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Wednesday, April 18, 2012

The American Welfare State and How It Has Failed

"But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime." — Frédéric Bastiat (The Law)

The following report contains excerpts for a Policy Analysis released by the Cato Institute on April 11, 2012.

On January 8, 1964, President Lyndon B. Johnson delivered a State of the Union address to Congress in which he declared an "unconditional war on poverty in America." In his speech Johnson stated:

This administration today, here and now, declares unconditional war on poverty in America. I urge this Congress and all Americans to join with me in that effort.

It will not be a short or easy struggle, no single weapon or strategy will suffice, but we shall not rest until that war is won. The richest Nation on earth can afford to win it. We cannot afford to lose it. One thousand dollars invested in salvaging an unemployable youth today can return $40,000 or more in his lifetime.

Poverty is a national problem, requiring improved national organization and support. But this attack, to be effective, must also be organized at the State and the local level and must be supported and directed by State and local efforts.

For the war against poverty will not be won here in Washington. It must be won in the field, in every private home, in every public office, from the courthouse to the White House.”

At the time, the poverty rate in America was around 19 percent and falling rapidly. This year, it is reported that the poverty rate is expected to be roughly 15.1 percent and climbing. Between then and now, the federal government spent roughly $12 trillion fighting poverty, and state and local governments added another $3 trillion. Yet the poverty rate never fell below 10.5 percent and is now at the highest level in nearly a decade. Clearly, we have been doing something wrong.When most Americans think of welfare, they think of the cash benefit program known as Temporary Assistance to Needy Families (TANF), formerly known as Aid to Families with Dependent Children (AFDC). But in reality TANF is only a tiny portion of a vast array of federal government social welfare programs designed to fight poverty. In fact, if one considers those programs that are means-tested (and therefore obviously targeted to low-income Americans) and programs whose legislative language specifically classifies them as anti-poverty programs, there are currently 126 separate federal government programs designed to fight poverty.

News that the poverty rate has risen to 15.1 percent of Americans, the highest level in nearly a decade, has set off a predictable round of calls for increased government spending on social welfare programs. Yet this year the federal government will spend more than $668 billion on at least 126 different programs to fight poverty. And that does not even begin to count welfare spending by state and local governments, which adds $284 billion to that figure. In total, the United States spends nearly $1 trillion every year to fight poverty. That amounts to $20,610 for every poor person in America, or $61,830 per poor family of three. No matter how distasteful or outrages this sounds we would be better off by just giving each poor family of three a check for $60,000 every tax day. At least we spare the bureaucracy and administrative costs.

Of course no individual is eligible for every program, and many poor people receive nowhere near this amount of funding. And many supposedly anti-poverty programs are poorly targeted, with benefits spilling over to people well above the poverty line. But that is precisely the point—we are spending more than enough money to fight poverty but not spending it in ways that actually reduce poverty.


Welfare spending increased significantly under President George W. Bush and has exploded under President Barack Obama. In fact, since President Obama took office, federal welfare spending has increased by 41 percent, more than $193 billion per year. Despite this government largess, more than 46 million Americans continue to live in poverty. Despite nearly $15 trillion in total welfare spending since Lyndon Johnson declared war on poverty in 1964, the poverty rate is perilously close to where we began more than 40 years ago.

Clearly we are doing something wrong. Throwing money at the problem has neither reduced poverty nor made the poor self-sufficient. It is time to reevaluate our approach to fighting poverty. We should focus less on making poverty more comfortable and more on creating the prosperity that will get people out of poverty.

The exact number and composition of these programs fluctuates slightly from year to year, depending on congressional appro­priations and presidential priorities. For example, the 2011 federal budget eliminated programs such as the Foster Grandparent Program, the Senior Companion Program, Even Start, and Vista, while creating new ones such as Choice Neighborhood Planning Grants, the Emergency Homeowners Loan Program, and the Capacity Building for Sustainable Communities Fund. However, the number of federal anti-poverty programs has exceeded 100 for more than a decade.

