'Welfare State' Doesn't Adequately Describe How Much America's Poor Control Your Wallet

'Welfare State' Doesn't Adequately Describe How Much America's Poor Control Your Wallet
July 1, 2013

Peter Ferrara

Peter Ferrara is senior fellow for entitlement and budget policy at The Heartland Institute, a... (read full bio)

Many people choose to become Democrats when they are young because of a humane belief that government policies in America are stingy in providing resources to the poor. William Voegeli fingered the attitude in his book, Never Enough: America’s Limitless Welfare State: “no matter how large the welfare state, liberal politicians and writers have accused it of being shamefully small” and “contemptibly austere.” Barbara Ehrenreich expressed the same attitude in her book, Nickled and Dimed: “guilt doesn’t go anywhere near far enough; the appropriate emotion is shame” regarding the stingy miserliness of America’s welfare state.

Once such a decision is made, habits are formed, and many continue to vote reflexively Democrat, regardless of facts on the ground. As people start busy careers, and take on family responsibilities, basic assumptions are never questioned, the effects of policies are never considered, identification with “their team” becomes hardened, and it is easy to burrow into like-minded media cocoons, where contrary facts and probing questions are never aired, or printed.

The Welfare Empire

But the term “welfare state” does not begin to encompass the totality of America’s commitment of resources to aid the poor. It is more like a vast empire bigger than the entire budgets of almost every other country in the world. America’s welfare empire encompasses close to 200 or more federal/state programs, including 23 low income health programs, 27 low income housing programs, 30 employment and training programs, 34 social services programs, at least 13 food and nutrition programs, and 24 low income child care programs, among others.

Federal and state governments spend a trillion dollars a year just on these means tested welfare programs, which does not include Social and Medicare. That is more than we spend on national defense. It adds up to roughly $17,000 per person in poverty, over $50,000 for a poor family of three. The Census Bureau estimates that our current welfare spending totals four times what would be necessary just to give all of the poor the cash to bring them up to the poverty line, eliminating all poverty in America. A recent book by Charles Murray, In These Hands, further documents that.

The War on Poverty famously began in 1965. From 1965 to 2008, the total spent only on means tested welfare for the poor in 2008 dollars has been nearly $16 trillion, according to a Heritage Foundation study. That has been more than twice all spending on all military conflicts from the American Revolution to today.

Helping or Hurting the Poor?

What have we gotten for all of that welfare spending? Poverty fell sharply after the Depression, before the War on Poverty. The poverty rate fell from 32% in 1950 to 22.4% in 1959 to 12.1% in 1969, soon after the War on Poverty programs became effective. Progress against poverty as measured by the poverty rate then abruptly stopped. By 2009, the U.S. poverty rate had risen back to 14.3%, and today it has further soared to 16.1%, substantially higher than when the War on Poverty began. In other words, we fought the War on Poverty, and poverty won.

One major reason that poverty stopped declining after the War on Poverty started is that the poor and lower income population stopped working. In 1960, nearly two-thirds of households in the lowest income one-fifth of the population were headed by persons who worked. But by 1991, this work effort had declined by about 50%, with only one-third of household heads in the bottom 20% in income working, and only 11% working full-time, year round.

Along with this collapse of work, the War on Poverty was also associated with the breakup of lower income families, and soaring out-of-wedlock births. Prior to the War on Poverty, black families remained intact, and the overwhelming majority of black babies were born to 2 parent families. But coinciding with the War on Poverty, the black out-of-wedlock birth rate soared from 28% in 1965, to 49% in 1975, to 65% in 1990, to about 70% in 1995, where it remains today. This effect has not been limited to blacks. Among whites, out-of-wedlock births soared from 4% in 1965, to 11% in 1980, 21% in 1990, and 25% in 1995, where it also remains today. Among white high school dropouts, the out-of-wedlock birth rate is 48%. Among Americans overall, out-of-wedlock births soared from 7% when the War on Poverty began to 39% today.

Non-work and having children outside of marriage are the two main causes of poverty in America today. Indeed, full time work year round at the current minimum wage, plus the Earned Income Tax Credit (EITC), and the Child Tax Credit, would be enough to lift every American family out of poverty. Yet, the typical poor family with children today is supported by only about 800 hours of work during a year, or 16 hours per week.

Moreover, the poverty rate for female headed households with children is 44.5%, compared to 7.8% for married couples with children. The poverty rate for married black Americans is only 11.4%, while the rate for black female headed households is 53.9%. As Robert Rector of the Heritage Foundation explains, “If poor women who give birth outside of marriage were married to the fathers of their children, two-thirds would immediately be lifted out of poverty. Roughly 80 percent of all long-term poverty occurs in single-parent homes.”

Indeed, poverty in America is negligible among those who do only three things – finish high school, upon graduation take whatever job is available and keep working, and get married before having children. That in itself is a good strategy for ending poverty in America.

