Welfare Cliffs Exist—Concludes Team of Economists

Welfare Cliffs Exist—Concludes Team of Economists




Welfare Cliffs Exist—Concludes Team of Economists 







By Erik Randolph



Since 2016, the Georgia Center for Opportunity (GCO) has demonstrated the existence of welfare cliffs. Now a team of five economists has come to the same conclusion.

Welfare cliffs are an unfortunate feature of the American welfare system. They occur when a family’s breadwinner, or an individual, discovers that his or her family will become worse off economically by earning more money. It sounds paradoxical, but it happens whenever the loss in welfare benefits exceeds the additional take-home pay.

Exactly when the cliffs occur, and how bad they are, depends on many factors, including the characteristics of the family, how much they earn, and where they live. And because of the haphazard way the welfare system is constructed, it turns out that there isn’t a single cliff but multiple cliffs that a family can encounter over the range of potential earnings.

For more information on GCO’s work on the cliffs, check out this website that shows cliffs in eight states by common family types.

New Study

Authored by economists at the Federal Reserve Bank of Atlanta, Boston University, and the University of California, Berkeley, a newly published study takes a sophisticated approach to identify disincentives in the U.S. tax and welfare structure. Published as a working paper by the National Bureau of Economic Research (NBER), the authors fed the results of the most recent Survey of Consumer Finances through a fiscal analyzer.

The Economic Team

David Altig, Federal Reserve Bank of Atlanta

Alan J. Auerbach, University of California, Berkeley and NBER

Laurence J. Kotlikoff, Boston University and NBER

Elias Ilin, Federal Reserve Bank of Atlanta and Boston University

Victor Ye, Boston University



The Survey of Consumer Finances is a project of the Board of Governors of the Federal Reserve System. It is the most comprehensive survey examining the personal finances of American individuals and families. Thus, the input data for their study represent a statistical picture of how families are faring economically.

In other words, the financial situations of a representative cross-section of families in America was fed through a fiscal analyzer. This particular fiscal analyzer was based on a personal financial planning tool developed by the software company of Laurence Kotlikoff, one of the study’s authors.

The fiscal analyzer estimates the likely future financial path that individuals or families will take over their remaining lifetime, along with the future taxes and benefits they will pay or receive. The study uses standard mortality rates to predict lifespans and gives a unique calculation on the degree and magnitude that incentives or disincentives exist over that likely path.

The study defined the future fiscal burdens, consisting as taxes and benefits, as marginal tax rates. If a person’s remaining marginal tax rate increases, then so does the tax burden. The greater the magnitude of the marginal tax rate, the greater the disincentive.

Study Results

Given our own work, the conclusion of the authors was not surprising. To quote from their study:

“Our findings are striking. One in four low-wage workers face marginal net tax rates above 70 percent, effectively locking them into poverty.”

“… one in four bottom-quintile households, regardless of age, face marginal tax rates above 65 percent. Thus, a major share of poor households are effectively locked into poverty by America’s fiscal system.”

The authors were careful to point out that this study looks at the structure of America’s fiscal system, meaning these disincentives are hardwired into the laws and rules of the system. This corroborates exactly with our research. The very rules themselves are what create the disincentives and the cliffs. The silver lining here is that rules can be changed.

This study did not attempt to measure how people react to the disincentives. Some might bite the bullet, take the hit, and still advance their earnings anyway. On the other hand, others may take a defeatist tact, backing off from earning more to draw down more government assistance. This is a ripe area for future research, to determine the proportion of people who forge ahead anyway versus those who give up and retreat.

In the meantime, we shouldn’t wait for future research on how many people accept defeat and remain poor. It makes more sense to fix the rules now so the question becomes moot.

Erik Randolph is Director of Research at the Georgia Center for Opportunity. This blog reflects his opinion and not necessarily that of the Georgia Center for Opportunity.






Based on the most recent 2015 data, this report provides an in-depth look at the welfare cliffs across the state of Georgia. A computer model was created to demonstrate how welfare programs, alone or in combination with other programs, create multiple welfare cliffs for recipients that punish work. In addition to covering a dozen programs – more than any previous model – the tool used to produce the following report allows users to see how the welfare cliff affects individuals and families with very specific characteristics, including the age and sex of the parent, number of children, age of children, income, and other variables. Welfare reform conversations often lack a complete understanding of just how means-tested programs actually inflict harm on some of the neediest within our state’s communities.