State and local governments provide additional funding for several of these pro­grams and operate a number of programs on their own. Federal spending accounts for roughly two-thirds of welfare funding, with the states—and occasionally localities—accounting for the rest.

Chart 2a

The single largest welfare program today is Medicaid. Medicaid spending that sup­ports health care for the poor, excluding funding for nursing home or long-term care for the elderly, topped $228 billion in 2011. The Supplemental Nutrition Assistance Program (food stamps) was the second most expensive welfare program, costing taxpayers nearly $72 billion. Rounding out the top 10 were the Earned Income Tax Credit, Child Tax Credit, Pell Grants, Supplemental Security Income, the State Children’s Health Insurance Program, housing vouchers, and TANF (see Figure 2).

At least 106 million Americans receive benefits from one or more of these programs. Again, Medicaid tops the list, with roughly 49 million poor Americans receiving benefits from this program (once again excluding the elderly receiving assistance to pay for long-term care and nursing home care). Second is food stamps; nearly 41 million Americans, about 15 percent of the population, now receive food stamps, the highest number in U.S. history. Looking at the remainder of the 10 most costly programs, all provide benefits to more than 4.5 million Americans (see Figure 3).

By any measure, U.S. welfare spending has increased dramatically since 1965. In constant dollars, federal spending on welfare and anti-poverty programs has risen from $178 billion to $668 billion, a 375 per­cent increase in constant 2011 dollars, while total welfare spending—including state and local funds—has risen from $256 billion to $908 billion.

Chart 2b

Measured as a percentage of GDP, fed­eral spending increased more than fourfold, from just 0.83 percent of GDP to 4.4 percent. Total welfare spending nearly tripled, from 2.19 percent of GDP to 6 percent (see Figure 5).

And, on a per capita basis, that is per poor person, federal spending has risen by more than 900 percent, from $1,625 to $14,848, while total spending rose by a smaller, but still substantial 651 percent, from $3,032 to $19,743 (see Figure 6).

Over the last decade the increase has been even more rapid. Federal welfare spend­ing increased significantly under the Bush administration, but President Obama has thrown money at anti-poverty programs at an unprecedented rate. Since taking office, the Obama administration has increased spending on welfare programs by more than $193 billion (see Figure 7).

These numbers are slightly distorted by the inclusion of Medicaid, where expenditures have increased because of the overall rise in health care costs as well as program expansion. However, even excluding Medic­aid, spending on means-tested social welfare programs grew by 26 percent from 1990 to 2008—and much more rapidly since then. Expenditures for every program except TANF increased in real terms. The growth of expenditures has been particularly strong for “in-kind” programs, which provide benefits for specific consumption, such as medical care, food, and housing, rather than cash.

Some of the increase, of course, is clearly due to the recession. Many of these programs are countercyclical, meaning that they automatically expand during economic downturns. However, increases in both participation and spending were greater during this recession than in previous ones. For example, during the 1980–82 recession, enrollment in food stamps increased by only 635,000, and spending rose by just $124 million (in constant 2012 dollars). During the 1990–92 recession and jobless recovery, enrollment increased by 5.2 million, and spending rose by $9.1 billion. During the current recession (over a comparable three-year period), enrollment increased by 12 million people, while spending increased by $30 billion.

Clearly we are spending more than enough money to have significantly reduced poverty. Yet we haven’t. This should suggest that we are doing something wrong. This is not just a question of the inefficiency of government bureaucracies, although the mul­tiplicity of programs and overlapping juris­dictions surely means that there is a lack of accountability within the system.

In addition, whatever the intention behind government programs, they are soon captured by special interests. The nature of government is such that programs are almost always implemented in a way to benefit those with a vested interest in them rather than to actually achieve the programs’ stated goals. As economists Dwight Lee and Richard McKenzie among others point out, the political power necessary to transfer income to the poor is power that can be used to transfer income to the nonpoor, and the nonpoor are usually better organized politically and more capable of using political power to achieve their purposes. Among the nonpoor with a vital interest in anti-poverty programs are social workers and government employees who administer the programs and business people, such as landlords and physicians, who are paid to provide services to the poor. And of course we have the race-baiters, politicians, and academics that make a profession out of controlling and pandering to the poor for their power and livelihood. Thus, anti-poverty programs are usually more concerned with protecting the prerogatives of the bureaucracy and the politicians than with actually fighting poverty.

