PAI786: Urban Policy Class 16: Welfare Programs and Principles of Welfare Policy

PAI786, Class 16: Welfare Programs and Policy Class Outline ▫Welfare Programs ▫Work Incentives  Theory  Evidence ▫Marriage Incentives

PAI786, Class 16: Welfare Programs and Policy Cash Welfare Programs, TANF ▫Temporary Assistance to Needy Families (1997)  Replaced Aid to Families with Dependent Children (AFDC), which was set up in 1935  Provides assistance mainly to single parents  Has work requirements and time limits, which are covered in detail in the next class.

PAI786, Class 16: Welfare Programs and Policy Cash Welfare Programs, EITC ▫Earned Income Tax Credit  The EITC is part of the income tax code.  It subsidizes wages for the lowest-income earners in the form of a (refundable) tax credit.  The EITC is now the nation’s largest cash welfare program.

PAI786, Class 16: Welfare Programs and Policy / EITC Parameters

PAI786, Class 16: Welfare Programs and Policy Recent Developments ▫See “The Changing Safety Net for Low Income Parents and Their Children: Structural or Cyclical Changes in Income Support Policy?” Hardy, Smeeding, and Ziliak, Working Paper ▫This is the source of the following figures. ▫Available at: changing-safety-net-for-low-income-parents-and-their- children/files/2015/04/TheChangingSafetyNet-Feb2015.pdf changing-safety-net-for-low-income-parents-and-their- children/files/2015/04/TheChangingSafetyNet-Feb2015.pdf

PAI786, Class 16: Welfare Programs and Policy / Spending on “Welfare” Programs

PAI786, Class 16: Welfare Programs and Policy / Participation in “Welfare” Programs

PAI786, Class 16: Welfare Programs and Policy Cash Welfare Programs, SSI ▫Supplemental Security Income  SSI is a cash welfare program for the elderly and disabled poor—a supplement to Social Security.  It appears to be the main reason that poverty has dropped so much among the elderly.  It is the least controversial welfare program.

PAI786, Class 16: Welfare Programs and Policy In-Kind Welfare Programs ▫Some welfare programs provide goods and services, not cash.  The Supplemental Nutritional Assistance Program (SNAP, formerly called Food Stamps) provides coupons that can be used to pay for food.  Medicare (for the elderly) and Medicaid (for the poor) provide health insurance.  As discussed in previous classes, housing assistance subsidizes rents for some low-income families.

PAI786, Class 16: Welfare Programs and Policy In-Kind Welfare Programs, Continued ▫The distinction between cash and in-kind programs can be important.  Some in-kind programs (SNAP) are essentially like a cash program.  Others (Medicare, Medicaid, and housing assistance) are different than cash.  The following figures explain this distinction.

Other Goods Per Day 0 Food per Day Cash versus In-Kind Subsidies, Case 1 PAI786, Class 16: Welfare Programs and Policy Indifference curve Original Budget Constraint Budget Constraint with SNAP Extension of Budget Constraint with Cash Grant Choice with Food Stamps or Cash Grant Original Choice Amount of SNAP Coupons The value of SNAP coupons is less than pre-SNAP food consumption.

Other Goods Per Day 0 Medical Care per Day Cash versus In-Kind Subsidies, Case 2 PAI786, Class 16: Welfare Programs and Policy Budget Constraint with Medicaid Extension of Budget Constraint with Cash Grant Choice with Medicaid = In-Kind Grant Original Choice Choice with Cash Grant Income Shift That Is Equivalent to Medicaid from Household Point of View Spending on Medicaid is greater than a household’s pre-Medicaid spending on medical care.

PAI786, Class 16: Welfare Programs and Policy Work Incentives ▫One of the conceptual issues at the heart of the debate about welfare policy is that of work incentives.  Some welfare programs create financial incentives that discourage work.  This feature may harm recipients in the long run and it undermines support for the programs.  Today we develop conceptual tools; current program details are covered in the next class.

 Leisure Hours per Day, L  Work Hours per Day Time Constraint 0 L1L1  Goods per Day, Y The Labor-Leisure Choice PAI786, Class 16: Welfare Programs and Policy Indifference curve Budget Constraint A household sets the marginal benefit from leisure equal to the marginal cost, which is the wage rate.

 Leisure Hours per Day, L  Work Hours per Day Time Constraint 0 L1L1 L2L2 L3L3 Income Effect Substitution Effect Slope = -w(1-t)    Guarantee Goods per Day, Y Leisure Choice with a Welfare Guarantee and “Tax” Rate PAI786, Class 16: Welfare Programs and Policy A welfare program boosts leisure though an income effect (leisure is a normal good) and a price effect (the welfare “tax” lowers the net wage).

 Leisure Hours per Day, L  Work Hours per Day Time Constraint 0 L1L1 L2L2 L3L3 Slope = -w(1-t)   Guarantee Disregarded Income Goods per Day, Y Leisure Choice with a Welfare “Disregard” PAI786, Class 16: Welfare Programs and Policy  A “disregard” prevents the price effect from kicking in right away.

