Why Nonprofits Should Care and What to Do

by Eric Cochling | May 2, 2022

Why Nonprofits Should Care and What to Do

Key Takeaways:

Welfare cliffs and marriage penalties are discouraging people from work and forming families.
The cliffs and penalties may mean that our clients are locked into poverty for much longer than they would be otherwise and despite our best efforts.
GCO has created a platform that allows anyone to see when a particular family can expect to experience benefit cliffs as they earn more money through work.

If you work in a nonprofit serving the poor, you need to know that the government benefits your clients receive are likely discouraging them from working or forming a family, two things that research shows could lift them out of poverty the fastest.

This is an especially tough problem for nonprofits, like GCO, that work to get their clients into good-paying jobs and strengthen their family relationships.

What’s going on?

These disincentives to work are often called “welfare cliffs” and the disincentives to family formation are called “marriage penalties.” Essentially, “cliffs” are generated any time a person receiving government benefits gets a raise at work that causes them to lose more in benefits than they will earn in additional income from the raise. These same individuals can face a similar financial penalty IF they decide to marry. In many cases, they will lose more in benefits than their spouse is able to provide in new income to the household.

While you would think (hope?) cliffs and penalties are rare, they are not. Instead, they are baked into the structure of nearly all welfare programs and many of the cliffs are severe. It’s also important to know that welfare recipients don’t face a single cliff or a single penalty, but they face cliffs and penalties at a number of different points as they have additional income from working or through marriage.

Why does it matter?

For nonprofit leaders, the cliffs and penalties may mean that our clients are locked into poverty for much longer than they would be otherwise and despite our best efforts. For workforce development nonprofits, cliffs could be the underlying reason why your clients don’t pick up additional work hours when they are offered or seem less than excited when they are offered a good promotion. In extreme cases, clients may quit jobs that seemed like a perfect fit simply because they panic when they learn they may lose a major benefit – like housing or childcare.

For nonprofits trying to help strengthen family relationships, marriage penalties may be driving behavior that is otherwise inexplicable, like seemingly happy couples refusing to marry or live in the same home. These dynamics can lead to stress for the couples affected and to a sense that a parent (usually the father) has abandoned the family when, if the system would allow it, he would be in the home. In these cases, children pay the biggest price.

What can you do about it?

Fortunately, we have created a platform that allows anyone to see when a particular family can expect to experience benefit cliffs as they earn more money through work. For nonprofits working with these families, you now have a tool (available for 10 states, with two more on the way) that will allow you to help your clients plan for the future. In some cases, knowing when cliffs are likely to happen will allow your clients to seek a larger raise that will help them bypass or leapfrog a cliff. In other cases, maybe the answer is seeking additional training or certifications that will get your client into a different payscale entirely – one that avoids the cliffs.

In the coming weeks, we will be adding a tool that will allow users to see the impact of penalties on couples who decide to marry. We will also be incorporating a solutions tool that will allow anyone to see how reforming our government benefit programs can actually eliminate cliffs and penalties entirely, giving recipients every reason to pursue work and form stable households.

For GCO, it is this last point – reforming the system – that remains the ultimate goal. In the meantime, we are looking for ways to mitigate the harm caused by the welfare system, so that as many people as possible can escape the system and break cycles of poverty now.

The Success Sequence provides an outline of how to reverse the cycle of poverty in our communities. GCO uses this as a framework for much of our work.

Nicole’s story: How a raise meant losing food stamp benefits for this mom of four

by David Bass | Oct 4, 2021

Nicole’s story: How a raise meant losing food stamp benefits for this mom of four

Nicole had high hopes when she moved her family from a rural area in south Georgia to Henry County in the Atlanta metro. The cost of living went up, but the job opportunities were more plentiful and paid much better: She went from making $25,000 a year to over $35,000 as a corrections officer.

