The Rise of Poverty Inc.
6 min read
In 1964, President Lyndon B. Johnson declared “unconditional war on poverty,” and since then, federal spendingon 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 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 toward 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 for 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 the 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 over allegations of Medicaid fraud and a 2023 federal class-action suit alleging that a data breach exposed the personal information of 612,000 Medicare beneficiaries. In 2023, Maximus reported revenues of $4.9 billion and 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, 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 students 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, the Department of Labor’s inspector general concluded that the program “could not demonstrate beneficial job training outcomes.” Another investigation, 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 in separate 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.
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