Taxes & Spending

Stimulus Bill Abolishes Welfare Reform Successes

Welfare reform in the mid-1990s was a major public policy success leading to a dramatic reduction in welfare dependency and child poverty. Little-noted provisions in the House and Senate stimulus bills actually abolish this historic reform.

In addition, the stimulus bills will add nearly $800 billion in new means-tested welfare spending over the next decade. This new spending amounts to around $22,500 for every poor person in the U.S. The cost of the new welfare spending amounts, on average, to over $10,000 for each family paying income tax. Since the House and Senate bills are nearly identical in their welfare provisions, we can expect these features to continue in any final bill.
New System Worse than AFDC

The welfare reform of 1996 replaced the old Aid to Families with Dependent Children (AFDC) with a new program named Temporary Assistance to Needy Families (TANF). Although much emphasis has been placed on the time limits on assistance in the new TANF program, in reality, the time limits were full of loopholes and largely symbolic.

The true key to welfare reform’s reduction in dependency was the change in the funding structure of AFDC.

Under the old AFDC program, states were given more federal funds if their welfare caseloads were increased. By contrast, federal funds to a state were cut whenever the state caseload fell. This created a strong incentive for states to swell the welfare rolls. It should be no surprise that, prior to reform, one child in seven was receiving AFDC benefits.

When welfare reform replaced the old AFDC system with TANF, this perverse financial incentive to increase dependence was eliminated. Each state was given a flat funding level that did not vary whether the state increased or decreased its caseload. In addition, states were given the goal of reducing welfare dependence (or at least of requiring welfare recipients to prepare for employment).

The House and Senate stimulus bills will overturn the fiscal foundation of welfare reform and restore an AFDC-style funding system. For the first time since 1996, the federal government will begin paying states bonuses to increase their welfare caseloads. Indeed, the new welfare system created by the stimulus bills is actually worse than the old AFDC program because it rewards the states more heavily to increase their caseloads. Under the stimulus bills, the federal government will pay 80% of cost for each new family that a state enrolls in welfare; this matching rate is far higher than in old AFDC program.

The stimulus bill thus eliminates the reform goal of reducing dependence and returns to the old policy of providing states incentives to build up their welfare caseloads. The House bill provides $4 billion per year to reward states to increase their TANF caseloads. The Senate bill follows the same policy but allocates less money.

Proponents of the stimulus plan might argue that these changes are necessary to help TANF weather the current recession. This is not true. Under existing TANF law, the federal government operates a TANF “contingency fund” with nearly $2 billion in funding that can be quickly funneled to states that have rising unemployment. (Note: The existing contingency fund ties increased financial support to states to the objective external factor of unemployment. It specifically avoids a policy of funding states for increased welfare caseloads, recognizing the perverse incentives this could entail.)

‘Liberal Conspiracy’

If the authors of the stimulus bills merely wanted to provide states with more TANF funds in the current recession, they could have increased funding in the existing contingency fund. But they deliberately did not do this. Instead, they completely overturned the fiscal and policy foundations of welfare reform.

Writing in Slate, liberal commentator Mickey Kaus criticizes the stimulus bill welfare provisions as a “liberal conspiracy to expand the welfare rolls.” He laments, “Why use the aid specifically to encourage expansion of welfare? At the very least the extra aid to the states shouldn’t be triggered by caseload expansion. (You could, for example, give states aid in proportion to their local unemployment rate.)” These are reasonable suggestions. The authors of the stimulus bills pursued a different policy precisely because they wish to overturn welfare reform and increase dependence on government.

Welfare Spendathon

But overturning welfare reform is just the beginning. In his recent press conference, President Obama explained that the stimulus bill would provide “tax relief” and “direct investment” in infrastructure. He neglected to mention that of the $816 billion in new spending and tax cuts in the House stimulus bill, 32% or $264 billion is new means-tested welfare spending. (The figure in the Senate bill is about 15% lower. )

Means-tested welfare programs give cash, food, housing, medical care, and targeted social services to poor and low income persons. In a means-tested program, benefits are limited to persons below a specified income level. The cut-off income level varies from program to program but is typically less than 150% of poverty or around $33,000 per year for a family of four.

For example, food stamps and public housing are means-tested (or limited to lower-income persons), while Social Security and postal service are not. Means-tested welfare also includes “refundable” tax credits. With a refundable credit program, the government gives cash grants to persons who owe no income tax. Like conventional means-tested programs, refundable credits give aid to poor and lower-income persons.

The federal government runs over 50 means-tested welfare programs, including Temporary Assistance to Needy Families, Medicaid, food stamps, the Earned Income Tax Credit (EITC), the Women, Infants, and Children (WIC) food program, public housing, Section 8 housing, the Community Development Block Grant, the Social Services Block Grant, and Head Start.

Largest Expansion Ever

In the first year after enactment of the stimulus bill, federal means-tested welfare spending will explode upward by more than 20%, rising from $491 billion in fiscal 2008, to $601 billion in fiscal 2009. This one-year explosion in welfare spending is, by far, the largest in U.S. history. But spending will continue to rise even further in future years. The stimulus bill is a welfare spendathon, a massive down payment on Obama’s promise to “spread the wealth.”

While $264 billion in new welfare spending may seem like a lot, it is only the tip of the iceberg. If the stimulus bill is enacted, the real long-term increase will be far higher. This is because the stimulus bill pretends that most of its welfare benefit increases will lapse after two years. In fact, both Congress and President Obama intend for most of these increases to become permanent. The claim that Congress is temporarily increasing welfare spending for Keynesian purposes (to spark the economy by boosting consumer spending) is a red herring. The real goal is a permanent expansion of the welfare system.

The House and Senate bills contain a half-dozen or more new welfare entitlements or expansions to benefits in existing programs. The pretense that these welfare expansions will lapse after two years is a political gimmick designed to hide their true cost from the taxpayer. If these welfare expansions are made permanent — as history indicates they will — the welfare cost of the stimulus will rise another $523 billion over ten years.

Once the hidden welfare spending in the bill is counted, the total ten-year cost of welfare increases will not be $264 billion but $787 billion. This new spending will amount to around $22,500 for every poor person in the U.S. The cost amounts, on average, to over $10,000 for each family paying income tax in the U.S.

The overall ten year fiscal burden of the bill (added to the national debt) will not be $814 billion but $1.34 trillion. To this must be added the interest on the debt issued to finance this spending deluge.

$127,000 Cost per Household

Even without the stimulus bill, means-tested welfare spending in the U.S. is already at an historic high and growing rapidly. In 2008, federal, state, and local means-tested spending hit $679 billion per year. This vast outlay was the result of a fairly steady growth in welfare spending over the last two decades, and is not a temporary surge due to the recession. Without any legislative expansions, given historic rates of growth in welfare programs, federal, state, and local means-tested welfare spending over the next decade will total $8.97 trillion. The House stimulus bill will add another $787 billion to this total, yielding a ten-year total of $9.8 trillion. The total ten-year cost of means-tested welfare will amount to $127,000 for each household paying federal income tax.

Unprecedented Deception

Both the Senate and House stimulus bills are Trojan horses that deliberately employ hysteria about the current recession to conceal a permanent revolution in the U.S. welfare system. The fact that the stimulus proponents seek to conceal the bill’s massive permanent changes in welfare is a clear indication that they understand how unpopular these changes would be if the public became aware of them. Far from an exercise in “unprecedented transparency,” as President Obama claims, the stimulus bills are an example of unprecedented deception.

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