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THE RISE OF POVERTY INC.  
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Anne Kim
June 1, 2024
The Atlantic
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_ How helping the poor became big business _

, Adam Maida for The Atlantic

 

In 1964, president lyndon b. johnson declared “unconditional war on
poverty,” and since then, federal spending_ _on anti-poverty
initiatives has steadily ballooned. The federal government now devotes
hundreds of billions of dollars a year to programs that exclusively or
disproportionately benefit low-income Americans, including housing
subsidies, food stamps, welfare, and tax credits for working poor
families. (This is true even if you exclude Medicaid, the
single-biggest such program.)

That spending has done a lot of good over the years—and yet no one
would say that America has won the War on Poverty. One reason: Most of
the money doesn’t go directly to the people it’s supposed to be
helping. It is instead funneled through an assortment of
private-sector middlemen.

Beginning in the 1980s, the U.S. government aggressively pursued the
privatization of many government functions under the theory that
businesses would compete to deliver these services more cheaply and
effectively than a bunch of lazy bureaucrats. The result is a
lucrative and politically powerful set of industries that are fueled
by government anti-poverty programs and thus depend on poverty for
their business model. These entities often take advantage of the very
people they ostensibly serve. Today, government contractors run state
Medicaid programs, give job training to welfare recipients, and
distribute food stamps. At the same time, badly designed anti-poverty
policies have spawned an ecosystem of businesses that don’t contract
directly with the government but depend on taking a cut of the
benefits that poor Americans receive. I call
[[link removed]] these industries
“Poverty Inc.” If anyone is winning the War on Poverty, it’s
them.

Walk around any low-income neighborhood in the country and you’re
likely to see sign after sign for tax-preparation services. That’s
because many of the people who live in these neighborhoods qualify for
the federal earned-income tax credit, which sent $57 billion
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low-income working taxpayers in 2022. The EITC is a cash cow for
low-income-tax-prep companies, many of which charge hundreds of
dollars to file returns, plus more fees for “easy advance”
refunds, which allow people to access their EITC money earlier and
function like high-interest payday loans. In the Washington, D.C.,
metro area, tax-prep fees can run from $400 to $1,200 per return,
according to Joseph Leitmann-Santa Cruz, the CEO and executive
director of the nonprofit Capital Area Asset Builders. The average
EITC refund received in 2022 was $2,541.

Tax preparers might help low-income families access a valuable
benefit, but the price they extract for that service dilutes the
impact of the program. In Maryland, EITC-eligible taxpayers paid a
total of at least $50 million to tax preparers in 2022, according to
Robin McKinney, a co-founder and the CEO of the nonprofit CASH
Campaign of Maryland—or about $1 of every $20 the program paid out
in the state. “That’s $50 million not going to groceries, rent, to
pay down student debt, or to meet other pressing needs,” McKinney
told me.

Low-income tax prep is just one of many business models premised on
benefiting indirectly from government anti-poverty spending. Some
real-estate firms manage properties exclusively for tenants receiving
federal housing subsidies. Specialty dental practices cater primarily
to poor children on Medicaid. The “dental practice management”
company Benevis, for example, works with more than 150 dental
practices nationwide, according to its website, and reports that more
than 80 percent of its patients are enrolled in either Medicaid or the
Children's Health Insurance Program. (In 2018, Benevis and its
affiliated Kool Smiles clinics agreed to pay $23.9 million to settle
allegations of Medicaid fraud brought by federal prosecutors. The
companies did not admit wrongdoing.)

A second crop of companies that make up Poverty Inc. are the
contractors paid directly to deliver services on the government’s
behalf. The 1996 welfare-reform legislation repealed a federal
prohibition on contracting out for welfare services. Barely a month
after President Bill Clinton signed it into law, behemoths such as
Lockheed Martin, Andersen Consulting, and Electronic Data Systems
were vying
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multimillion-dollar contracts to run state welfare systems. Today, the
sector is dominated by firms like Maximus, a full-service contractor
that, among other things, operates
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state of Texas’s entire welfare system. Over the years, Maximus has
been hit with multiple lawsuits and investigations, including a 2007
federal prosecution resulting in a $30.5 million settlement
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allegations of Medicaid fraud and a 2023 federal class-action suit
alleging that a data breach exposed
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personal information of 612,000 Medicare beneficiaries. In 2023,
Maximus reported revenues of $4.9 billion
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gross profits of $1 billion. Its CEO made nearly $7 million in total
compensation last year (including $5 million in stock).