Safeguarding the Economy is Paramount for Everyone’s Well-Being

Safeguarding the Economy is Paramount for Everyone’s Well-Being

Safeguarding the Economy is Paramount for Everyone’s Well-Being

By Erik Randolph

Recent numbers in confirmed COVID-19 cases have been nothing but discouraging, but is it logical to turn back? The resurgence in confirmed cases may tempt our political leadership to reimpose shelter-in-place mandates and business shutdowns, but at this stage it would be a mistake.

The Resurgence 

The recent data may be giving credence to those medical experts who have been arguing the lockdowns only delayed the inevitable. We must learn from the mistakes made and the impact the shutdowns have had on already heavily-impacted communities.

The official confirmed cases displayed on the Georgia Department of Health’s COVID-19 Daily Status Report webpage lags 14 days behind. Beyond that 14-day window at the time of this writing, the seven-day moving average of confirmed cases peaked at 763.1 on April 22 and began to decline. However, the average began rising again on May 10, and since May 25 the average has been steadily increasing. On June 24, the average reached nearly 2,000 cases, more than double its prior peak in April. There is good news on the Department’s webpage, reported deaths have been on a downward trajectory since the end of April. However, there is still much we do not know, including the unreported number of Georgians who successfully cleared the virus asymptomatically or otherwise.

Comparison to Other States

Compared to other states, Georgia does not look that bad. For example, deaths attributed to COVID-19 are far fewer in Georgia than in the Northeast. 

On the economic front, Georgia’s shelter-in-place orders were far less severe than in other states, such as Michigan, Massachusetts, and Washington State. Recent unemployment numbers suggest a possible negative correlation between the more harsh measures taken by states and employment. Georgia looks good with an unemployment rate better than 72 percent of all states. In some cases, Georgia’s unemployment rate is drastically better. Georgia’s rate is 36.4 percent of Michigan’s rate and less than half of Massachusetts’s rate.



The Economic Situation Overall is Not Good

When Congress first passed legislation addressing the pandemic, the discussion was shutting and locking down for 14 days that might extend to a month’s time. Recall the talk about a “V” shaped recession with the economy quickly rebounding? With the crisis dragging into its fourth month, this is no longer the discussion.

In my last blog, I argued that the official unemployment rates understate the seriousness of the unemployment problem. While Georgia’s rate measured 9.7 percent, I estimated that the real problem was closer to 25 percent . This was just one metric. There are plenty of other metrics indicating potential for some serious economic damage.

First, the economic impact is not shared equally. Some industries—such as restaurants, bars, tourism, live entertainment, and brick-and-mortar retail stores—have been hit especially hard. Many of these businesses are smaller, mom-and-pop operations with lesser capacity to withstand long periods of economic hardship. Workers, too, have been unevenly impacted, with lower income households bearing the brunt of the negative impact.

It’s also been bad financially. About 3,600 companies filed for bankruptcy in 2020 thus far, 26% higher than the first six months in 2019. Cash reserves is a major issue. A Federal Reserve Banks’ survey found that three in 10 small businesses were financially at risk or distressed at the beginning of the pandemic. 

We do not yet know the total loss in production due to our response to the coronavirus, but we know it will be bad. Production dropped 5 percent for the first quarter of 2020 nationally and 4.7 percent for Georgia. The loss for the second quarter will not be known until the end of the month when new numbers are released. Assuredly, the numbers will be worse.

Lost production is a great economic concern for all of us. It means lost societal wealth and hardships for many individuals and their families.

The Precarious Federal Fiscal Position

Since March, Congress has poured $3 trillion into the economy to help us sustain the hit. This is an enormous sum greater than the annual federal spending for social security benefits, Medicare, and all other mandatory spending programs. Additionally, the Federal Reserve is making trillions of dollars more available to help the public withstand the economic impact of the pandemic. 

In the meantime, U.S. total debt now exceeds $26 trillion and continues to grow. This is more than the total annual production of the United States when last measured. 

The temptation to reverse course in reopening the economy and looking to Congress and the Federal Reserve to bail us out with even more spending comes with enormous risks: high inflation, higher taxes, slower economic growth, and less wealth. Poorer communities and persons with lower income typically suffer more from these consequences.

