Ryan asks the right questions

U.S. Rep. Paul Ryan’s discussion paper on “Expanding Opportunity in America” puts attention where it belongs — on poverty and upward mobility for those at the bottom of the income distribution.

It argues for an expanded earned income tax credit, the best way to reduce poverty in work. And it correctly explains what’s wrong with existing federal programs.

The essential challenge is how to provide financial support to the poor without reducing their incentive to work. As earnings increase, means-tested benefits are withdrawn, creating an implicit tax on higher earnings.

Paying a universal benefit regardless of income would deal with that, but it would be prohibitively expensive.

Reducing the benefit at every level of income would lessen the disincentive, too — there’d be less to tax away — but only by making the poor worse off.

One way to mitigate the trade-off is to deny benefits to people who aren’t working. The EITC supplements wages; if you don’t have a wage, you don’t qualify.

But even with a work test in place, higher incomes reduce benefits, so there’s still an implicit tax on working harder (full time rather than part time, say) or on seeking a better-paid job.

The best you can do is to simplify and coordinate the benefits so that their interactions don’t cause this hidden tax to reach punitive levels.

Ryan’s idea is to bundle some programs — assorted housing subsidies, the Supplemental Nutrition Assistance Program, Temporary Assistance for Needy Families, the Weatherization Assistance Program and others, 11 different schemes in all — and replace them with a single block grant to states wishing to participate.

These states would contract with competing one-stop providers to deliver, in total, the current level of funding for payments and services to the needy.

Except for the elderly or disabled, beneficiaries would have to work or “engage in work-related activities.”

The standard objection to this approach is to recoil at the very idea of block grants. Progressives see a predictable conservative ruse to convert programs into forms that can be more easily cut or diverted to other purposes.

Ryan isn’t designing a better system — he’s delegating the design of a better system to the states and their contractors. There’s no guarantee in his proposal that the providers would come up with something more cost-effective or more conducive to effort and ambition.

Maybe competition to design better schemes would discover good models, but Ryan leaves this vague.

Still, it’s great that Ryan is discussing the right subject. In that, let’s hope he succeeds.

Clive Crook is a Bloomberg View columnist and a member of the Bloomberg View editorial board.