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Mend, Don't End, Welfare Reform

Paula Dwyer writes editorials on economics, finance and politics for Bloomberg View. She was London bureau chief for Businessweek and Washington economics editor for the New York Times, and is a co-author of “Take on the Street: How to Fight for Your Financial Future.”
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Twenty years ago, President Bill Clinton signed the landmark welfare-reform law against the wishes of some of his closest Democratic allies and with support from his normally hostile Republican foes. Debate still rages over what the law accomplished.

Hillary Clinton, who is set to accept the Democratic nomination for president on Thursday, is caught in the undertow of that dispute. She is reluctant to forswear one of her husband's biggest achievements, yet unwilling to lose faith with her party's liberal wing. What's a good Democrat to do in 2016?

She can unflinchingly point to evidence that welfare reform worked. Soon after the law's enactment, poverty rates fell and teen pregnancies plummeted (they remain at a historical low).

There's also little doubt that the end of welfare as an entitlement encouraged millions of people to find work: The labor-force participation rate of poor single mothers rose sharply. Yes, the number drifts back down whenever the economy stutters, but it was still 10 percentage points higher in 2014 than in 1992.

Critics argue that welfare reform may have worked in boom years but that it failed in bad times, especially the 2007-2009 recession, when poverty rose as employers laid off the most vulnerable workers and cut wages. But this just demonstrates how important work is to the safety net. The ups and downs also show why Congress needs to restore cash assistance to its inflation-adjusted level (more on that later) so states can use the program to offset the economic cycle.

QuickTake The Safety Net

Much of the debate over the impact of the 1996 law focuses on poverty rates. Bernie Sanders and other liberals argue that welfare rolls may have shrunk -- in part because some states deliberately cut them -- but poverty rates have climbed. The critics point to Census Bureau data, which puts the official rate at 13.7 percent before the law was enacted. By 2001, it had declined to 11.7 percent, but was back up to 15.1 percent in 2010 and has settled at 14.8 percent for the last two years. (A single mother with two children and income under $19,073 is considered below the poverty line today.)   

But once other safety-net benefits are counted as household income (the only proper way to measure poverty because it more accurately reflects real living conditions), poverty rates never exceeded pre-reform levels and are lower now than in 1996.

Other anti-poverty programs, including earned-income tax credits, food stamps and Medicaid, were all enhanced around the same time that welfare was overhauled, so the effects are hard to disentangle. Some analysts argue that, even after controlling for those improvements, poverty is still lower than it was in 1996.   

Defending the legacy of the Bill Clinton-era welfare reform is not an argument for leaving it alone. After two decades, the system needs fixing. A little history explains why.  

The law, known as Temporary Assistance to Needy Families, transformed what had been a guaranteed check for poor people into a $16.5 billion block grant to states. Recipients must work or attend a job-training program, and are limited to two consecutive years of cash benefits (five years over a lifetime). Beyond that, states have great leeway in setting eligibility criteria and deciding how to spend their block grants. Many states used the flexibility to trim welfare rolls, which at their 1994 peak counted 14 million people. Today the number is 4 million.  

Congress hasn't added to the $16.5 billion block grant in 20 years, so the inflation-adjusted amount that the states get is really only $11 billion.

In addition, the law lets states funnel some of that block-grant money into other programs: child care, foster care, pre-kindergarten programs and drug-abuse treatment -- almost anything that can be defined as "benefits and services" to poor families.

The money has become like a slush fund that states use to cover shortfalls in downturns. As a result, states spend only 26 percent, or about $8 billion, of combined federal and state welfare funds on cash assistance, depriving the needy of money to pay for rent, clothing, school supplies, gasoline, car payments and countless other necessities.

The median monthly benefit in 2015 was $428 for a family of three, amounting to one-fourth of the poverty level.

One of the law's main aims was to encourage people to pursue an education. Instead, the opposite has happened, since many states emphasize work over education as the way to get and keep benefits.

But Hillary Clinton doesn't have to tear down what her husband helped build in the 1990s. She should replenish the welfare block grant and tie it to inflation so it doesn't erode over time. She should require states to spend most of the money on cash assistance, as intended. And she should hold states accountable for connecting people with jobs, plus end loopholes states have used to avoid such investments in promoting work.     

The heated rhetoric in the presidential primaries notwithstanding, Clinton and the Sanders Democrats want the same things -- for government to help poor people obtain the skills needed to get a job; to subsidize child-care and transportation needs to keep them working; and to supplement often-meager wages with earned-income tax credits. Old welfare was a failed program. New welfare can still be made to work.

  1. Female labor-force participation was rising overall, but the number of poor single mothers who got jobs jumped substantially, to 64 percent in 1999 from 44 percent in 1992. It dropped back to 51 percent during the recent recession but by 2014 was back to 54 percent.

  2. Researchers, however, see an increase in deep poverty. From 1996 to 2011, the share of households with children living on less than $2 a day rose to 4.3 percent from 1.7 percent. But when food stamps, Medicaid, tax credits and housing subsidies are counted, the rate rose to only 1.6 percent from 1.1 percent. That's still troubling, yet hardly an indictment of the entirety of welfare reform. It reveals where states should be focusing their efforts -- making sure the poorest families are getting cash assistance.

  3. States must have 50 percent of welfare caseloads in work or training programs, but states have learned to game the system. They can, for example, reduce the 50 percent standard by one percentage point for each percentage-point decline in total caseloads, leading some states to actively discourage needy families from applying for TANF funds.  

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Paula Dwyer at pdwyer11@bloomberg.net

To contact the editor responsible for this story:
Katy Roberts at kroberts29@bloomberg.net