Contractors also deliver most government-funded job-training programs,
which have a well-deserved reputation for ineffectiveness. One reason
is the abundance of companies that are approved to receive federal
funds as “eligible training providers” despite showing
unimpressive results. In California, that includes institutions such
as Animal Behavior College in Valencia, which offers an online
dog-grooming course for a total cost of $6,298.87—and whose
graduates were making median quarterly earnings of just $5,000 six
months after graduation, according to state data.

Perhaps the greatest damage that Poverty Inc. inflicts is through
inertia. These industries don’t benefit from Americans rising out of
poverty. They have a business interest in preserving the existing
structure of the government programs that create their markets or
provide their cushy contracts. The tax-prep industry, for instance,
has spent millions over the past 20 years to block the IRS from
offering a free tax-filing option to low-income taxpayers. The irony
is that this kind of rent-seeking is exactly what policy makers
thought they were preventing when they embraced privatization 40 years
ago.

In his second term, President Ronald Reagan empaneled
the President’s Commission on Privatization
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which recommended the wholesale transfer of major government functions
to the private sector, including Medicare, jails and prisons, public
schools, and even air-traffic control. Privatization advocates were
heavily influenced by “public-choice theory,” posited by the
Nobel-winning economist James M. Buchanan. According to Buchanan,
government agencies are as motivated by self-interest as any other
entity. Instead of serving the public good, Buchanan argued,
bureaucrats act to preserve their own status by maximizing their
budgets and job security. Insulated from competition, they become
inefficient and detached from the public interest.

Privatization was supposed to pop that bubble of bureaucratic
indolence. Instead, it merely shifted it from government agencies to
corporate boardrooms.

Perhaps the clearest example of public-choice theory turned on its
head is Job Corps, a $1.8 billion job-training program for young
adults that, unlike most War on Poverty initiatives, has been
contracted out since its inception in 1964. Decades of evidence
suggest that the program accomplishes very little. It served
barely 50,000
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a year before the pandemic, meaning it cost about $34,000 a student.
(Job Corps largely shut down during the pandemic and hasn’t fully
restored operations since.) In one 2018 audit
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the Department of Labor’s inspector general concluded that the
program “could not demonstrate beneficial job training outcomes.”
Another investigation [[link removed]], by
the Government Accountability Office, noted more than 13,500 safety
incidents from 2016 to 2017 at Job Corps centers, nearly half of them
drug-related episodes or assaults. In 2015, two students
were murdered
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campus-related crimes. Critics have also questioned the value of
running an expensive residential program in mostly rural areas, far
from actual jobs.

Nevertheless, Job Corps administrators manage to hang on to government
contracts for decades. (One such company notes on its website that it
won its first Job Corps contract in 1964.) Today, the biggest operator
is the Management & Training Corporation, a Utah-based company that
runs 20 Job Corps centers nationwide. In 2022, MTC won three multiyear
contracts, worth a total of about $263 million, to run Job Corps
Centers in Nevada, New Jersey, and Hawaii. The program remains popular
in Congress, especially in districts where centers are located. The
Friends of Job Corps Congressional Caucus, organized by a lobbying
organization for Job Corps contractors, has 80 members. (MTC’s
president serves on the organization’s board.)

Contractors’ longevity stems in part from their ability to outlast
administrations—and the simple fact that, once a contract is
awarded, the company that wins it often becomes a de facto monopoly.
When the next contract rolls around, there may be no credible
competitors.

In short, an effort to curtail Big Government has instead preserved
the worst of both worlds: all the spending and bloat of government,
with none of the public accountability. No wonder, then, that poverty
sticks around. There’s simply too much demand for it.

_Anne Kim is a contributing editor at Washington Monthly and the
author of Poverty for Profit: How Corporations Get Rich Off
America’s Poor [[link removed]]._

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* big business
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* government programs
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