Chart 3

But more important, the concept behind how we fight poverty is wrong. The vast majority of current programs are focused on making poverty more comfortable—giving poor people more food, better shelter, health care, and so forth—rather than giving people the tools that will help them escape poverty. And we actually have a pretty solid idea of the keys to getting out of and staying out of poverty: (1) finish school; (2) do not get pregnant outside marriage; and (3) get a job, any job, and stick with it.

Consider: High school dropouts are roughly three and a half times more likely to end up in poverty than those who complete at least a high school education. If they do find jobs, their wages are likely to be low. Wages for high school dropouts have declined (in inflation-adjusted terms) by 17.5 percent over the past 30 years. At the same time, children growing up in single parent families are four times more likely to be poor than children growing up in two-parent families. Roughly 63 percent of all poor children reside in single-parent families.

And only 2.6 percent of full-time workers are poor. The “working poor” are a small minority of the poor population. Even part-time work makes a significant difference. Only 15 percent of part-time workers are poor, com­pared with 23.9 percent of adults who do not work.

To jobs, education, and marriage, we can add one more important stepping stone on the road out of poverty—savings and the accumulation of wealth. As Michael Sherraden of Washington University in St. Louis has noted, “for the vast majority of households, the pathway out of poverty is not through consumption, but through saving and accumulation.”

Yet with the exception of some education programs such as Pell grants and some job training programs, little of our current welfare state encourages—and much discourages—the behavior and skills that would help them stay in school, avoid unmarried pregnancies, find a job, and save money. All of this suggests that it is far past time to reevaluate our current approach to fighting poverty. It should be clear that we need to focus less on making poverty more comfortable and more on creating the prosperity that will get people out of poverty.

The American welfare state is much larger than commonly believed. The federal government alone currently funds and operates 126 different welfare or anti-poverty programs, spending more than $668 billion per year. State and local governments provide additional funding for several of these programs and also operate a number of programs on their own, adding another $284 billion per year. That means that, at all levels, govern­ment is spending more than $952 billion per year, just short of the trillion dollar mark.

Yet for all this spending, we have made remarkably little progress in reducing pov­erty. Indeed, poverty rates have risen in recent years even as spending on anti-poverty programs has increased. All of this suggests that the answer to poverty lies not in the ex­pansion of the welfare state, but in building the habits and creating the conditions that lead to prosperity.

It would make sense therefore to shift our anti-poverty efforts from government programs that simply provide money or goods and services to those who are living in poverty to efforts to create the conditions and incentives that will make it easier for people to escape poverty. Poverty, after all, is the natural condition of man. Indeed, throughout most of human history, man has existed in the most meager of conditions. Prosperity, on the other hand, is something that is created. And we know that the best way to create wealth is not through government action, but through the power of the free market.

That means that if we wish to fight poverty, we should end those government policies—high taxes and regulatory excess—that inhibit growth and job creation. We should protect capital investment and give people the opportunity to start new businesses. We should reform our failed government school system to encourage competition and choice. We should encourage the poor to save and invest.

The possibility of reforming the school system is challenging as reforming the poverty producing system we have today. Once again we have those nonpoor such as the teachers, teachers unions, academics, and the politicians they support working in contradiction to this notion reform. It is in their vested interest to continue with the failed policies of the past 48 years.

We all seek a society where every American can reach his or her full potential, where as few people as possible live in poverty, and where no one must go without the basic necessities of life. More importantly we seek a society in which every person can live a fulfilled and actualized life. Shouldn’t we judge the success of our efforts to end poverty not by how much charity we provide to the poor but by how few people need such charity?

By that measure, our current $1 trillion War on Poverty is a failure.

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