These risks are based on fundamental principles in economics. We cannot spend money without someone, somewhere, at some time paying for it. With all the new money spent by Congress and created by the Federal Reserve, we will have one of two likely non-exclusive ways to pay for it: higher taxes in the future and/or inflation.

The much worse of the two is inflation. It is a hidden tax that everyone—rich and poor alike—must pay. It will erode wealth and opportunities for many.

An uptick in inflation will place the Federal Reserve in a precarious position. The standard tool is to increase interest rates. However, this can jeopardize any economic recovery from the pandemic. It will also exacerbate the federal budget deficit because of the extraordinarily high national debt, while potentially adding even more to the debt. In federal fiscal year 2019, the federal government spent $376 billion in interest payment to service the national debt—an amount equal to 28 percent of discretionary spending. This amount could easily double over the next few years.

The Best Course of Action

We cannot afford to wait for a vaccine. We must find our way to reopen the economy that is well managed and reduces risks to those most vulnerable to the virus.

Low-risk individuals, including almost all children, need to return to their routines as much as practically possible. This is the best way to extend opportunities for everyone and rebuild wealth so everyone can have fulfilling lives. 

Our fate lies not only with Congress but also with our governors. Reopening the economy is necessary to avoid greater economic damage. Everyone’s well-being depends on it.  


Erik Randolph is Director of Research at the Georgia Center for Opportunity. This article reflects his calculations, analysis and opinion and does not necessarily reflect that of the Georgia Center for Opportunity.

To learn more about what Georgia Center for Opportunity is doing to help get Georgians back to work check out our Hiring Well, Doing Good initiative. 

Reopening Responsibly

Reopening Responsibly

Reopening Responsibly

Fully Reopening Georgia’s Economy Safely

As stories continue to mount on the impact of the current COVID-19 pandemic on individuals and communities, the Georgia Center for Opportunity recognizes the need to come together as communities. This is already happening with social distancing becoming the new norm. The next step is for businesses, workers and patrons to begin to take the responsibility on themselves to provide safe environments. With the guidance of health experts, Georgia has the opportunity to be an example of how responsible individuals can come together to combat a common threat.


Recommendation for a Governor’s Task Force

On April 21, 2020, a day after Governor Brian Kemp outlined steps to safely reopen Georgia’s economy, the Georgia Board of Cosmetology and Barbers issued guidelines on how its licensees may resume operations while looking after public health and safety. This step sets an example for other industries so that all Georgians can get back to work again in a safe and successful manner.

The task for reopening the economy is uncharted territory complicated by the fact that Georgia has 233,500 employer-based establishments, according to the most recent data from the U.S. Census Bureau. There are not only differences between industries, but operations and practices can vary widely among business firms within industries. While we can rely on licensing boards and other government agencies to develop guidelines within their purviews, the complexity of the economy demands more.

The Georgia Center for Opportunity (GCO) believes that the only way the Governor’s initiative to reopen the economy can be successful is if business leaders, employees, and customers innovate and adapt to operations under the new circumstances. The best solutions will bubble up from individuals at the local level who will develop practical solutions to safely resume activity. While we all properly look to the Governor for his leadership, success will depend on how each member of the community responds. Local heroes will rise to the occasion in their own ways and set an example for us to follow.

Therefore, GCO recommends a process to help facilitate the Governor’s directive for reopening the economy. The hope is that it will allow the economy to operate under a restricted environment until it is possible to return to full functioning without concern for public health, such as having the population protected with a Covid-19 vaccine or a medication available that is both safe and effective against the virus.

To help ensure the success of reopening the economy, GCO recommends the Governor establish a task force to invite business leaders to submit guidelines specific to their industries. The Governor can use these industry-specific guidelines produced by this process to help him make further decisions on how to effectively and safely bring Georgia’s economy fully back. Furthermore, by making the guidelines available publicly, it will help others determine the best ways they, too, can resume activities safely.


Role of the Task Force

The proposed task force will notify business leaders of the opportunity to set up teams for their industry. These teams will draw up guidelines on how businesses in their industry will resume operations in a safe manner, consistent with CDC guidelines and other guidance provided by the Commissioner of Public Health.