But that’s when Nicole got an unpleasant surprise. Her new salary level meant that her safety-net benefits from the government went entirely away—not reduced, but entirely eliminated. She ended up getting around a $10,000 raise but losing approximately $12,500 in benefits.

“I ended up getting kicked off social services because I made a couple dollars more than the max I could,” Nicole shared.

Nicole is 32 years-old and the single mother of four boys. “I’m the only income. I don’t get child support payments or anything else,” she said.

Losing her benefits—particularly food stamps—was a severe blow, especially during the pandemic. Although she has gotten help from local church-based food banks to help her make ends meet, her situation is still stressful.

To further bridge the gap, Nicole is working as much overtime as possible. But she would need to earn significantly more—to the tune of $25 an hour—in order to fully make up for the benefits she has lost. Even in an economy where wages are quickly rising for many workers, that raise level is a tough haul.

What needs to change?

Nicole encountered what we call the “benefit cliff,” where well-intentioned policies actually prevent people from getting off public services. They make just enough to lose their benefits, but not enough to make up for those lost benefits. The result is a system that keeps people trapped in poverty rather than one that propels them toward self-sufficiency and the dignity that comes with it.

While it is wonderful to see how the community has stepped up to help Nicole fill the gaps left from her losing access to food stamps, not everyone is so fortunate.

So, what’s the best pathway forward? Our goals should be to shore up the safety net for those who truly need it, eliminate these benefit cliffs, and create a system that encourages (rather than discourages) people from climbing the economic ladder. Along these lines, here are three possible ways forward:

The food stamp program could be fully redesigned to eliminate the benefit cliffs.

Separate pools of funds (from public, private, and charitable resources) could be set up as temporary stop-gap measures to get people like Nicole beyond the cliff.

Nicole could work with someone who understands the cliffs to help her strategize a career and pay progression to effectively jump over the cliff.

The Success Sequence provides an outline of how to reverse the cycle of poverty in our communities. GCO uses this as a framework for much of our work.

#DareToClimb media campaign

This is why the Georgia Center for Opportunity (GCO) recently launched the #DareToClimb media campaign. The campaign is designed to raise awareness and share stories of those trapped in government assistance programs that, while well-intentioned, are structured in a way that often does more harm than good. GCO believes it is important to share the stories of these courageous men and women who have overcome obstacles in their lives to achieve self-sufficiency.

To learn more, follow the #DareToClimb hashtag.

** The $35,000 income limit is based on Nicole’s interview with us. Although our calculations show it will be somewhat higher, the impact and stress she is experiencing will be the same.

Inflation’s Growing Problem: A warning shot for Congress

by Erik Randolph | Aug 16, 2021

Inflation’s Growing Problem: A warning shot for Congress

The inflation rate in July—as measured by the seasonally-adjusted Consumer Price Index (CPI)—abated somewhat from June’s rate, increasing at 0.5% instead of 0.9%. But don’t cheer too much yet.

This is known by economists as disinflation, not deflation. The rate came down, but prices are still continuing to climb.

Annualized, the monthly inflation rates calculate to 5.8% for July and 11.4% for June. Both rates continue to exceed the Federal Reserve’s target of 2% annual inflation. Of course, as I discussed in this blog, the Fed’s 2% target rate is too high and compromises Congress’s original goal of promoting purchasing power that would benefit everyone.

Prices are Ratcheting Upwards

When the CPI inflation rate is viewed by its increase from the same month of the prior year, the trend is not good.

Although the increase over the prior year held steady for July, prices were also increasing last year. That is, prices are still 5.3% higher than a year ago when prices were also increasing. The problem is compounding, and prices are ratcheting upwards.

Perhaps not surprisingly but definitely unfortunately, the Fed’s economists appear to have been caught off guard. When Fed Chairman Jerome Powell testified before Congress last month, he admitted as much as inflation has spiked higher than they anticipated. However, he still maintained that the inflation is based on temporary factors that will abate with time.

Mr. Powell’s comments may have been just for the inflation rate, and he may be overly optimistic. In the meantime, we must brace ourselves for an increase in the price level.

