Confessions of a Wayward Academic

by Tom Corbett

  Before discussing child support further, let us look at some of our other ideas. The concept of the Earned Income Tax Credit (EITC), once having been planted in the state public arena, eventually took hold and became law in Wisconsin. I don’t recall us doing much further work on the idea, I suspect it sold itself. The EITC provided a refundable tax credit to low-income workers. The return increased proportionately to a pre-established level of earnings (a kink point) before beginning to decline to zero as earnings increased further (a break-even point).

  Some of the virtues of the EITC are as follows. It is administered through the tax system and thus does not require an expansion of the dreaded welfare bureaucracy. By tying the state EITC to the federal program (the local version would be a percentage of whatever the federal refund was), its administration was relatively efficient. It only went to working low-income families with children though; years later, a small version for single workers was introduced by the feds. Thus, it was tied to work and was believed to encourage labor market participation. This appealed to conservatives. Finally, unlike cash welfare, people could combine earnings plus the federal and state EITC benefits (up to a point, at least) and have a legitimate shot at escaping poverty. This was less true of conventional cash welfare assistance.

  There were downsides as there were with all reform ideas, even the appealing ones. It increased the “error rate” among tax returns. I have heard U.S. Treasury officials claim that it is the single most error prone element of tax returns. Many low-income workers did not think they needed to file a tax return, so it took a massive marketing effort to spread the word that doing so was to their advantage. The program was suspected of discouraging marriage since two-earner couples filing jointly may earn too much to get a refund while they would as non-married single filers. Finally, the economists worried (they are a worrying lot) about work being discouraged during the phase out range; particularly when other benefits like Food Stamps, might also be facing cuts during that same earnings range. What economists called marginal tax rates could exceed those faced by millionaires even back then, before we started redoing the tax code to give unconscionable tax breaks to the Koch brothers, the Walton family, and filthy rich hedge fund managers. Some of these issues were not fully appreciated at first, and the attraction of this concept remained reasonably high throughout this period.

  At this point, let me interject a vignette that perfectly illustrates the chasm between the world of the policy wonk and the world where real people reside. One day, the welfare director of a smaller northern Wisconsin county accosted me. I think this was in a bar and back in my drinking days, so my judgment might not have been the best. “Tom,” she said excitedly, “would you please come up north to give a talk to a group of welfare directors and county board chairs about the welfare study and the report’s recommendations.” Her request made sense. Counties back then had a budgetary stake in the welfare system and would (or should) be interested in what kind of mischief we were cooking up. Though my instincts told me that “this is not good,” she wore me down after some more abject pleading and perhaps a couple more drinks. I should have stamped out that people-pleasing instinct I inherited early on in life.

  Shortly, I was looking over the audience. I knew the welfare director part of the audience well…the county board chairs were a different animal. They struck me as old, white, male, and sporting a demeanor of mistrust across their faces. Too many of them looked as if they had just taken a break from working their alfalfa field and could not wait to get back to doing something worthwhile. I could see it in their eyes…surely this Communist sympathizer from Madison (a known den of left wing nut cases) had nothing of note to say. Bravely, however, I launched into my talk with soaring rhetoric and sweeping vision. The plan, if adopted, would transform the very foundations in the way we help poor families. I was so moved by my rhetoric that tears were forming in my own eyes.

  Perhaps I should have paid more attention to the glazed eyes out there and the furtive glances at their watches. It eventually dawned on me that the noon hour was approaching. Oh my god, I was keeping them from lunch and, more importantly, the bar. I finally wound down to polite applause, the kind that says, “damn glad that is over.” Well, I mused, this was at least better than facing that bunch of social workers early in my state career. My solicitation of questions was met with deafening silence. Finally, a grizzled board chair tentatively raised his hand. “Yes,” I responded enthusiastically. “Well,” he started, “I don’t understand a lot of what you were saying but I can see that if a young girl gets pregnant the first time, we give her a little help. On the other hand, if it happens a second time, we sterilize her.” Uh-uh, I think I might have missed this audience by just a smidge.

  Try as I may, I could not recall one mention of sterilization in our report or in my remarks. I recalled, though, that this is exactly what happened to my wife’s aunt in northern Minnesota back in the 1930s. She had a child out-of-wedlock and St. Louis County had her sterilized. After a couple more anemic questions and responses, someone gave a signal and the rush to the bar was on. Fortunately, I was not between them and their destination or my career as policy wonk would have come to a bloody end as my body was ground ingloriously into the floor. Many of my experiences result in personal epiphanies and this talk was no exception. In the future, I would never underestimate just how far my world is from the real world. As I would repeatedly tell my future students that what we consider to be the real world is vastly overrated. Avoid it at all costs, not leaving the protection of the university is one way of doing just that.

