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Want to Help Gary, Indiana? Why Not Just Give Them Money?

In the 1970s, an experiment with a negative income tax in the Indiana city led to positive outcomes. It’s a policy that’s seen renewed interest during the Great Recession.

The bodies of three women were found over the weekend at this abandoned house in the 400 block of East 43rd Avenue in Gary.   Photo: Michael Tercha/Chicago Tribune

The Tribune’s coverage of suspected serial killer Darren Deon Vann is accompanied by dramatic photos—not of blood and gore, but striking, almost beautiful pictures by Michael Tercha of two abandoned homes in Gary, Indiana, where four bodies were found. Gary has long been a destination for urban-explorer photographers; in this story, the economic ruin they capture overlaps with the crime problems the underfunded city struggles to cope with.

Gary is estimated to have some 10,000-15,000 abandoned homes, a quarter of its stock and an astonishing figure in a city of 80,000, the result of having lost more than half its population in 40 years. No one really knows how many there are; the city has been working with the University of Chicago’s Gary Project and a team of volunteers, using open-source software from LocalData, to document the scale of the problem.

Then there’s the problem of bringing down the buildings. Tearing down the Sheraton that’s stood empty along the freeway for twenty years until this month, cost two million dollars. As Bryan Smith wrote when he profiled Karen Wilson-Freeman, the Gary native and Harvard Law grad in her first term as mayor, stood as a symbol of old, failed redevelopment. Even the healthy-looking stadium next door tells a sad story:

The downward spiral of fewer residents, store closings, an eroding tax base, and higher crime proved impossible to stop, despite repeated efforts. Mayors from Richard Hatcher through Freeman-Wilson’s predecessor, Rudy Clay, spent hundreds of millions in federal and other funds trying to help the city regain its footing. On 1981’s little-used Genesis Center, which has been a drain on municipal coffers for years. On the Sheraton, into which the city poured millions in the 1980s before the hotel went under a few years afterward. On 2003’s U.S. Steel Yard stadium, which cost $45 million (nearly double the original estimate), never led to development nearby, and landed a business associate of then-mayor Scott King in the big house. And, of course, on Gary International Airport, a potential economic boon that is still struggling to get off the ground.

One thing that has worked in Gary has particular resonance today: its 1970s experiment with the negative income tax, a brief, small-scale, but promising attempt at stabilizing some of the city’s population.

The negative income tax is simple; that’s part of its appeal, which, at the time, was bipartisan. It guarantees an income: say, $10,000. It’s called the negative income tax because, if your income is below that amount, you get money. Here’s how Milton Friedman, one of its most famous proponents, explained it in a 1973 interview with Playboy:

With a negative income tax, an income of $2000 would be subject to negative taxation. Instead of paying taxes, you’d get some money. Just how much would depend on the negative tax rate. If the negative tax rate were 20 percent, you’d get $400. If the rate were 50 percent, you’d get $1000. The 50 percent negative tax rate is simplest, so it’s the one I always like to use for illustration. If you have no income at all, for example, you would have a negative taxable income of $4000—that is, zero minus $4000. You would be entitled to receive 50 percent of that: $2000.

It might seem surprising that a free marketeer like Friedman would support no-strings-attached welfare, but it makes sense from a certain perspective. He was a believer in autonomy and homo economicus, so the negative income tax would replace a paternalistic welfare system that targets some of the poor and not others, under often-complex restrictions (like WIC prohibitions on things like potatoes). “The freedom of welfare recipients is terribly restricted,” Friedman said. “Whether we’re doing this for good purposes or bad, it’s not a wise thing to do. Not if we believe that individuals should be responsible for their own actions.”

And eliminating those restrictions would also eliminate the bureaucracy that enforces them. You give people money, and you’re done. They’re done, too—no time-consuming caseworker and office visits, no SNAP card stigma. There are variations on this idea, but that’s the basic concept.

Nearly 1,800 Gary residents below 240 percent of the poverty line were randomly enrolled in a NIT experiment from 1971 through 1974, 59 percent headed by single families, one of a number of NIT experiments run between 1968 through 1982.

The big concerns were that recipients would stop working and waste their money. And they did work less, as was expected, but not necessarily in deleterious ways:

Instead, according to research cited by Dylan Matthews in a recent post on Vox, even among participants in the IMEs who reduced their hours worked, full withdrawal from the labor force was a relative rarity. Instead, the reduction in hours worked more often took the form of longer periods of job search between spells of employment. For some that might mean loafing, but for others, it could well mean a more thorough search process resulting in a better job match. In the case of young secondary workers in families receiving NIT benefits, reduction in work often meant more time spent in school. As one participant in the Boston Fed conference reported, the probability of graduation from high school was 25 to 30 percent higher in families receiving the NIT than in the control group.

