FIRST DRAFT: A Decade of "Welfare Reform"
J. Bradford DeLong
894 words
The 1990s were supposed to be the decade of welfare reform. By the start of the decade mainstream political opinion was that the welfare system based on Aid to Families with Dependent Children--cash payments to non-working single mothers--was not a success. Welfare recipients remained very poor, the incentives the system gave them were horrible, and the lessons implicitly taught about responsibility and opportunity were destructive. It seemed better, mainstream political opinion decided, to make a big push to shift people from welfare to work: to boost the wages of low-skilled workers, to provide training programs so that ex-long term AFDC recipients could build skills, and to provide job search assistance so that they could find employers who would pay for those skills. Such welfare reform would be more expensive for the government than simple cash grants to non-working single mothers, but it seemed worthwhile.
But the 1996 welfare reform of Newt Gingrich, Bob Dole, and Bill Clinton largely dropped the ball. Instead of making a big push on training and job search, it largely gave each state a blank check to spend as it saw fit the money the federal government had formerly spent on welfare. A few states have used their money to do remarkable and innovative things. Rather more have paid lip-service to the goal of reform, and used large chunks of the federal money for programs that the state budget used to pay for, reducing--not increasing--the total amount of money spent. The number of people on welfare has dropped significantly. In spite of a booming economy, the incomes of the poor have not risen significantly. Welfare reform has not spent serious money on building skills. It has not spent serious money on assistance in finding jobs. No one knows but everyone fears what will happen to America's single-parent poor when the boom ends and the next recession begins.
However, one piece of the original welfare reform program was put into place in 1993, as part of the Clinton deficit-reduction program. The Earned Income Tax Credit [EITC] gives a family with two children a 40-cent payment from the IRS for each of the first $9,500 of income earned. A part-time $8 an hour job thus becomes--after taxes--an $11.20 an hour job for the working poor. The Earned Income Tax Credit means that a two-child family with a full-time minimum-wage worker is lifted (barely) above the poverty line. Economic Policy Institute (www.epinet.org) economists Max Sawicky and Robert Cherry conclude that more than five out of six families eligible for the EITC actually collect it, and that the EITC manages to push more families above the poverty line than any other government program.
Is the EITC perfect? No. There are three standard criticisms of the EITC: (1) It is a subsidy to low-wage employers, and low-wage employers should be discouraged. (2) It penalizes working-class two-earner families. (3) It is overly bureaucratic and complicated.
The first criticism seems completely wide of the mark. If we want to raise the wages of the working poor, we want to see a lot of employers competing to hire them. To provide subsidies to employers of low-wage labor is to boost their numbers, and so increase the bargaining power in the market of low-wage workers.
The second criticism has a point. As the income of a two-child family increases from $12,500 to $30,850, they lose their $3,816 EITC. Combine this reduction in their tax credit with the 15.3% total Social Security tax and the $15% first bracket of the income tax and discover that American families earning $28,000 are the ones that pay the highest marginal federal tax rates of anyone. An easy way to make the EITC a better program would be to reduce the speed with which the credit is phased-out as income rises. But that takes money. High politicians are almost always more excited about their new signature initiatives than about improving effective but existing programs, and the politicians who made the EITC their signature initiative--Russell Long and Lloyd Bentsen--are long gone from Washington.
And the third criticism has a point as well. The EITC is a social insurance program administered by the Internal Revenue Service, an agency whose core mission does not involve boosting the incomes of the working poor. Moreover, the EITC's details are unnecessarily complex--the family as defined by the EITC is not necessarily the family as defined by the rest of the tax code, and the income concept that determines whether you qualify for the EITC is not necessarily the income that appears anywhere else on your tax form. (Cherry and Sawicky have proposals to fix this by simplifying the EITC and combining it with other child-centered tax provisions into a "Universal Unified Child Credit.")
But the validity of these criticism should not blot out the broad success of the program: $32 billion a year channeled to 15 million working poor and lower middle class families to boost their real wages and make work pay. I wonder whether the training-and-skill-building and job-search-assistance components of the original 1990s welfare reform program
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-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- "Now 'in the long run' this [way of summarizing the quantity theory of money] is probably true.... But this long run is a misleading guide to current affairs. **In the long run** we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."
--J.M. Keynes -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- J. Bradford De Long; Professor of Economics, U.C. Berkeley; Co-Editor, Journal of Economic Perspectives. Dept. of Economics, U.C. Berkeley, #3880 Berkeley, CA 94720-3880 (510) 643-4027; (925) 283-2709 phones (510) 642-6615; (925) 283-3897 faxes http://econ161.berkeley.edu/ <delong at econ.berkeley.edu>