To think that the price level may come down is probably unrealistic. That has not happened ever since we gave the Fed the responsibility to maintain purchasing power in 1946 that was dumbed down in 1978 to the weaker goal of “reasonable price stability.” Of course, this policy change happened during the complete failure of federal policymakers in both the Fed and Congress when the nation was suffering from double-digit inflation combined with stagnant economic growth.

Why does promoting purchasing power matter?

Inflation hurts practically everyone. If your wages do not keep up, your purchasing power is eroding.

This is truest for those in poverty, low-income families, and low-skilled labor. They will slip further behind, making income disparity worse and possibly causing Congress and state governments to spend more on safety-net programs that will only fuel inflation higher when Congress funds the increases with even more debt.

Businesses—who need predictability to make good entrepreneurial decisions—generally will also suffer, slowing down economic activity.

Workers will have a harder time keeping up with rising prices and will demand higher wages, only fueling inflation further.

More Cautious Approach to Government Spending is Needed

A likely major cause of the climbing price level is all the governmental debt-based spending to address the pandemic. Further debt-based spending will not ameliorate the problem but exacerbate it.

Congress needs to exercise more restraint and caution now as it considers the expansive spending bills that appear likely to pass. It is very likely that they are setting up the nation for unpleasant economic times, hurting the poorest among us the worst. The growth in the Consumer Price Index is an omen for Congress to take a step back and trim those bills.

Promote Purchasing Power—Not the Minimum Wage

by Erik Randolph | Jul 13, 2021

Promote Purchasing Power—Not the Minimum Wage

How to help working families the most

During a focus group session on working class families we recently conducted at the Georgia Center for Opportunity, Jazmine* made an observation more perceptive than most experts.

Our focus group consisted of working-class African-Americans who did not have a college degree and who were not employed in a managerial position nor on track to become a manager.

Knowing financial stress up close, Jazmine essentially said that either the minimum wage should be increased or the cost of living should be lowered.

Her observation is a perfect segue from my prior blogs on:

the empirical economic evidence against the minimum wage,
why the minimum wage is bad news for small business and the overall economy, and
alternative strategies to the minimum wage that help everyone, instead of just some workers at the expense of others.

The Success Sequence provides an outline of how to reverse the cycle of poverty in our communities. GCO uses this as a framework for much of our work.

Promoting Purchasing Power

The Employment Act of 1946 declared it is the policy and responsibility of the federal government to:

“promote maximum employment, production, and purchasing power.”

Promoting purchasing power means lowering the cost of living, as Jazmine suggested.

Solidified in the 1951 Accord with the Treasury Department, the responsibility ultimately fell to the Federal Reserve to conduct monetary policy as we know it today.

How well has the Fed done with promoting purchasing power? Horribly, quite frankly.

Since 1951, prices have increased 3.4% annually on average, as measured by the geometric mean. In other words, the price level was tenfold higher in 2020 than in 1951. Prices doubled each generation.

It is widely accepted that the poor suffer most from inflation because they spend a higher portion of their income on necessities, and their income growth typically lags others.

For example, according to the most recent mid-year consumer expenditure report from the Bureau of Labor Statistics, consumers in the lowest income quintile spend 82.2 percent of their income on housing, transportation, food, and healthcare, compared to 64.4 percent for the highest quintile. A five percent inflation rate would cost those in the lowest quintile an additional $1,156 for these items on a budget that is already tight, averaging $28,141. A 10% inflation rate would double those costs to $2,312.

Worse, those in the lowest quintile are unable to save for their future, and inflation erodes away the value of the little savings they do have. Consider that on average, those in the lowest quintile purchased only $563 in personal insurance or toward their pensions, compared to $19,736 for those in the highest quintile. This disparity guarantees the poor will be inadequately prepared for retirement or unforeseen loss or tragedy.