The task force may initiate contact with business leaders and invite other industries to form teams. Businesses are responsible for writing the guidelines. In other words, the task force will not write the guidelines. Its job is to facilitate the process and to assist where needed. This approach relies on innovation and the resilience of individuals that have been the hallmark of American prosperity. It also recognizes that the best solutions rise up from individuals at the local level.

The members of the task force should be state officials and key government staff of the Governor’s choosing, and the Governor may elect to appoint private citizens to participate in the task force as well. For example, among those the Governor chooses for the task force may include the economic development commissioner, the labor commissioner, key staff from the Governor’s office, an economic advisor, and perhaps a well-known business leader.


Infectious Disease Guidance

Under the proposal, the Commissioner of Public Health plays a critical role. Business leaders, employees, and customers need good and trustworthy information to help them make good decisions. Therefore, the Commissioner will provide guidance, including forwarding CDC information, on how to stop the spread of infectious disease. It is important to formalize her role in this process so that her team can be fully engaged in providing guidance to businesses, employees, and customers.

The information provided by the Commissioner will be crucial to the business teams, allowing them to develop their industry-specific guidelines. As new information and technologies on stopping the spread of infectious disease become available, the commissioner will provide updates. These updates will enable the industry teams to modify their guidelines appropriately.

In turn, small and large businesses alike can use the guidelines to devise practices and protocols on how they can resume operations safely.


Industry Teams

Business leaders will volunteer their time and are expected to put together their own teams of experts to devise the guidelines. When the proposed guidelines are ready, they simply submit them directly to the task force.

Under this proposal, businesses are free to form their own teams and submit their proposals even if they were not approached by a member of the task force.



One of the first actions of the task force should be to establish a central website with easy access and easy navigation to all industry guidelines and announcements. In addition, the website should provide links to guidance from the Commissioner of Public Health and the names of the industry team members to facilitate communications. This website should go online as soon as possible


Responsible Society Reaction

Reopening the economy is extremely important. The livelihoods of Georgians are dependent on it. Moreover, a strong economy is the best policy against poverty, and we certainly do not want to thrust more Georgians into poverty. Therefore, we must find ways to safely resume activity within the current environment. Georgia can be an example to the nation, but its success depends on how we as individuals respond and innovate.

Fully Reopening Georgia’s Economy Safely

Fully Reopening Georgia’s Economy Safely

Fully Reopening Georgia’s Economy Safely


Today, the Georgia Center for Opportunity (GCO) released the following recommendations for governments and schools to adopt to safely return to normal during the COVID-19 crisis. These recommendations come on the heels of President Trump’s announcement that states should begin reopening the economy at their own pace beginning May 1st. GCO will be releasing further recommendations in the near future.

1. Establish a Georgia Task Force on the Economy and Education

We encourage state leaders to put together a task force on reopening the economy. This task force will invite business leaders to submit industry-specific guidelines on how they will operate safely in a restrictive environment until the threat is over, such as when a vaccine is found. These business leaders will receive guidance from the U.S. Centers for Disease Control and Prevention and Georgia’s Commissioner of Public Health. Gov. Kemp can then use these guidelines to loosen restrictions in a safe manner. In addition, GCO recommends that the governor consider modifications to his shelter-in-place order to allow people to shop, a vital step for businesses to rebound successfully.

Second, we recommend another task force providing advice to families and school districts on facilitating remote learning. This task force should also create a plan and timetable for the safe return to brick-and-mortar schools in a restrictive environment. We also recommend that school systems develop a plan to ensure students are caught up on schoolwork they might have missed. Additionally, school systems should prepare for COVID-19 outbreaks during the 2020-2021 school year and be ready to return to remote learning when and if that occurs, including a plan to assist students with limited internet access and limited access to appropriate technology.


2. Tap Into Civil Society Resources

Now is the time for civil society to work with government to plan out the reopening of our economy. Workers are being hurt because of forced closures, and we must focus particularly on individuals in vulnerable sectors of our society who could be working now but are unable. Our small businesses are hurting, too. A recent survey by the U.S. Chamber of Commerce reported that one-in-four small businesses are on the brink of closure and half are considering a temporary shutdown.

