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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Baumol’s Disease and the Perception of Welfare State Retrenchment



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There is an unexamined assumption I often encounter when reading about anti-poverty efforts, which is that anti-poverty spending has collapsed since the Reagan era. Andrea Elliott’s recent series of articles on the challenges facing a homeless family living in Brooklyn is one recent example. But consider the following from Dismantling the Welfare State?, a 1994 examination of the politics of welfare state retrenchment in the U.S. and Britain under Reagan and Thatcher by Paul Pierson, a well-regarded left-of-center political scientist now based at Berkeley:

On the whole, the challenge proved to be too much for both administrations. Although for different reasons both supporters and opponents of retrenchment have had cause to exaggerate the success of the conservative reformers, the reality is a messy, mixed picture of welfare states beset by genuine pressures but not by fundamental crises. The fear of popular opposition to radical spending cuts repeatedly forced each administration to retreat. Only on the infrequent occasions when it was possible to design reforms that defused such opposition did radical retrenchment occur.

Robert VerBruggen of RealClearPolicy observes that means-tested welfare spending in the U.S. increased from 3.14 percent of GDP in the 1970s to 3.48 percent in the 1980s, and it has reached 6.1 percent in the 2010s so far. To be sure, the 2010s are far from over, and we’re not that far off from the 2008 financial panic. Means-tested welfare spending is high in part because we’ve lived through a lost half-decade. But it is hard to argue that means-tested welfare has been “dismantled.” Rather, it has taken a different shape, with the transformation of AFDC into TANF and the growth of the EITC, among other work supports. Scott Winship has documented the extent to which transfers have contributed to low-end household incomes in recent decades.

Recently, Max Sawicky, a left-liberal critic of universal basic income proposals, has called for super-sizing TANF:

If you like the transfer of cold cash, your chief target ought to be Temporary Assistance for Needy Families, the fruits of the Clinton/Gingrich welfare reform of 1996. The Feds provide a grant to state governments, who busy themselves with helping people to help themselves. In the actual event, states helped a lot of people off the welfare rolls and into poverty. The national poverty rate, notwithstanding this reform, steadily went up after 2000. So if you want to strike a blow for reduced overhead, simplicity, and adequacy – if you’re serious – go ahead and make my day: Federalize TANF and establish it as an individual, adequate cash payment to which every resident has a legal right. To constrain its cost, limit eligibility to families with dependent children and phase it out as other income grows.

Sawicky’s suggestion doesn’t strike me as wise. But to his credit, he acknowledges a few important facts, e.g.:

Overhead cost is typically exaggerated in conservative discussions. Conservatives present comparisons of spending under a long list of Federal programs, many of which have broader or entirely different objectives than reducing poverty. The costs of programs that try to do things requiring public employees are not the same as ‘overhead,’ nor are these employees necessarily a bureaucracy. Even the programs explicitly aimed at reducing poverty are designed to cover more than just those under the poverty line. Moreover, the overhead costs of the main programs noted below are low, for the most part.

We also see exaggerations of the number of programs that are dedicated to reducing poverty. The fact is that most anti-poverty spending is concentrated in relatively few places: Medicaid, food stamps, the Earned Income Tax Credit, Supplemental Security Income, Temporary Assistance for Needy Families, unemployment compensation, and housing subsidies. Coverage in most of these programs goes well above the official poverty line. [Emphasis added]

Again, Sawicky’s objective is to make the case for more ample programs that attach fewer strings. But when we think about why public social expenditures (a larger category than means-tested benefits) have increased, we need to keep in mind the fact that skilled workers are expensive, and so the cost of labor-intensive social services has been growing at a much faster rate than, say, the cost of televisions or air travel. People might feel as though the post-Reagan era has seen a “dismantling” of social services, but the more disturbing truth is that we’re spending more to get social services that deliver less. Student-teacher ratios, for example, have declined over the past forty years, and one result is that we’ve seen a dilution of the teacher talent pool, which in turn seems to have contributed to a deterioration in average teacher quality. There are ways around this problem, e.g., specialization or embracing an evidence-based salary schedule, but this is easier said than done, particularly in public sector organizations that are resistant to change. Similar dynamics obtain in other public services. The problem is less that we used to have great programs in the Great Society era that were subsequently destroyed than that Baumol’s cost disease is a thing. We have decided that in-kind services are preferable to cash transfers, and this has proven to be an expensive (if not necessarily inappropriate) decision. To return to Scott Winship for a moment, consider his assessment of low-end incomes:

From 1979 to 2007, median pre-tax income defined to include non-cash benefits rose by about 30 percent. I find about the same increase for median post-tax income, but my estimates do not account for tax credits. The Congressional Budget Office reports a 33 percent increase in pre-tax income and a 42 percent increase in post-tax income. At the 20th percentile, pre-tax income rose by 26 to 38 percent, depending on how Medicare and Medicaid are valued. The truth is almost surely somewhere in the middle. The post-tax increase was similar.

Finally, the Census Bureau figures do not account for the fact that households have become smaller over time. When households have fewer mouths to feed, a given amount of income goes a longer way, so even if incomes had not grown, Americans would have been better off. 

After adjusting for household size, median pre-tax income was about 40 percent higher in 2007 than in 1979, and according to CBO, post-tax income was 49 percent higher. At the 20th percentile, size-adjusted household income rose by 28 to 46 percent (with the health insurance valuation much more consequential than the inclusion of taxes). [Emphasis added]

The range of estimates Winship provides regarding the value of Medicare and Medicaid benefits is a vivid reminder that health expenditures may well be crowding out cash transfers as an anti-poverty tool.

Sawicky, meanwhile, makes a point that David Armor and Sonia Sousa have made, namely that many anti-poverty programs actually cover people who earn well above the poverty line. This is perfectly sensible in some cases, as we have to be mindful of implicit marginal tax rates as people climb out of poverty. But covering the nonpoor means that social expenditures aren’t as concentrated on the hard-core poor as they might be.

I don’t think there is any question that anti-poverty policy in recent years has had disappointing results. But that’s not primarily because spending hasn’t increased. My sense is that voters would be more comfortable with increasing anti-poverty spending if they felt more confident that it was being spent intelligently. Oren Cass has offered a valuable new framework for reforming anti-poverty spending that has attracted some attention on the Hill, and one hopes that it will help shape the debate going forward.



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