Americans are wealthier than ever, but social media is full of posts and videos about how the middle class is poor. No wonder an essay by financier Michael Green arguing that the real poverty line in the United States for a family of four is $140,000, not $32,150, managed to go viral. Economists ridiculed this claim, which was based on a fundamental misreading of data and demonstrated ignorance of poverty research. But there are still things to learn from Green’s errors.
Green’s Substack postdelved into the well-known concepts of “the two-income trap” and benefit “cliffs.” The former is largely nonsense, and the latter are very real. One can intuitively understand both by remembering that people generally do not choose to make their families worse off.
First popularized by Sen. Elizabeth Warren (D-Massachusetts) when she was a professor at Harvard Law School, the “two-income trap” posits that the increase in two-earner households that has coincided with the rise in female labor-force participation has not made families better off because their expenses have risen alongside their incomes. Warren’s book alleges that some families have been tricked into being poorer by having two earners, largely because of child-care costs.
Looking at eye-popping daycare rates in areas like D.C. can make that feel true, but if it were really the case that child-care expenses were not worth working full-time to pay for, then one parent wouldn’t work full-time. People just aren’t that dumb.
The truth is that more parents work today than in the past because jobs are better. They are especially better for women, as gender stereotypes have weakened in many higher-paying professions. The opportunity cost for women to stay at home is larger than it used to be, because they can now access the highest-paying jobs.
Whether having both parents work is worthwhile is up to each family to decide. If parents value not having their child in daycare more than the extra income they could make by working, they are free to stay at home.
The same economic logic is also vital to understanding benefit cliffs. People will choose to work less than they otherwise would if working more makes them worse off. People don’t work an extra hour, for example, if doing so means they lose out on more than an hour’s worth of government benefits.
That happens constantly with entitlement programs, welfare and the tax code. For years, poverty researchers have known that there are points along the income ladder at which welfare recipients face effective marginal tax rates of 100 percent or higher due to benefit phaseouts. It’s perfectly rational to stay on the dole when working more hours or seeking a raise means they’ll have less money at the end of the month.
That’s the opposite of what welfare policy is supposed to be doing. The official poverty rate in the U.S. is 10.6 percent for all people, but only 4.4 percent among workers. Among full-time, year-round workers, the poverty rate is just 1.8 percent. To the degree that government policies are getting in the way of people working full-time and year-round, they’re getting in the way of families escaping poverty and dependency.
Benefit cliffs are a serious problem for poor, working families, not the middle class. Solving them requires technical policy solutions, not flashy commentary that sparks social media outrage. People will choose different working and family arrangements for many reasons, but government policies that punish earning more money should never be among them.
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