 Leisure Hours per Day, L  Work Hours per Day Time Constraint 0 L1L1 L4L4 100% tax rate  Guarantee Disregarded Income Goods per Day, Y Leisure Choice with a Disregard & a 100% Tax Rate PAI786, Class 16: Welfare Programs and Policy  A 100% tax rate pushes people to the “kink.”

 Leisure Hours per Day, L  Work Hours per Day Time Constraint 0 Red= Household initially on welfare; increases work effort. Guarantee Green= Household initially not on welfare; reduces work effort. Goods per Day, Y Impact of Tax Rate Reduction on Aggregate Work Effort PAI786, Class 16: Welfare Programs and Policy

 Leisure Hours per Day, L  Work Hours per Day Time Constraint 0 L1L1 L2L2 Guarantee Disregarded Income Value of Medicaid Medicaid Notch Choice without Medicaid Notch Choice with Medicaid Notch Goods per Day, Y The Medicaid Notch (Reduced by ACA!) Blue = Budget Line with Medicaid Notch Black = Budget Line without Medicaid Notch PAI786, Class 16: Welfare Programs and Policy What happens when receipt of Medicaid is tied to eligibility for welfare.

 Leisure Hours per Day, L  Work Hours per Day Time Constraint 0L1L1 L2L2 L3L3 Income Effect Substitution Effect Slope = -w(1+e)    Goods per Day, Y Leisure Choice with an EITC, 1 PAI786, Class 16: Welfare Programs and Policy By raising the net wage, the EITC reverses the substitution effect—and thus increases work effort.

 Leisure Hours per Day, L  Work Hours per Day Time Constraint 0 L1L1 L2L2 Slope = -w(1+e) Slope = -w(1-t) Goods per Day, Y Leisure Choice with an EITC, 2 PAI786, Class 16: Welfare Programs and Policy But the EITC lowers the net wage in the phase-out range, thereby decreasing work effort for some.

 Leisure Hours per Day, L  Work Hours per Day Time Constraint 0L1L1 L2L2 L3L3 Budget Line After Training or Child Care Subsidy Slope = -w 2    Slope = -w 1 Goods per Day, Y Leisure Choice with Wage Boost or Child Care Subsidy PAI786, Class 16: Welfare Programs and Policy A wage increase or a child care subsidy raises the net wage and, like the phase-in portion of the EITC, increases work effort.

PAI786, Class 16: Welfare Programs and Policy Empirical Evidence on Labor Supply and the EITC (Eissa & Hoynes, NTJ, June 2011) ▫“The research on single mothers shows consistently that the EITC leads to significant increases in employment... ▫In contrast, there is little evidence that the EITC leads to a reduction in labor supply for those in the labor market… ▫There are fewer studies on the incentive effects for married couples, but the available evidence finds that the EITC leads to small but statistically significant decreases in participation rates and hours worked.”

PAI786, Class 16: Welfare Programs and Policy Net Impact of EITC on Work Effort ▫The net effect of the EITC is probably to increase work effort. ▫But this is hard to calculate, because the negative impacts results for married couples are difficult to measure. ▫And there are almost as many married couples as single parents among the poor.

PAI786, Class 16: Welfare Programs and Policy

Survey of EITC Research ▫A survey of the EITC research on work effort and other topics by Maag can be found at: ▫ earned-income-tax-credit-in-the-united- states.pdfhttp:// earned-income-tax-credit-in-the-united- states.pdf

PAI786, Class 16: Welfare Programs and Policy The Accumulation of Tax Rates ▫Because many programs have implicit tax rates or subsidies, the net tax rate for low-income households varies by household type and is difficult to determine. ▫The following figures provides one careful summary. ▫See: Steuerle testimony, February 14, Available at: content/uploads/2013/02/Steuerle-Testimony.pdfhttps://oversight.house.gov/wp- content/uploads/2013/02/Steuerle-Testimony.pdf

PAI786, Class 16: Welfare Programs and Policy

Welfare Reform and Marriage ▫The Negative Income Tax Experiments had a striking finding: Providing cash grants to poor families increased divorce. ▫Most commentators interpreted this finding as showing that financial desperation kept many women in unpleasant relationships. ▫But ever since, there has been a lively debate on welfare reform and marriage.

PAI786, Class 16: Welfare Programs and Policy Welfare Reform and Marriage, Continued ▫AFDC/TANF clearly discouraged marriage for most recipients.  Adding earnings by a secondary earner cut benefits, and most states did not provide any benefits to married couples (although some had AFDC-UP).  The current time limits cut these incentives greatly. ▫The EITC has complex incentives for marriage.  It encourages marriage for some, discourages it for others.  The overall effects appear to be minimal.

PAI786, Class 16: Welfare Programs and Policy Marriage Rewards and Penalties with the EITC Source: Ellwood, NTJ, 2000

PAI786, Class 16: Welfare Programs and Policy Marriage and Poverty ▫Single-parent families are more likely to be poor than two-parent families. ▫Unmarried parenthood is becoming more common among all groups (in many countries). ▫Policies may be able to lower teenage pregnancy, but they can’t do much to boost marriage (which is almost certainly a good thing). ▫Most scholars conclude that poverty leads to low marriage rates—not the other way around.