Chapter Study Outline
- The Great Depression spawned many programs to reduce poverty.
- Lyndon B. Johnson declared a war on poverty in 1964.
9.1 The Battlefield: Poverty in the United States
- Poverty line: individuals below this threshold are defined as poor, and the line may vary according to specific circumstances.
- Absolute standard: the poverty line does not depend on the economic experiences of other people.
- Relative standard: the poverty line depends on others.
- In the United States, poverty is measured by an absolute standard derived from minimum food expenditures.
- In 2008, the poverty line in the United States for a single person without dependent children was $11,200 per annum.
- It was $21,834 for a family of four with two children under the age of 18.
- In 2007, the U.S. poverty rate was 12.5% and over 37.3 million people were classified as poor.
- Poverty varies considerably across demographic groups, but the largest category of the poor is children, at 13.3 million in 2007.
- Families headed by a single female have a much higher poverty rate (30%) than married-couple families (4.9%).
- Over the years poverty rates have also seen large fluctuations.
- The duration of poverty may also vary, and Stevens (1999) found that those who become poor are likely to stay poor.
- Timeline of legislation and programs to combat poverty
- Social Security Act (1935)
- ADC: Aid for Dependent Children, renamed Aid to Families with Dependent Children (AFDC) in 1962
- ADFC-UP: in 1961 AFDC expanded to families with an “unemployed parent”
- Food Stamp Act (1964)
- SNAP: Supplemental Nutrition Assistance Program (2008), the renamed Food Stamp Program
- Medicaid (1965)
- EITC: Earned Income Tax Credit (1975)
- OBRA: Omnibus Budget Reconciliation Act (1981)
- FSA: Family Support Act (1988)
- Contained child support provisions
- JOBS: Job Opportunities and Basic Skills
- PRWORA: Personal Responsibility and Work Opportunity Reconciliation Act (1966)
- TANF: Temporary Aid for Needy Families, which replaced AFDC
- MOE: Maintenance of Effort, a constraint on welfare programs
9.2 The Armory
- Currently the United States spends nearly $700 billion on programs to reduce poverty, or about 5% of the economy’s GDP.
- AFDC/TANF are the most recognizable welfare systems. They provide cash support to eligible participants who are usually single mothers with dependent children.
- TANF replaced AFDC in 1996.
- TANF was a much leaner welfare system.
- The newer program gave states greater autonomy and set a five-year time limit for recipient eligibility.
- EITC was introduce in 1975 to help low-income families deal with Social Security tax payments
- The program provides low-income individuals with a tax credit.
- In 1986 the Tax Reform Act extended EITC coverage to working parents with dependent children.
- Medicaid was passed as part of the Social Security Act in 1965.
- The program provides medical care to low-income persons.
- Prior to PRWORA, Medicaid was a linked benefit because eligibility was contingent on enrollment in another program.
- SNAP provides coupons, or an electronic debit card today, that eligible low-income families can use to buy certain types of food.
- Initially it was a linked benefit program.
- Child support refers to a number of legislative efforts to establish child paternity in single-parent families on welfare.
- The programs collect and disburse child support payments.
- They attempt to transfer financial responsibility from the public to the actual parents.
- Child support payments are not counted as government spending, but they are counted as part of the total income of recipients.
- Medicaid is by far the largest program, and it has grown rapidly over the last 40 years. In 2008 it amounted to $300 billion in spending.
- In the last 15 years EITC expenditures have surpassed TANF expenditures.
- The level of SNAP expenditures lies between TANF and EITC spending.
- Because they are counted as part of the custodial parent’s income, child support payments can have an effect on welfare benefit payments.
- Many constraints prevent the government’s massive spending from eliminating poverty, including:
- Limited resources
- Multiple objectives
- Political constraints
9.3 The Economic Consequences of Five Major Policy Weapons
- In the neoclassical model of the poor it is reasonable to ignore initial wealth and set A0 equal to zero.
- The budget constraint takes the simple for c = w ∙ (T - l).
- AFDC/TANF
- BRR: the benefit reduction rate at which a welfare recipient’s benefits are reduced for each additional dollar of alternative income she accrues from employment earnings or child support
- If the BRR is set to unity, a $1 increase in alternative income will result in a $1 reduction in welfare benefits, resulting in zero net gain and problematic incentives.