  One other lingering piece of business from the report was the use of wage bill subsidies. These are subsidies to employers for hiring workers whose human capital or motivation might be less than that of a typical hire. Longer-term welfare recipients, those applicants with mild physical or mental impairments, others with criminal backgrounds or checkered employment histories might be targeted by these efforts. Economic theory would argue that a subsidy of the wage costs to employers would compensate for perceived deficiencies in an applicant, resulting in a positive marginal productivity contribution by the otherwise disadvantaged employee. Now that is a mouthful of jargon. Put more simply, lousy job applicants would look better if they cost less to the employer in wages. Some extended the basic argument by suggesting that the credits be generally available in softer labor markets to spur hiring that might not otherwise take place. When profit margins are squeezed, the availability of a wage subsidy might help maintain the demand for labor that would not otherwise exist given overall economic conditions. All this certainly sounded good on paper.

  Variants of the wage bill subsidy concept flowered during this period including the New Jobs Tax Credit, the Targeted Jobs Tax Credit, the WIN (Work Incentive Program, notice they avoided the more accurate acronym of WIP) credit program. I think there also may have been a credit program for hiring displaced race jockeys from Lower Bessarabia. The problem was that we were hearing rumors on the policy grapevine that these initiatives were undersubscribed. That is, they were not being used as often as expected. Could economic theory be flawed? Perish the thought.

  The question did intrigue me, however, though the thought crossed my mind that I should consider getting a real life as opposed to worrying about such things. Perhaps I should finish up my degree. Unfortunately, silly impulses to do the wise thing never stayed with me long. Be that as it may, I decided to look at this conundrum more closely. Now, economists generally prefer observational studies using large data sets and fancy econometric tools for teasing out causality. Unfortunately, I always had trouble with things like basic algebra. I could never figure out how long it took the boat captain to eat his lunch when the river was flowing in one direction at Y miles per hour, and the boat was chugging along in the opposite direction at Z miles per hour. Therefore, I concluded we should do something different. Let’s ask employers directly! I can still hear the cries. This man should be shot for academic h
eresy.

  Most acolytes of the dismal science would scoff at this approach. People lie. They give socially desirable responses. They cannot be trusted. Observed behavior, not verbalized intent, was the best path to the truth. Only devotees of the lesser pretend sciences, like sociologists and social workers, would ever ask people direct questions. As someone who had no ego left to defend, sarcasm was lost on me. I wanted to find out what was on people’s minds.

  With help from the Wisconsin Labor Department, we went about trying to answer that question. Stan Masters, an open-minded economist and IRP post-doc, signed onto the project along with Jim Moran, a Social Work doctoral student. Then we developed a complicated set of survey instruments including brief telephone surveys, in-depth personal interviews, focus groups, and so forth. We picked random samples from carefully selected sample frames representing sectors of the economy likely to use such subsidies. Like most people who spend their lives desperately avoiding reality, I found the opportunities to interact with real people surprisingly stimulating.

  When we pulled all the data together, the picture was clear. I will reduce a rather complex narrative down to a simple story. Tax credits often did not work because the person doing the hiring was not the same person who worried about the firm’s taxes. The former wanted the best applicant possible. If the tax person later found that a potential hire was eligible for a credit, great. In such a situation, the subsidy had no influence on the hire. It was a mere windfall to the employer, an unexpected benefit.

  Even when the hiring decision and the wage-subsidy decision were codetermined, there were numerous issues. The largest problem involved stigma. If an applicant walks into an interview with a voucher in hand (used in some programs), too many employers told us this would set off a red flag. What is wrong with this person? Why does he or she need a subsidy? Many told us a variant of the following, no subsidy was worth hiring someone who would be unreliable, who would offend their customers, who would destroy their capital machinery, or who would unintentionally (or even intentionally) burn their business to the ground. Sometime later, our conclusion was verified by a true experiment in which a random sample of applicants bearing a wage subsidy voucher, which they showed to hiring supervisors, were less likely to be hired than those applicants without the subsidy.

  The other big problem was the stigma associated with government. There were widespread feelings that participating in the program would be labor intensive, involve crushing red tape, and worst of all, would result in government looking over their shoulders. Again, a common refrain was that if I signed on, surely the government would tell me that I can’t fire this person who just burned down my business and put me on food stamps. For me, the results persuaded me not to push the wage bill subsidy notion in Wisconsin even though we had spoken positively about the concept in our report.

  My parting shot to state officials was that even if what I called “naked’ subsidies did not work well (a subsidy that is not accompanied by any other information on the client from the sponsoring agency), work on developing the use of subsidies along with direct employer contact might be worth a try. Interacting with employers about specific clients might counteract general suspicions and stereotypes. But I would let others do the pursuing on that one. Sometime down the road, Sheldon Danziger pulled me aside and said that Gary Burtless, a Brookings scholar and IRP affiliate, had mentioned how useful he thought that wage bill study was. I respected Gary immensely, one of the brighter people I have met in this business, so this was high praise indeed. I got to know him much better a decade down the line when we worked together on revising the official poverty measure.

  We now return to child support. Some of the best fun in the aftermath of the welfare study involved a push to reform the child support system in Wisconsin. This initiative started out small, but eventually evolved into a multifaceted set of reforms that, on occasion, erupted into fierce stakeholder debates, political controversy, and near-death experiences for some involved. The welfare wars were soon to pick up in intensity. I cannot do justice to the whole story here so will only touch upon selected highlights.