Economic Growth

The discussion above shows why restoring and maintaining traditional American economic growth is central to ultimately eliminating poverty in America. Economic growth provides the jobs to ensure that the poor can work. It also increases wages and incomes of working people, lifting the poor out of poverty all the faster. If we could raise and sustain annual real compensation growth to 2%, after just 20 years the real incomes and living standards of working people would be nearly 50% greater.

The central role of economic growth in overcoming poverty is reflected in the rapidly declining poverty rates after World War II, until the War on Poverty. Similarly, as the economy faltered in the 1970s, the poverty rate during the Carter Administration began a 33% climb, from 11.4% in 1978 to 15.2% in 1982. But during the Reagan recovery, the poverty rate declined every year from 1984 to 1989, dropping by one-sixth from its peak. During the weak economy of the Obama Administration, we have seen poverty rocket to 16.1%.

This is why it is most important to restore and sustain traditional American economic growth and prosperity as the foundation for fighting poverty. The U.S. economy sustained a real rate of economic growth of 3.3% from 1945 to 1973, and achieved the same 3.3% sustained real growth from 1982 to 2007. It was only during the stagflation decade of 1973 to 1982, reflecting the deeply misguided, reigning, Keynesian intellectual leadership of the time, that real growth fell to only half long term trends. President Obama’s first term was even worse, with annual real economic growth averaging only 0.8%, the worst of any Presidential term since the Great Depression.

Consequently, pro-growth economic policies, such as maintaining low tax rates, particularly on the capital investment that is the foundation of job creation, reducing or eliminating the multiple taxation of capital, avoiding excessive, unnecessary, regulatory costs and barriers, and restoring a stable dollar foundation to monetary policy, are central policies for fighting poverty as well. Restoring traditional economic growth and prosperity would restore as well the American historical pattern of the poor in each generation attaining the same standard of living as the middle class of the prior generation. To the extent that policies to increase general economic equality slow economic growth, they promote rather than help to reduce poverty.

Self-satisfied Assumptions

The liberal left likes to pretend smugly that only they bear any concern for the poor, and only they support a social safety net. They like to pretend that Republicans and conservatives don’t care, would terminate any social safety net, and would let the poor starve or die from lack of health care or other material want if that is the consequence.

But the major social safety net programs were mostly adopted on a bipartisan basis (except for the mistake of Obamacare, where free market conservatives and Republicans support a superior health safety net). When Republicans have been in power, instead of eliminating the social safety net, they continued to expand those programs, probably too much given the adverse consequences of those policies as discussed above.

Indeed, the Earned Income Tax Credit came from Ronald Reagan, first expressed in historic testimony before the Senate Finance Committee in 1972, as a way to offset the burden of payroll taxes on the working poor. His famous welfare reform policies centered on eliminating hand outs for those who were not in poverty, and actually increasing benefits for the truly needy. The Child Tax Credit came from conservative Republicans as well, when Newt Gingrich was leading the Congress as Speaker of the House in the 1990s.

Moreover, welfare reform, spearheaded by conservatives and Republicans, and enacted on a bipartisan basis in 1996, has proven highly beneficial for the poor as well. Those 1996 reforms of the old Aid to Families with Dependent Children (AFDC) program returned the share of federal spending on the program to each state in the form of a “block grant” to be used in a new welfare program redesigned by the state based on mandatory work for the able bodied. Federal funding for AFDC previously was based on a matching formula, with the federal government giving more to each state the more it spent on the program, effectively paying the states to spend more. The key to the 1996 reforms was that the new block grants to each state were finite, not matching, so the federal funding did not vary with the amount the state spent. If a state’s new program cost more, the state had to pay the extra costs itself. If the program cost less, the state could keep the savings. The reformed program was renamed Temporary Assistance to Needy Families (TANF).

The reform was shockingly successful, exceeding even the predictions of its most ardent supporters. The old AFDC rolls were reduced by two-thirds nationwide, even more in states that pushed work most aggressively: Wyoming (97%), Idaho (90%), Florida (89%), Louisiana (89%), Illinois (89%), Georgia (89%), North Carolina (87%), Oklahoma (85%), Wisconsin (84%), Texas (84%), Mississippi (84%).

As a result, in real dollars total federal and state spending on TANF by 2006 was down 31% from AFDC spending in 1995, and down by more than half of what it would have been under prior trends. At the same time, because of the resulting increased work by former welfare dependents, the incomes of the families formerly on the program rose by 25%, and poverty among those families plummeted. Haskins reports, “[B]y 2000 the poverty rate of black children was the lowest it had ever been.”

Consequently, a promising strategy to counter poverty would be to extend these same 1996 block grant welfare reforms to all of the nearly 200 federal/state means tested welfare programs referenced above. With these programs currently expected to cost more than $10 trillion over the next 10 years, the potential for resulting savings for the taxpayers is enormous. At the same time, with power and control over welfare restored to the states, such reform has the potential to succeed where the War on Poverty failed, and actually eliminate poverty in America. Future columns will discuss what the states could do with that power to achieve that ultimate goal, and other promising, anti-poverty policies.

[First Published by Forbes]

Peter Ferrara

Peter Ferrara is senior fellow for entitlement and budget policy at The Heartland Institute, a... (read full bio)