In this environment, civil society is more important than ever through nonprofits, community organizations, and churches. We recommend the state of Georgia tap into these resources through coalitions such as GCO’s Hiring Well, Doing Good initiative that matches local businesses with workers.


3. Working with Neighboring States

We are seeing positive examples of other states forming regional coalitions to fight the coronavirus. The Georgia government should consider working with neighboring states. For example, the Port of Savannah is close to the South Carolina border, and many people work at the Port and live in the Palmetto State. It would make sense for these two state governments to coordinate reopening this area at the same time.

Quote from GCO President and CEO Randy Hicks

“We are in unprecedented times, and we recognize the suffering from those affected directly by the disease, but also by those impacted by the mass closure of our economy, schools, and way of life. The time has come to create actionable items for reopening Georgia. No recovery plan is without risk, but we must weigh the risk and rely on health and business professionals to do so. Now is the time for everyone to come together to explore solutions that protect our neighborhoods and respond to community needs.”

Three reasons why Medicaid expansion is bad for Georgia

Three reasons why Medicaid expansion is bad for Georgia

By Erik Randolph, Contributing Scholar


Expanding Medicaid to reduce the number of Georgians without health insurance is an idea continually being promoted. Here are three good reasons why it would be bad for Georgia.


Reason Number One: Expanding Medicaid without fixing the individual markets would trap people in the welfare system.

Nearly 60 percent of Georgia’s uninsured would be unaffected by Medicaid expansion because their family incomes are above the threshold established by the Affordable Care Act (ACA).

The greater proportion of the uninsured has incomes between 139 percent  and 400 percent of the Federal Poverty Level. This is precisely the income range that the ACA health insurance exchanges are supposed to serve. Even with the premium tax credit and other subsides, affordability for average-income families was not achieved.

Affordability is extremely important. A study by the Institute of Medicine of the National Academies listed affordability first among reasons why people without health insurance don’t purchase some.

Consider the price increases on the ACA exchanges since their creation. Average prices in Georgia increased by roughly 70 percent since 2014, and in some Georgia counties, they have more than doubled. For 2019, a quarter of Georgia counties has only one insurance company offering policies, and half of the counties has only two insurers.

Most of the uninsured—more than 728,000—are employed. Now imagine you are a single person earning the equivalent of $8.30 per hour working full-time without health benefits. You would earn too much to qualify for Medicaid under an expansion. However, if you could reduce your income by less than five cents an hour, you would qualify for Medicaid.

What would you do if you were in this situation? Would you find a way to cut back just a little on earnings so you can get Medicaid? If you are like most persons, you would indeed.

Let’s reverse the situation. Suppose you earn $8.25 and have Medicaid under an expansion. You know that health insurance is unaffordable on the individual markets. Would you accept a pay raise of just five cents an hour knowing that you would lose Medicaid? Again, if you are like most people, you would find a way—such as working less hours or refusing a pay raise—so that your income would not exceed the threshold.

This scenario highlights the problem of transitioning off public assistance and onto the private system. The financial incentives are stacked against you, trapping you in the welfare system and its associated challenges of a low-income lifestyle.


Reason Number Two: Expansion is really, really expensive.

States that expanded Medicaid were initially enticed by the Federal government that promised to pay 100 percent of the expansion enrollment cost for calendar years 2014, 2015, and 2016. Since then, the federal reimbursement rate has been falling. It was 94 percent in 2018, is 93 percent for 2019, and will be 90 percent in 2020.

Because states must pay part of the bill, it is not surprising to learn that expansion states are doling out even more in state dollars to fund Medicaid than non-expansion states. Based on data from the National Association of State Budget Officers, the expansion states spent 95.2 percent more of their own state funds on Medicaid in 2018 than they did in 2010. As a matter of comparison, non-expansion states spent 81.5 percent more.

To put this in perspective, Georgia would have needed $562 million more in state revenue for its Medicaid program in 2018 had it expanded Medicaid along with the expansion states. This assumes that the cost of Medicaid would have grown consistent with the average experience of the expansion states. The actual cost could be less, or, more likely, it could be more considering Georgia’s population growth and poverty levels.

From a fiscal perspective, not expanding Medicaid saved Governor Deal and the General Assembly from having to increase taxes to raise $562 million in revenue in 2018, or alternatively, from the tough budgetary task of cutting more than half a billion dollars from other state programs, like education, to make room for Medicaid expansion.

