Most people know the old welfare program has been tossed out in favor of a tough new system that requires indigent mothers to get a job. What has gone largely unnoticed is that the federal government now spends more on low-income families than ever before. The difference is that the new approach doles out money to the poor only if they're employed. This squares with the mores of the American public, which is happy to help people who help themselves. It also works well in an economy where jobs are available to everyone.
But the U.S. also has set itself up for a potential disaster when the next downturn hits. The new money--primarily an expanded Earned Income Tax Credit (EITC) and Medicaid--won't help anyone who can't find a job. And when unemployment rises again, as it likely will, those with the lowest skills will be squeezed out first. "Among the greatest dangers of the recent strategy is that the employed but poor will become the unemployed and destitute in bad times," warns Harvard University economist David T. Ellwood in a new paper published this month.
The U.S. should grapple with this dilemma now, while the economy is booming, or millions of families could go hungry and homeless when times get tough. One solution in keeping with the new philosophy: offer "a publicly subsidized community-service job" to people tossed out of work in a downturn, suggests Brookings Institution economist Isabel V. Sawhill.
STRONG ECONOMY. The new social policy can be seen in the federal tab for poor families. The strong economy started slicing welfare rolls even before the new system was set up in 1996. The number of welfare recipients has plunged by nearly 50% since the 1994 peak, to 2.7 million families. The result: Welfare spending has dropped in half since then, to $20 billion.
Meanwhile, job-linked programs for the poor have jumped nearly tenfold, even after adjusting for inflation, to nearly $52 billion a year, according to a Congressional Budget Office study (table). Congress has repeatedly expanded the EITC, which refunds tax dollars to the working poor, as well as Medicaid, which gives them health coverage. And it has created several new programs tied to employment, including a child tax credit, a child-care program, and a children's health insurance program. "The new system that Republicans have helped to push through is far superior to the old one," says Ronald T. Haskins, chief staffer at the House subcommittee that deals with welfare.
The new approach gives the poor a tremendous incentive to work. Take a single mother with two children who received welfare under the old system. In 1986, she would have gotten about $8,500 a year in welfare and food stamps, after adjusting for inflation. And all family members would have had health coverage through Medicaid. If she took a full-time, minimum-wage job, her income would have climbed by about $2,000 a year in today's dollars, after factoring in the loss of her welfare check, the cost of child care, and added taxes. None of the family would have health coverage. "Working or not, the family would be poor," Ellwood says.
Take the same mother in 1997. If she didn't get a job, she would receive just $7,500 a year in benefits, and only for a limited time. Eventually, the family could wind up on the street. But if she works full-time at the minimum wage, her net income would nearly double, to $14,600 a year. A higher minimum wage is one reason, but more important is the expanded EITC and other programs. Together, they would put her above the poverty line (though not by much). Plus, her kids would get to keep their Medicaid coverage.
But what happens when jobs dry up? In the next downturn, the jobless rate will likely rise above today's 30-year low of 4%. If we're lucky, it will stop at 7.5%, the peak of the 1992 slump. That would add some 4 million people to the 6 million out of work today. And this time, the safety net for the jobless poor won't be providing much support, designed as it is nowadays to help only those who are employed. It's time to start looking into this problem--before the next crisis hits.