Wednesday, December 09, 2009

Results of US welfare reforms

"A primer on US welfare reform" is the title of a paper by Robert Moffit, Professor of Economics at John Hopkins University, Baltimore. The tables I have used are from it. But first, some background from me.

When New Zealanders think of welfare they think any welfare benefit - unemployment, sickness, invalid and DPB are the main ones. So when they hear about the US welfare reforms they assume the same areas are covered whereas, in fact, the reforms were largely focussed on family assistance, which covered mainly single mothers. Unlike NZ, the US never created a widows benefit but from 1935 single mothers could claim federal assistance (although states imposed their own rules about eligibility.) So the benefit that covered this purpose, Aid to Families with Dependent Children (AFDC) was effectively the equivalent of NZ's combined widow's and domestic purposes benefit. In the US unemployment insurance is an entirely separate matter funded through payroll taxes. Social Security (for low income elderly, sick and disabled) is funded through a separate payroll tax (which began at 2 percent but has grown to 12.4 percent). Supplemental social security (subjected to a spattering of less successful reforms) and AFDC, on the other hand, were funded through general tax revenues. It was also accepted that socially, AFDC was doing more harm than good. That then was the major target.

AFDC was abolished and replaced with Temporary Assistance To Needy Families (TANF). Open-ended entitlements became temporary. (Which is what I have long campaigned for).

The result:

However, when we look at overall cash transfers, those the author includes as 'welfare' spending, the picture is very different.

That is because spending on other programmes continues to grow. The following table details the nine largest programmes.

So, many of those families that disappeared from the welfare rolls are, in effect, still on welfare. NZ opponents of the idea ask, what happens when people reach their time limits? US opponents claimed there would be mass poverty, people would die in the gutters. But often their homes, food and health needs are still paid for or subsidised and even a small amount of work will entitle them to an earned tax credit top-up. Plus states have a waiver to exempt a certain number from the limits.

The significant difference is that families were expected to work and, this is the really important thing, their children learned the same. The Americans also had little truck with funding training and education schemes. The major principle (although states differed) was work first.

The author writes, "That the 1996 welfare reform was a success, in overall terms and on average, is almost universally accepted by policy analysts and researchers."

Yes, there is good and bad, but on balance, most lives have improved. The following table summarises the findings of several studies. You will need to enlarge it to read it. But I want to highlight what I think is the crucial one.

A large fraction, if not the majority, of the effect arose from decreased entry to the program rather than increased exit.

That supports what I have long argued. That we have to change expectations. The easier part of reform is stopping people from putting themselves in the situation where they need welfare. For the life of me I do not know why it is so difficult for politicians to take this on board.

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