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Both Parties Should Support Mitt Romney’s Welfare Reform

“We have not comprehensively reformed our family support system in nearly three decades, and our changing economy has left millions of families behind. Now is the time to renew our commitment to families to help them meet the challenges they face as they take on the most important work any of us will ever do — raising our society’s children.” – Senator Mitt Romney

Romney made that statement as he proposed what is arguably the most substantial welfare reform proposal in fifty years (Jeff Stein [1], Washington Post – also the source of the quote).

Romney’s proposal would provide $4,200 per year for every child up to the age of 6, as well as $3,000 per year for every child age 6 to 17.

Romney’s new plan, like the one being explored by senior Democrats [2], would provide the benefit monthly by depositing it directly in taxpayer bank accounts.

Unlike the Democrats’ plan, Romney’s Family Security Act would be paid for, in part, by eliminating Temporary Assistance for Needy Families, a welfare program, as well as other existing federal tax credits for children and working families.

Romney’s plan also eliminates the state and local tax deduction, which Republicans capped but didn’t eliminate in 2017. As Stein notes, the plan has its supporters and detractors on either side of the political spectrum. Senators Marco Rubio and Mike Lee have already panned it, as did the head of the left-leaning Center on Budget and Policy Priorities. Romney’s plan also excludes immigrants without a Social Security number (which I think is a mistake for reasons I’ll explain).

What Romney’s critics miss is the changes to our economy since the 20th century. Small business formation is the critical engine to strong and well-spread economic growth. It did not have a good pre-COVID decade (AP [3]).

Despite a decade-plus of economic growth, Americans have slowed the pace at which they’re forming new companies, a trend that risks further widening the gap between the most affluent and everyone else.

The longest expansion on record, which began in mid-2009, has failed to restore entrepreneurship to its pre-recession level, according to a Census Bureau report based on tax filings.

Between 2007 and the first half of 2019, applications to form businesses that would likely hire workers fell 16%.

Even in an economy with low unemployment (which we eventually got in the 2010s), slow business formation can cause serious problems (same source).

Business formation has long been one of the primary ways in which Americans have built wealth. When fewer new companies are established, fewer Americans tend to prosper over time.

In addition, smaller companies account for roughly 85% of all hiring, making them an entry point for most workers into the workforce. Even with the unemployment rate at a near-record-low of 3.7%, a decline in the creation of new companies means there are fewer companies competing for workers, a trend that generally slows pay growth. The pace of pay growth has stalled for the past five months even as hiring has remained healthy.

“What you see is reduced social and economic mobility,” said Steve Strongin, head of global investment research at Goldman Sachs. “It means that most of the growth is occurring in the corporate sphere, which keeps wage growth down and improves profits.”

“People became a lot more risk-averse after the Great Recession because so many people were hurt,” said Nicholas Johnson who founded Su Casa, a chain of four furniture stores based in Baltimore that employs 30 workers.

“People became a lot more risk-averse after the Great Recession.”

So what does that have to do with welfare reform? I answered that last year [4].

A system incentivizing people to work for someone else may have made sense in the large-industry era of the 1950s, but with small business formation on a downward slope even before COVID-19, it is no longer fit for purpose. We need to ask ourselves if we really want a large and intrusive government taxing the rich for the purpose of regulating the poor.

Romney may have been more focused on keeping his plan deficit-neutral, but intentionally or not, his plan would move family support away from discouraging entrepreneurship. It would also address, at least in part, the risk aversion issue. Finally, it would being to get the government out of the business of regulating the poor. Matt Bruenig of the left-leaning People’s Policy Project sees this as well, noting that “the benefits Romney’s new plan provide to poor families outweigh the potential downsides of eliminating these programs, which Bruenig said are complicated and hard for families to navigate” (Stein, WaPo).

Of course, both major parties have self-imposed blind spots on this. My former party (the Republicans) aren’t yet inclined to see past their social paternalism. My current party (the Democrats) aren’t yet inclined to see past their penchant for large programs that hire all sorts of public employees (and their own social paternalism).

That said, if the Democrats and Republicans can look around their blind spots, they’d see that Romney has hit upon a plan to increase support for the least fortunate while reducing government largess. We can at last begin to end the cycle of taxing the rich to regulate the poor.