When it comes to cost, we should not ignore also the impact on the federal government. According to the Peterson Foundation, health care is a key driver of the federal budget crisis and the national debt. Congress has been making promises it cannot afford, and Medicaid spending is among them.

In economics, there is no free lunch. Someday the rooster will come home to roost. We will pay for the cost one way or another, whether through inflation, cuts in needed services, eventual increases in federal taxes, or distortions in the economy.


Reason Number Three: Medicaid has the worst health care outcomes.

In his comprehensive report Transcending ObamaCare, Dr. Avik Roy correctly observes Medicaid has bad health care outcomes, the worst of any public or private health insurance coverage in America. In fact, and surprisingly, studies have showed those on Medicaid fare no better than those with no insurance coverage at all.

For example, a study published in the New England Journal of Medicineastoundingly showed persons on Medicaid for two years in Oregon did not fare better in measured physical health outcomes than comparable groups who were uninsured.  A Columbia-Cornell study on patients with clogged blood vessels or clogged carotid arteries came to the same conclusion.

Considering the notorious bad health outcomes for Medicaid patients, it makes little sense expanding the program without at least reforming it. Or better yet, it should be replaced.


Our Hopes Reside with Governor Kemp and the General Assembly

Governor Kemp is doing the right thing in pursuing federal waivers to redesign the health insurance system and Medicaid.  The waivers would give Georgia tremendous flexibility to do it right and even allow Georgia to capture dedicated federal revenue sources to underwrite the cost.

What Georgia needs is a market-based consumer-directed health insurance system with risk equalization coupled with real reform of medical assistance programs. Medicaid needs to be fundamentally changed and consolidated with other programs so poor people can access the same health insurance as everyone else, and so that no one gets trapped in the welfare system.

If done correctly, the redesign will solve the problem of pre-existing conditions, make insurance more affordable, achieve universal coverage, and not undermine the quality of care to which Americans have grown accustomed. Everyone will benefit, poor and rich alike.


* A contributing scholar to the Georgia Center for Opportunity, Erik Randolph researches and writes on welfare reform. Further research on this topic is available on the Center’s website: https://georgiaopportunity.org/employment/welfare-reform



Committee on the Consequences of Uninsurance, Institute of Medicine of the National Academies,Insuring America’s Health: Principles and Recommendations,National Academies Press, 2004. http://www.nationalacademies.org/hmd/Reports/2004/Insuring-Americas-Health-Principles-and-Recommendations.aspx.

Reforming America’s Healthcare System Through Choice and Competition, U.S. Departments of Health and Human Services, Treasury, and Labor, Report to the U.S. President in response to Executive Order 13813, 2018, p. 4: https://www.hhs.gov/sites/default/files/Reforming-Americas-Healthcare-System-Through-Choice-and-Competition.pdf.

Reforming America’s Healthcare System Through Choice and Competition, U.S. Departments of Health and Human Services, Treasury, and Labor, Report to the U.S. President in response to Executive Order 13813, 2018, p. 72: https://www.hhs.gov/sites/default/files/Reforming-Americas-Healthcare-System-Through-Choice-and-Competition.pdf.

Calculations by author using State Expenditure Reports of the National Association of Budget Officers: https://www.nasbo.org.

Peter G. Person Foundation, Key Drivers of the Debt, https://www.pgpf.org/the-fiscal-and-economic-challenge/drivers, accessed February 26, 2019.

Avik S. A. Roy, Transcending ObamaCare: A Patient-Centered plan for Near-Universal Coverage and Permanent Fiscal Solvency, Second Edition, The Foundation for Research on Equal Opportunity, 2016, pages 43 – 45:  https://www.manhattan-institute.org/html/transcending-obamacare-patient-centered-plan-near-universal-coverage-and-permanent-fiscal

Baicker K et al., The Oregon experiment—effects of Medicaid on clinical outcomes. New England Journal of Medicine. 2013 May 2; 368(18): 1713–22. https://www.nejm.org/doi/full/10.1056/NEJMsa1212321

Giacovelli JK et al., Insurance status predicts access to care and outcomes of vascular disease.

Journal of Vascular Surgery. 2008 Oct; 48(4): 905–11. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2582051/