Chapter 9

Policy Application: The War on Poverty

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.