Ryan Leads On Welfare Reform And Fighting Poverty

Published September 18, 2014

No one in Washington is taking the lead in addressing poverty and welfare reform like House Budget Committee Chairman Paul Ryan. Almost alone, he has noted that this year marks the 50th anniversary of the War on Poverty. So now is an appropriate time to take stock of what we have done, what we have accomplished, and what we have not.

After those 50 years, America’s welfare state today is not a principality. It is a vast empire itself bigger than the entire budget of almost every other country in the world. That empire involves nearly 200 joint federal/state means tested welfare programs, including Medicaid, Food Stamps, 27 low income housing programs, 30 employment and training programs, 34 social services programs, another dozen food and nutrition programs, another 22 low income health programs, and 24 low income child care programs, among others.

Federal and state governments today spend close to a trillion dollars a year just on these means tested welfare programs, which do not include the big entitlement programs for retirees, Social Security and Medicare. That is 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 needed to bring them up to the poverty line. Charles Murray wrote a whole book, In These Hands, documenting that we spend far more than enough to completely eliminate all poverty in America. This dramatic overspending leaves wide scope for reforms that would be far more effective in reducing poverty, while still saving taxpayers a fortune.

Over the 10 year period from 2009 to 2018, federal and state welfare spending will total $10.3 trillion. That does not include Obamacare’s massive expansion of Medicaid, or Obamacare’s massive new health insurance subsidies for families making close to $100,000 per year, and ultimately beyond. Even in 2005, government spending on these means tested welfare programs was 25% more than was spent on national defense, and that was at the height of the wars in the Middle East.

The War on Poverty was proclaimed in 1964, and initiated 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. Rector et al. report that has been well over twice all spending on all military conflicts from the American Revolution to today, at $6.39 trillion in 2008 dollars.

Yet, in November, 2012, the Census Bureau reported that more than 16% of Americans were in poverty, including nearly 20% of American children. Today, more than 46 million Americans live in poverty, an all-time record. In other words, we fought the War on Poverty, and poverty won.

Counterproductive Welfare Policies the Root Cause of Poverty Today

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 17.3% in 1965. The poverty rate continued to decline, 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.

Today, the poverty rate, as indicated above, has been well above that 1969 level for years, and the actual numbers in poverty are at an all time high record. Not a worthy payoff for $16 trillion spent over 50 years, about 4 times what it took to defeat Nazi Germany and Imperial Japan.

One key 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.

This was not a matter of the poor not being able to find work. While the economy was chaotic during the 1970s, during the 1980s and 1990s America enjoyed an historic economic boom creating ultimately 50 million new jobs. The proof is in the pudding, or in how people actually voted with their feet. Millions of illegal aliens surged across the border to gain those jobs and participate in America’s economic golden age, with the unemployment rate collapsing to 4.4% under President Bush by 2006.

In his 50th Anniversary Report of the War on Poverty, House Budget Committee Chairman Paul Ryan observed that only 2.7% of Americans that work full time, year round, are in poverty. Robert Rector of the Heritage Foundation adds that the typical poor family with children is supported by only 800 hours of work during a year, which amounts to 16 hours of work per week. If work in each poor family increased to 2,000 hours per year, which is the equivalent of one adult working 40 hours per week throughout the year, nearly 75% of poor children would be lifted out of poverty.

With the government offering such generous and wide-ranging benefits, from housing to medical care to food stamps to outright cash, and many others, to those with low incomes or who are not working at all, naturally many choose to reduce or eliminate their work effort and take the free benefits. Incentivewise, it is as if the government is generously paying people not to work and to have low incomes.

The Poverty Trap

Consequently, under today’s welfare system, taxpayers are effectively paying the bottom 20% of the income ladder more than a trillion dollars a year basically not to work. This was confirmed by the famous Seattle/Denver Income Maintenance Experiment (“SIME/DIME”) conducted from 1971 to 1978, which demonstrated the impact of such substantial, unconditional, welfare subsidies on the incentive not to work. The dramatic bottom lime result of that experiment – for every $1 of extra welfare given to low income persons, they reduced their labor and earnings by 80 cents. No wonder the War on Poverty failed!

Even worse, when those in poverty try to go to work, they are effectively subject to extra, higher, marginal tax rates. Since welfare is phased out as income rises, the loss of welfare benefits is economically the same as a tax on the rising earnings. Take the example of someone suffering in poverty who receives $12,000 a year in welfare benefits. Suppose she gets the opportunity for a job earning $16,000 a year. But if she loses 50 cents in welfare benefits for every dollar earned, that is like a 50% tax taking away $8,000 of the earnings from work. The payroll tax will take another 7.65% of earnings, federal income taxes another 10% on the margin, and state income taxes roughly another 5% on the margin on average. That leaves an effective marginal tax rate of 72.65%, leaving little incentive for the poor to work.