  The core set of child support reforms, as first articulated by Irv Garfinkel, contained three main elements. I will start with the most controversial. Government should assure the payment of child support. That is, if government failed to collect what was due, then a guaranteed amount (set in law) would be forwarded to the child(ren). This “assured” child support payment, as it came to be called, was not without precedent. Variants could be found in a couple of Scandinavian countries and Harold Watts, first IRP director, apparently had floated a similar concept about two decades earlier.

  Before the audience could scream about government overreach and excessive program cost, Irv would move on to his collection-side reform ideas. First, we needed a better way of setting child support amounts. The existing approach was subjective, incomprehensible, and largely based on who had the better lawyer. Awards varied from case to case on no transparent basis. With so much subjectivity, those expected to pay often did not, partly based on the notion that they were getting hosed since they knew other noncustodial parents in similar circumstances who paid much less.

  After much thought and study, we proposed that a simple proportional formula be adopted. Absent parents would pay 17 percent for one child, 24 percent for two, 27 percent for three, and so on. Some modifications were made for shared custody arrangements, but the basic approach was highly simplified in most cases. When in place, this approach would respond to variation in earnings or cessation of earnings. After all, 17 percent of nothing is nothing. The percentage approach also would ensure that children would enjoy levels of support commensurate with what they enjoyed before the family dissolution.

  The next step was to collect what was owed more efficiently. Existing practice would simply order the absent parent to pay. When they did not, a common occurrence, they would be warned; or a lien imposed on their earnings or, in the extreme, they would be thrown in jail where their ability to support their offspring was really challenged. It is rather hard to pay child support when you are making about eighty cents an hour stamping out license plates.

  Why wait for default? We argued that the use of automatic wage withholding should be universal. Orders would immediately be deducted from earnings and forwarded to the child support agency in all cases where it was feasible. It would be a rebuttable presumption in legal jargon. While this is common practice now, it was revolutionary in the early 1980s.

  As Irv put it, we were proposing a three-legged stool. Government would guarantee child support, or at least a minimal amount of support. But the public exposure would be minimized by sound improvements to the setting and collection of support orders. The second leg would be setting the amount of the obligation is a straightforward and uniform manner, while the final leg improved the collection process. Moreover, government would be highly motivated to go after what was owed since they were on the line if they failed on the collection side of things.

  Even better, the guaranteed child support payment was not like welfare. A key characteristic of welfare is that benefits fall as earnings rise, a perverse incentive indeed. The child support guarantee did not operate that way (at least as we envisioned it). It would complement earnings, not act as a substitute for earnings, thus properly incentivizing work. This approach would help single-parent families escape poverty.

  Going from where we were at the starting line to where we wanted to be at the finish would take much study, time, and effort. To do this we needed money (don’t we all?). Remember that the two most important motivations driving research are a thirst for truth and the availability of money, and not in that order. We did get some help from outside sources. For example, with the help of Prudence Brown, the Ford Foundation kicked in with some early planning money. The primary source of support, however, came out of a much more imaginative idea and has supported a long-standing state-university partnership.

  Simply p
ut, whenever the federal government had a public assistance program that matched state dollars, there was an opportunity for a university-state partnership to maximize those federal dollars. It would work like this. Let us say the feds matched state contributions on a 3-1 basis, for each state dollar put up the feds put up three. Now, there was nothing in the law that said the university could not put up the state match since we are a state agency, though few of the faculty would see it that way. The genius of our approach was in developing new ways of coming up with the university match. Fortunately, the financial guy at IRP at the time, Jack Sorenson, was quite creative and rather devious. Bill Wambach, who followed Jack in the position, was equally talented.

  I will let one example suffice as an illustration of the alleged creativity. The university had negotiated with the federal government a 44 percent overhead rate for research. That is, out of each federal research dollar, forty-four cents went to pay for stuff like lights, office space, janitorial services, and other costs to the university for maintaining a research capacity. A state agency paid nothing, or a nominal amount, toward these overhead costs when they contracted with IRP, or any university entity, for such analytical work. Therefore, Jack came up with the notion of declaring that this hypothetical overhead contribution by the university was a legitimate state match against which federal dollars could be leveraged. That is, the university’s presumed overhead contribution was construed as a real contribution to the research effort. At a 3-1 match rate, you did not need much funny money to draw down a lot of real federal dollars.

  I recall Mary Ann Cook, always the quick wit, saying that the university could somehow use a tree located in lot 34 (a university parking lot near IRP) as match for federal dollars. Eugene Smolensky was IRP director at the time. Geno, as he was known, later went on to be dean of the Public Policy School at Berkeley and was one of the funniest men I have ever met, which is hard to believe since he is an economist. Anyways, I recall Geno walking around muttering, “I just know I am going to jail. I just know I am going to jail.” The problem was we had no precedent for such a state-university arrangement at the time. Since I was the state guy, it was up to me to negotiate something.