As a result, the effects on education were positive (it’s theorized that fewer work hours from parents, particularly mothers, would improve educational outcomes, but there’s no direct evidence from the study):

Three of the sites (Gary, Indiana, and rural areas in North Carolina and Iowa) measured impacts on achievement gains for children in elementary school; two of the three found significant impacts (Maynard and Murnane, 1979; Maynard, 1977). In contrast, no achievement differences were found for adolescents. Impacts on school enrollment and attainment for youth were more uniformly positive, with both the Gary and the New Jersey sites reporting increases in school enrollment, high school graduation rates, or years of completed schooling….

The experiment didn’t test for the effects on infants and pre-school children who were not in school when the experiment began, but it did find results that correlate with positive long-term outcomes: “resulting birth-weight increases from 0.3 to 1.2 pounds in the income-supplemented group, thought primarily to be due to maternal nutrition.”

Nor did recipients blow their money on luxuries, a concern that’s long been a barrier to less restrictive welfare programs.

The measurement of consumption in the experiments is very difficult, and none of the survey efforts appeared to do very well on this score. Nevertheless, the results suggest no general increases in frivolous or outlandish expenditures. Indeed, expenditures induced by experimental treatments follow (at least in aggregate) the same patterns observed from nonexperimental income. In other words, for most expenditure categories such as food, clothing, health expenditures, and so forth, the results show nothing startling or unexpected.

One thing people in Gary did spend their NIT money on? Housing, one of the core problems in the city.

A second finding is more surprising. Analyses of data from the experiments in Gary (Kaluzny 1979) and Seattle-Denver (Ohls and Thomas 1979) indicate that the income maintenance programs tend to encourage homeownership. In fact the estimated effects appear to be quite strong. For example, at the beginning of the Gary experiment, 23 percent of the experimental households owned homes; this rose to 34 percent three years later. Of the increase, 4 to 6 percentage points appears to be a treatment effect (Kaluzny 1979). One would expect that the temporary nature of the experiments—something not included in the housing analyses—would mute any effect on housing ownership. Nevertheless, the estimated homeownership effect, which is reasonably consistent across the Gary and Seattle-Denver experiments, suggests some noticeable experimental reactions that could potentially have long-term consequences.

The NIT experiments were relatively short-term and small-scale, and they were poorly handled with regard to the public; their results were rushed to the press, which proved incapable of handling the complexities of the results in ways that should sound awfully familiar:

Results of the fourth and largest experiment, SIME/DIME [NIT experiments in Seattle and Denver], were released while Congress was debating PBJI [Program for Better Jobs and Income]. Dozens of technical reports with large amounts of data were simplified down to two statements: It decreased work effort and it supposedly increased divorce. The small size of the work disincentive effect that pleased so many of the researchers hardly drew any attention. Never mind that everyone going into the experiments agreed that there would be some work disincentive effect; members of Congress were appalled; and columnists across the country responded with a chorus of negative editorials decrying the guaranteed income and ridiculing the government for spending millions of dollars to find out whether people work less if you pay them not to work.

The United Press International (1977) simply got the facts wrong saying that the SIME/DIME study showed that “adults might abandon efforts to find work.” The UPI apparently did not understand the difference between a decline in work hours while continuing to work, and abandoning the labor market. The Rocky Mountain News claimed that the NIT “saps the recipients’ desire to work.” Jones (1977) writing for the Seattle Times presented a relatively well-rounded understanding of the results, but despite this, simply concluded that the existence of a decline in work effort was enough to “cast doubt” on the plan. Similarly Rich (1978, November 18) implied that evidence showing the NIT “might cause recipients to work less” is enough to disqualify the program from consideration. Raspberry (1978) declared the experiments a failure simply because people worked less.

The response buried the NIT, and it mostly hasn’t been heard from since—at least until the economy collapsed during the Great Recession. Since then, the NIT and its policy cousins have been the subject of renewed interest in places like Bloomberg Businessweek, Vox, Reason, the New York Times Magazine, The Atlantic, Business Insider, and, uh, Fox News. And it appeals to the same breadth of ideologies that brought the NIT to the forefront in the 1970s, a cross-section of liberals and libertarians, the former objecting to the punitive nature of the current welfare system and the latter to its mechanisms of control. We’re back in interesting times again, seemingly reliving the ’70s, and it might be time to bring an interesting experiment of that era back to the forefront.

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