- $B0: the maximum benefit that is paid to eligible recipients who have zero alternative income
- R: the break-even point at which benefits are completely displaced.
- If the BRR = 1, then if the welfare system affects the recipient at all, it is predicted to induce him to become a nonparticipant.
- If the BRR is strictly less than 1, the income and substitution effects work together to unambiguously discourage work.
- On neoclassical theoretical grounds, the AFDC/TANF welfare system is predicted to unambiguously dull work incentives.
- While AFDC permitted indefinite enrollment, the TANF program has a cumulative five-year eligibility limit.
- Grogger and Michalopoulos (2003) found that the introduction of time limits reduced welfare claimants by nearly 16%.
- There is mixed evidence on the link between welfare benefits and birth and fertility rates.
EITC
- Low-income individuals receive a check from the IRS corresponding to their EITC tax credit. The credit is the equivalent of a subsidy or a negative tax. It is characterized by
- s = the subsidy rate
- τ = the phase out rate
- $S0 = the maximum tax credit
- $T0 = the level of income that first leads to the maximum credit, $S0
- $T1 = the level of income beyond which the credit is reduced
- $TR = the break-even income where the credit first reaches zero
- The structure of the program creates three phases.
- Phase in: each additional $1 of earnings generates an EITC tax credit of $s.
- Plateau: once income reaches T0, the recipient earns the maximum credit, $S0.
- Phase out (claw-back): beginning at T1, each additional $1 of earnings reduces the EITC credit by $τ.
- The EITC dissipates once income reaches TR.
The system results in an unambiguous increase in the well-being of those who are affected.
- It provides an incentive for nonparticipants to enter the labor force, since participants receive the maximum credit $S0 only if they work h0 hours.
- However, low-income workers who participated in the labor market before the EITC’s implementation may have dulled work incentives due to the positive income effect of the outward budget line shift.
Medicaid and SNAP
- Until they were decoupled from enrollment in TANF in 1996, these were linked-benefit programs.
- The linkage between TANF and Medicaid exacerbates the disincentive to work created by TANF.
- With the linkage, if a single mother earns enough to exit TANF, her Medicaid benefits end.
Decoupling the programs is predicted to lead to an increase in workforce participation.
- Studies have confirmed the predicted effect.
Child support programs
- Due to the high incidence of poverty in households headed by a single mother, the large increase in the proportion of this type of family was cause for concern.
- Thus child support policies usually focus on absent fathers.
- The 2007 Child Support Enforcement Program collected over $25 billion in child support by attempting to
- Establish child paternity
- Obtain an appropriate support order
- Locate absent fathers
- Collect support payments from absent fathers
- Mothers on welfare must count child support payments as part of their total income. An increase in child support tends to:
- Encourage the labor-force participation of current nonparticipants.
- The overall effect of children’s well being depends on weighing the benefits of increased income against the reduction in the mother’s time at home.
- Reduce the hours worked by current participants
- The reduction is an example of a pure wealth effect.
9.4 The Battle is Joined: Welfare Reforms
- When AFDC was created in 1935, divorce and out-of-wedlock births were rarities.
- It was extremely uncommon for married mothers with children to work.
- The program was instead targeted at deserving widowed mothers.
- By 1990 one-third of families were headed by a single, usually female, parent, and the program was in need of reform.
- AFDC recipients increased 270% from 1965 to 1985.
- In 1960 only 1/4 of single mothers were employed, as compared with 2/3 today.
- Unemployed fathers in the 1961 recession prompted the government to expand the program to AFDC-UP.
- The Family Support Act (1988) began the reform process, ending AFDC-UP and calling for work requirements for welfare.
- While welfare reforms sought to reduce welfare recipients by making nonparticipation less attractive, EITC sought to reduce their number by making employment more attractive.
- The PRWORA (1996) abolished AFDC and replaced it with TANF.
- TANF was leaner and payments were contingent upon employment outcomes.
- The act changed the federal/state funding relationship by replacing the matching program with block grants.
- The new program mandated that recipients be working after 24 months in order to continue receiving assistance, with a 60-month maximum.
- After a sharp increase in welfare recipients from 1990 to 1995, TANF family caseloads plummeted from 1996 to 2005.
- Labor force participation by single mothers increased.
- Since the 1990s witnessed the longest sustained expansion of economic activity in U.S. history, it is difficult to isolate the effects of welfare reforms.