Conditional Payments

Mexico and Brazil have come up with forms of social welfare that pays the poor for meeting certain conditions, hence the name conditional payments (great article). These conditions can include keeping your kids in school, going to get medical checkups, going to classes on disease prevention, etc. The government figures its better to pay $1 to keep the kid in school than spend $5 to arrest them a few years down the road. The sums of money are tiny ($13 for every month a child is in school, $19 if you're 16 or over) but to a poor family it can double their income. The program is highly scrutinized and is showing very real and positive benefits. Poverty in Brazil has fallen from 22% to 7%. Mexico's version of the program has raised the numbers of kids entering junior high by 42% and high school by 85%. These are of course very real examples of direct stimulus - they're transfer payments.

I think you'd be hard pressed to find someone in America right now that thought our country was doing alright economically, and naturally one would assume that this means something should be done to correct the issue - which in this case is an unemployment rate of nearly 10% (about 4% is considered the natural rate currently).

Recently a bill passed approving 800 billion (that's 800,000 millions) in tax cuts that extended the Bush era tax cuts. This is, of course, more than the original stimulus received (which was roughly 40-60% tax cuts itself). And of course by taking away federal revenue - that's what a tax cut is - revenue declines and you go into debt if you don't slash spending. Of course that's not so easy. It turns out that if you take our defense spending, medicare/medicad, and social security you're only left with 20% of the budget. So have fun firing teachers, letting roads crumble further, and ceasing funding for scientific research. Why is any of that political? Doesn't everyone like education and roads?

Anyways, the whole point of this is that the legislative branch has two options for helping the economy. They can either cut taxes or spend more money. They both create debt so in essence they're the same thing. My complaint about tax cuts is that 70% (the bottom 50% pay 2.7%) of federal income taxes are paid by the top 10% of income earners, so if you make tax cuts guess who it goes to? When wealthy people get money they tend to save it which is not the intended outcome if you're trying to stimulate an economy.

This chart shows the percentage of Federal Income Taxes paid by each income group:

Year Top .01%Top 1%Top 5%Top 5-10%Top 10%Top 10-25%Top 25%Top 25-50 %Top 50%Bot 50%
2001 16.06%33.89%53.25%11.64%64.89%18.01%82.90%13.13%96.03%3.97%
2002 15.43%33.71%53.80%11.94%65.73%18.16%83.90%12.60%96.50%3.50%
2003 15.68%34.27%54.36%11.48%65.84%18.04%83.88%12.65%96.54%3.46%
2004 17.44%36.89%57.13%11.07%68.19%16.67%84.86%11.85%96.70%3.30%
2005 19.26%39.38%59.67%10.63%70.30%15.69%85.99%10.94%96.93%3.07%
2006 19.56%39.89%60.14%10.65%70.79%15.47%86.27%10.75%97.01%2.99%
2007 20.19%40.41%60.61%10.59%71.20%15.37%86.57%10.54%97.11%2.89%
2008 18.47%38.02%58.72%11.22%69.94%16.40%86.34%10.96%97.30%2.70%

If you give money to the less wealthy or even poor people they spend it because they have to. This of course begs the question why the not wealthy (see: the vast majority of Americans) would ever support tax cuts. I think the answer has, as it often does, to do with the perception of fairness.

To come full circle - why does America go for tax cuts that benefit the wealthy as opposed to inexpensive transfer payments that would help a greater percentage of our population and be more effective? Food stamps have long been THE most effective and efficient means of stimulus to the poor. Again, the answer seems to be the perception of fairness.