Prior to the federal government taking on the responsibility of promoting purchasing power, prices not only remained fairly stable but actually decreased during times of relative peace. Typically, they only increased dramatically during times of war.

This pattern can be seen visually in the accompanying chart using the Consumer Price Index and related data from the Federal Reserve Bank of Minneapolis. For example, the price level increased 24% due to the War of 1812 but then deflated 57% over 47 years until the start of the Civil War, even after accounting for a slight bump up due to the Mexican War.

The pattern was similar for the remainder of the century. Prices increased 74% during the Civil War but then deflated 47% to its pre-Civil War level until the start of the 20th Century.* Although the price level rose somewhat during the progressive era, it was still 30% lower at the start of World War I than at the close of the Civil War.

America’s inflationary policy

Unfortunately, a 1978 law changed promoting purchasing power to become the lame “reasonable price stability,” which is not the same thing.

Over the years, the Fed has allowed inflation as a matter of policy. In 2012, Fed Chairman Ben Bernanke explicitly stated for the first time an inflation target of 2% per year. If the Fed can somehow hold to this target, which it has not been able to do historically, it equates to doubling the price level every 35 years. Last August, it backed away from this policy. Because of all the pandemic spending and monetary expansions, the Fed approved a policy to allow inflation to rise “modestly” above its 2% target.

It is not just the Fed that has shied away from promoting purchasing power. In 1978, and in the midst of the stagflation years, Congress legislated the modest goal that inflation should be 3% or less, but the target rate was supposed to come down to zero percent by 1988 unless it might have impeded employment.

The Fed is not alone to blame for the inability of the federal government to control inflation. Congress’s lack of fiscal discipline resulting in soaring budget deficits place the Fed in a tenuous position to keep interest rates low so federal debt service costs also remain low. Furthermore, recent Fed direct purchases of Treasury debt because of all that federal spending adds to the money supply, eroding—not promoting—purchasing power.

How Congress can better help the average working family

If economics has any immutable law, it must be that you can’t get something out of nothing. This explains why the Consumer Price Index increased 5.4% since last year, as announced today by the Bureau of Labor Statistics. And the rate of increase appears to be accelerating. The monthly rate was 0.6% in May but 0.9% in June. If this June inflation rate persists, and hopefully it does not, we will have double digit inflation. A 0.9% monthly rate equates to an 11.4 % annual rate.

Considering all the recent deficit spending by Congress and expansionary policies by the Fed, expect more of the same, or worse. In fact, according to a survey of economists in yesterday’s Wall Street Journal, “Americans should brace themselves” because economists are waking up to the prospect of higher inflation, expecting “brisk price increases for a while.”

Economic history indicates deflation should be the norm. In fact, innovation spawns increased productivity that allows prices to fall, which should show up as deflation. We have the opposite: productivity gains with inflation. This outcome places the blame squarely on monetary and fiscal policy.

In the meantime, Jazmine and other hard working Americans struggle to keep up with rising prices. Instead of pushing for increases in the minimum wage that help some at the expense of others, Congress needs to renew our nation’s purchasing power policy and get its fiscal house in order.

*Jazmine’s last name withheld for confidentiality.

*This is not intuitive. It takes a smaller percent decrease to offset a percent increase, such as a 43% reduction will offset a 74% increase. For example, suppose you receive a 20 percent pay raise this week, but next week you receive a 20 percent pay cut. Are you back where you started? The answer is no; you are worse off. If your weekly pay was $100, the increase took you to $120, but then your pay cut took you to $96, even lower than your starting point.

Erik Randolph is the Director of Research at the Georgia Center for Opportunity.

Putting Georgia’s employment numbers in perspective

by Erik Randolph | Jun 24, 2021

Putting Georgia’s employment numbers in perspective

Is there any reason not to cheer? Georgia’s unemployment rate dropped to 4.1 percent in May.

Here are three reasons why this looks good for Georgia.

First, the unemployment rate is declining, giving optimism that the economy is bouncing back from the pandemic.

