Durden's analysis is presenting a hypothetical calculation of what someone could do rather than reporting what is actually happening among low-income workers.