The point is that the current welfare system counterproductively provides powerful incentives for the poor not to work, which too many intellectually lazy, knee-jerk defenders of the status quo have failed to understand, nearly as well as the poor themselves, who are only responding to those incentives rationally.

Family Breakup

But 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 rate of black out of wedlock births 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 rate of out of wedlock births is 48%. Among Americans overall, the rate of out of wedlock births has soared from 7% when the War on Poverty began to 39% today.

Such out of wedlock births are the second key cause of poverty, in addition to non-work. 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 Rector again 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.”

Family break up and illegitimacy are again the natural result of the incentives created by our massive, overgrown welfare empire. Most welfare benefits are restricted to families with children. If you are a non-elderly adult in America without children, you are pretty much expected to support yourself. That is a sound principle. But it means that having a baby is the gateway to a generous package of government benefits.

Moreover, if the mother is married to a man who earns a significant income, then the benefits are lost. Indeed, if the mother is married to a man who is not working, but the government requires him to take available work before benefits are paid, then the benefits will be lost in any event, whether he refuses to work, or if he works and earns an income that eliminates benefits.

Once again, it is as if the government is paying women to have children out of wedlock. As Rector aptly puts it, “Welfare …converts the low-income working husband from a necessary breadwinner into a net financial handicap. It transformed marriage from a legal institution designed to protect and nurture children into an institution that financially penalizes nearly all low-income parents who enter into it.”

Opportunity Knocks

Ryan has become the leading source for new ideas in Washington to help the poor and address poverty. On July 24, 2014, his House Budget Committee released Expanding Opportunity in America, a discussion draft advancing a new agenda to liberate the poor from the binds of poverty.

In the publication, Ryan proposes a new Opportunity Grant program that would start as a pilot project in a select number of states. For the selected states, the reform would consolidate a number of means-tested, public assistance programs into a single Opportunity Grant for the state. The chosen states would get the same amount from the Opportunity Grant as they currently do from the consolidated programs. So the reform would be budget neutral.

But in the process, the states would each propose new strategies and innovations to pursue with the funds to address the problems of the current, costly, ineffective, counterproductive system discussed above. The consolidated programs would include SNAP (food stamps), TANF (Temporary Assistance to Needy Families, formerly Aid to Families with Dependent Children), Section 8 Voucher and Project-Based Housing Assistance, Public Housing Capital and Operating Funds, Section 521 Rural Rental Assistance Payments, Child Care and Development Fund, Community Development Block Grants, The Low Income Home Energy Assistance Program (LIHEAP), the Weatherization Assistance Program, and WIA Dislocated Workers.

To obtain an Opportunity Grant, states would each write their own proposals regarding what they would do with the consolidated grant funds to help the poor in their state climb out of poverty and grow into financial independence. The federal government would choose which states won the Opportunity Grants.

The grant proposals all must include means to require the able bodied to engage in work or work related activities to receive public assistance. The proposals would include multiple, non-governmental, service-providers which the poor could individually choose from to receive their services and benefits. These services and benefits would be provided on a comprehensive, case management basis, enabling poor individuals to get all their services and benefits in one place with one cash payment, instead of on a fractured basis applying separately to and dealing with multiple bureaucracies.

Ryan’s proposal is inspired by the enormously successful 1996 block grant welfare reforms of the old, New Deal, Aid to Families with Dependent Children (AFDC) program. Those 1996 reforms changed the matching federal financing for AFDC, paying states more federal funds the more they spent on AFDC, to fixed, finite, block grants of federal funds, that did not vary with the amount each state spent. That transformed the incentives for the states, as any additional state, AFDC spending would come 100% at the expense of the state. But any AFDC savings remained 100% with the state.

Under those transformed incentives, within a few years, two-thirds of those dependent on AFDC were led by state administrators to leave the program for work. They were documented to increase their incomes by an average of 25% as a result. But after 10 years of flat federal funding for AFDC, the program cost taxpayers 50% less than it would have otherwise, under prior trends.

Ryan’s proposal is effectively a means of beginning to extend these same reforms to all of the programs covered by the Opportunity Grant proposal. It gives some chosen and willing states broad authority and full incentives to remake those programs without welfare’s current counterproductive effects in actually creating poverty, rather than preventing it. Under these Opportunity Grants, the states can be expected to produce a new generation of inspired reform ideas to remake welfare assistance for the 21st century, leading to full block grants for all of these programs.

The Opportunity Grant proposal should be viewed in the context of Ryan’s budget proposals to block grant Medicaid to the states, which would also greatly benefit the poor, while saving taxpayers nearly a trillion dollars over 10 years from that one program alone, and Ryan’s proposals for block grants for federal job training programs as well. Together, these reforms overall involve enormous strides to what should be the ultimate goal, which would be federal, fixed, finite block grants to the states for all federal means tested welfare programs. That was the original dream of Ronald Reagan, and his top welfare advisor Robert Carleson, who I worked for directly in the Reagan White House.

[First published at Forbes.]