Exclusive Commentary

Obama’s 2015 Budget: The Good and the Bad

Alex Brill, American Enterprise Institute - Posted March 17, 2014


After fifty years of the War on Poverty, we have neither a clearly defined mission nor a consensus on policy options. We don’t even have a good way to measure poverty. President Obama’s fiscal year 2015 budget is an example of the jumble that U.S. anti-poverty efforts have become, featuring both ill-conceived and promising policies.

The official poverty statistics indicate that there has been virtually no progress in reducing poverty in the United States in half a century, with the poverty rate – a measure of income – stuck at around 15 percent. But, as my colleague Nicholas Eberstadt has explained, income is a lousy measure of poverty, and consumption – roughly twice income for the poor – is rising faster than income itself. Given our inability to accurately quantify poverty, it’s not surprising that many of our proposed solutions are often poorly-targeted or confused as well.

As a centerpiece of his agenda to reduce inequality and poverty, President Obama has proposed in his most recent budget a steep increase in the federal minimum wage. He also recently signed an executive order requiring all federal contractors to pay their workers a higher minimum.

Undeterred by the failure to secure the more modest minimum wage increase included in last year’s budget, Obama is now asking Congress to set the minimum wage at $10.10 per hour. While raising the minimum wage may sound like a good idea on the surface, and obviously does benefit some workers, such a policy comes at a cost. The change would make it more difficult for companies to hire low-wage workers and does little to help low-income families. The Congressional Budget Office recently estimated that increasing the minimum wage to $10.10 would cost roughly half a million jobs.

If President Obama is serious about a minimum wage policy aimed at assisting a segment of our economy that has suffered greatly in the last few years, he should consider my colleague Michael R. Strain’s proposal to lower the minimum wage for long-term unemployed individuals to $4 per hour and offset the difference with a federal wage subsidy. This approach could result in a net positive impact on job creation for a group who, as Strain explains, represent “arguably the most immediate social and economic challenge facing the U.S. today.”

While President Obama’s minimum wage proposal may be little more than political gesturing, another provision in the budget holds more promise: expanding the Earned Income Tax Credit (EITC) for childless workers by doubling the current benefit to a maximum of $1,005 and making younger workers eligible.

The president’s EITC expansion is crafted to combat poverty by encouraging work among a demographic that has been disproportionately exiting the workforce. Conservatives, long supportive of the EITC generally, are expressing increasing interest in the type of expansion President Obama proposes. If Congress pursues the president’s proposal, policymakers should carefully consider raising the income level at which an individual eligible for the EITC receives the maximum benefit (currently just $6,570) instead of Obama’s proposal to double the subsidy rate.

I have outlined here just two provisions in a broad set of policies that the president has designed to help the less fortunate. These policies are a mix of good and bad. A minimum wage hike would hurt hundreds of thousands of people, is poorly targeted, and weakens labor markets. Broadening the EITC, however, is a far more promising proposal. Many commentators have concluded that the president’s budget is dead on arrival, but if Obama emphasizes good policies over politically motivated ones, he might eke out a legislative win—and one that actually furthers the stalled War on Poverty.

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Alex Brill is a research fellow at the American Enterprise Institute.

Spotlight also featured an alternative take on the president's budget by Thomas Hungerford of the Economic Policy Institute.

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