Published on October 15, 2013

OTHER VOICES: What would Milton Friedman think of shutdown debate?

(Crain News Service photo)
Diane Whitmore Schanzenbach

By Diane Whitmore Schanzenbach

CHICAGO (Oct. 15, 2013) — Milton Friedman, one of the most influential economists of the 20th century, has entered the pantheon of conservative thinkers.

Indeed, during the financial crisis and the resulting bailouts, many conservative congressmen and pundits were asking, "What would Milton Friedman do?"

But apart from monetary economics, Mr. Friedman also was deeply concerned about social welfare. His proposal for a negative income tax is widely considered by economists to be the ideal way to alleviate poverty. He believed that assistance should operate through the market without distorting or impeding it, and assistance should be targeted at individuals because they are poor, not because they belong to any particular group, such as the elderly or disabled. It should encourage and reward work while establishing a floor below which no individual's income would fall.

Milton Friedman's proposal for a negative income tax is widely considered by economists to be the ideal way to alleviate poverty.

Mr. Friedman advocated distributing anti-poverty benefits in the most efficient, fungible manner possible—cash. We come pretty close to his ideal system through the combination of the earned income tax credit (EITC) and the food stamp program. And yet conservative politicians are decrying this very program simply because it's working exactly the way it was set up to work.

Most of the work of poverty relief is done through the EITC, the cornerstone of the U.S. anti-poverty program. It is the largest cash transfer program for poor families, lifting 4.7 million children out of poverty each year. For each dollar that a low-income worker earns, the EITC provides a subsidy so that the worker's take-home pay is more than a dollar. This provides an incentive to join the labor force and increases income levels among workers.

Perversely, though, high unemployment and stagnant job growth during the recent "Great Recession" undermined the ability of the EITC to function in its safety-net role because if there are no earnings, the EITC provides no subsidy. That is probably why Mr. Friedman recommended the establishment of a consumption floor — that is, some minimal level of income available to everyone regardless of their employment status — even though money for nothing serves as a disincentive to work for some.

This consumption floor comes through the food stamp program, recently renamed the Supplemental Nutrition Assistance Program, or SNAP. It provides meager benefits in the form of food vouchers to those with no income—raising resources to a level equal to about 20 percent of the poverty threshold for a single person. Once a family has earnings, the program dovetails nicely with the EITC, reducing benefits at a moderate rate so that an extra dollar of wages always results in at least an extra dollar of income.

Of course, Mr. Friedman would prefer the benefits to be paid in cash instead of consumption-distorting food vouchers, but the best evidence is that this distortion is relatively minor. Low-income families typically purchase food first, regardless of whether they receive food vouchers or cash. To them, food stamps and cash are essentially equivalent.

Now some conservatives in Congress are attacking this program because its participation and costs have skyrocketed. But this indicates that the program is working, not that it has failed. The program has grown because it is serving as the modest consumption floor for those who have no work. Once the economy is back on track, the EITC once again will be positioned to encourage work and increase incomes.

The best way to reduce the cost of SNAP is not to amend its rules—but to increase economic growth and reduce unemployment.


Diane Whitmore Schanzenbach is an associate professor of social policy at Northwestern University in Chicago and a research associate at the National Bureau of Economic Research. She wrote this opinion piece for Crain's Chicago Business magazine, a sister publication of Tire Business.


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