Second, there were only two periods in recorded history when Georgia’s unemployment rate was this low or lower. Starting from 1976—the extent of available data from the U.S. Bureau of Labor Statistics (BLS) on unemployment rates for the states—the first period was between October 1998 and July 2001 when the rate reached as low as 3.4 percent. This period occurred after the long economic expansion of the 1990s.

The other period—from April 2018 to the start of the pandemic—just occurred with Donald Trump in the White House. During this period, Georgia broke its best record by achieving 3.3 percent.

Third, Georgia’s rate is the 16th lowest in the country, beating out 34 other states. For comparison, the United States as a whole has a rate of 5.8 percent rate, considerably higher than Georgia’s.

But wait. Is the unemployment rate artificially low?

While optimism is merited, it is important to put the unemployment numbers in perspective.

Unemployment percentages do not capture those who do not participate in the labor force. According to the BLS, anyone not employed who had not actively looked for a job during the prior four weeks is not part of the labor force. Therefore, any person temporarily not looking for work is not accounted for when the BLS calculates the official unemployment rate. Especially now with all the repercussions of the pandemic, all those potential workers who have been sitting on the sidelines for the last four weeks are simply not counted.

The behavior of labor force participation is a loose link for unemployment numbers. Normally, when economic times are good, sidelined workers and even retirees come back into the labor force, which can push the unemployment rate up. When times are bad, the opposite happens. Workers drop out of the labor force, artificially lowering the unemployment rate.

During the depth of the pandemic, and as expected, the labor force participation rate in Georgia dropped—to 59.4 percent to be precise, compared to 62.9 percent just prior to the pandemic. In terms of real people, there were an estimated 260,575 fewer workers participating in the labor force—who were not counted among the unemployed, to emphasize the point. Participation bounced back some to 61.7 percent, but still there are 40,934 fewer workers in the labor force.

Other ways to measure it

BLS’s U-6 labor underutilization metric is another way to shed light on unemployment. It adds to the unemployed those discouraged and other “marginally attached” workers as well as part-time workers wanting full-time work but cannot find it.

Nationally, the U-6 rate hit a historic high of 22.9 percent in April 2020 representing 36.3 million people. It has since dropped to 10.2 percent representing 16.5 million people. However, in the months prior to the pandemic, the rate was at historic lows—in fact, as low as 6.8 percent. Obviously, while 10.2 percent is far better than 22.9 percent, it is significantly worse than 6.8 percent, representing a difference of 5.3 million workers.

Unfortunately, monthly U-6 data is not available for the states, making any comparison difficult. The BLS currently publishes only experimental U-6 state data averaged over a year’s time.

More useful for the states is the Nonfarm Employment estimates from BLS’s Current Employment Statistics survey. Only two states—Utah & Idaho—have caught up with employment from where they were in February 2020 before the pandemic hit. In contrast, the U.S as a whole is still 5% behind. Georgia ranks 16th among the states and is 4.0 % behind. Hawaii (-14.8%), New York (-9.6%), and Nevada (-8.6%) are the three states furthest behind.

If we use standard economic ARIMA Model time-series forecasting to estimate where employment would have been absent the pandemic, no state is back on track. The United States is 6.8% behind, and Georgia ranks near the middle in 27th place at −6.1%. Utah and Idaho lead the pack being the furthest ahead, while Hawaii, Nevada, New York, California, and Massachusetts trail the pack.

Observations on state differences and policies

In viewing the differences in employment among the states, the more rural states appear to be doing better. The states more dependent on tourism appear to be doing worse. State governments that implemented less severe lockdowns appear to be doing better. To test these observations, we will be running regression analyses to tease out any correlations. We will post the results when completed.

In the meantime, it is important for government to adopt policies that will help businesses to rebound and make it easier for startups. The goal should be not to just lower unemployment but also to bring those sidelined workers back into the labor force.

Erik Randolph is the Director of Research at the Georgia Center for Opportunity.