Hamilton vs. Jefferson, on Welfare Reform

This column by Susan A. Carleson, CEO of the ACRU and the Carleson Center for Public Policy (CCPP), was published March 25, 2011 on the American Thinker website.

With federal and state budgets exploding, welfare reform is once again on the menu.

Just about everyone agrees that the 1996 welfare reform was a huge success. By 2009, the number of dependent families had dropped by two-thirds, and federal spending for cash welfare assistance remained stable at $16.5 billion a year. But most importantly, the ’96 reform gave dignity to millions by breaking the vicious cycle of multi-generational poverty.

Last week, the Republican Study Committee unveiled its Welfare Reform Act of 2011, which includes work requirements for Food Stamps and a mandatory cap on total welfare spending. It was described as “building upon the success” of the 1996 welfare reform. While admirable in its focus on reducing government spending, the new bill does not include the key reform that led to success in 1996 – block grants.

The 1996 welfare reform repealed a key element of the Great Society mosaic — Aid to Families with Dependent Children (AFDC). That open-ended entitlement program was replaced by the Temporary Assistance to Needy Families (TANF) program, which provided capped and stable block grants to the states with a work requirement for the able-bodied.

This bold and unprecedented action reversed the built-in incentive for states to continue to grow their welfare rolls in order to increase their federal matching funds. As a result, the ’96 law was able to reduce both family poverty and welfare dependence. Were it not for the structural redesign of the monetary incentives for state bureaucrats, overall welfare spending would be much, much higher today than it actually is. Why? Because AFDC was the gateway drug in welfare dependence. Qualifying for AFDC triggered automatic eligibility for Medicaid, Food Stamps and many other poverty assistance programs that entrap people.

Regrettably, the latest welfare reform effort lacks the essential element needed for reform to be effective — an incentive for state bureaucrats to care about how much money they are spending.

That is the result of a disagreement in conservative circles today as to why the ’96 welfare reform worked so well. Resolving this divergence of opinion will prove crucial going forward as Congress considers “updating” welfare reform to include other major means-tested entitlements.

One school, most aptly described as Hamiltonian, tends to favor strong national standards, i.e. regulatory control by Washington bureaucrats. Its adherents believe welfare reform succeeded because of tough federal mandates on the states to meet certain policy goals such as requirements to promote work and marriage.

The other, more Jeffersonian school, trusts the states to pursue such laudable goals on their own — provided they can operate in an environment of robust federalism marked by flexibility and competition.

The Jeffersonians firmly believe that we never get true reform policy from D.C. bureaucrats and point to the ’96 law’s unique structure to explain its success. They argue that block grants without federal “strings” supplied the powerful incentive for states to transform their ever-growing welfare rolls into successful, sustainable workfare and work placement programs.

Which side is right?

Logic and history should give the nod to the Jeffersonians.

First, logic.

While it’s true that the ’96 reform did improve incentives for individuals to get off welfare, the transformation would not have been possible without first changing the incentives for the states themselves to reduce their welfare caseloads.

Under the old AFDC program, states were paid more money for each new person enrolled – so they had an incentive to grow their welfare rolls. But under the block grant, federal funding given each state remained the same regardless of caseload. So, if a state decided to be overly generous, it had to spend its own money to do so. However, if a state succeeded in reducing its welfare rolls it could keep the federal savings and use the money to enhance other services for their truly needy caseload, such as child care, transportation, job training and earned income supplements.

Even the Heritage Foundation, which has generally adhered to the Hamiltonian view on this subject, has acknowledged, “This simple fix [replacing the individual entitlement with block grants] shifted the mindset of state agencies from an emphasis on increasing enrollment and processing checks to a new focus on shrinking caseloads and increasing employment.”

Second, the historical evidence.

While the TANF block grant is quite flexible, it does require states to have a specific (and increasing) percentage of their recipients engaged in federally defined work programs or training or lose a portion of their federal grant – a laudable and sensible goal.

Now, those work participation requirements might make sense as a prime factor if they had been clearly indispensable to the success of the 1996 welfare law. But we know they were of little consequence during the law’s first decade. Thanks to a loophole called the “caseload reduction credit,” states were allowed to count the net decline in their caseloads against the 50% work requirement – and thus were not actually required to make recipients work.

And yet the main measures of success-shrinking caseloads and falling poverty-were quite visible by 2001, a full five years before Washington closed the “caseload reduction” loophole and began enforcing work requirements on the states.

The fact is that block-granting is not only a more efficient way to deliver services, it is more compassionate than an entitlement program because it incentivizes states to target greater resources to those who need it most.

That’s why Ronald Reagan, a deeply compassionate man, supported and actively pursued welfare block grants, both as governor and president. Thanks to his reform effort as governor in 1971, by the end of 1972, California’s welfare rolls had shrunk by over 300,000 and had avoided the growth of another predicted 500,000 individuals. These remarkable results enabled him to save millions of dollars for taxpayers while increasing benefits for the state’s neediest families by 25 percent. (This, by the way, was the first increase that welfare beneficiaries had seen in 13 years – under two preceding “compassionate” Democrat administrations.)

A decade later, in his first month in office, President Reagan proposed block-granting AFDC-the proposal that eventually led to the 1996 welfare reform.

Today, many in D.C. are encouraging Congress to put a mandatory cap on total welfare spending, but they do not propose any mechanism for achieving that goal. The simple and most effective solution as demonstrated by the undisputed success of the TANF program is to repeal Medicaid, Food Stamps, Supplemental Security Income and the myriad other federal categorical welfare programs and block grant them to the states. Put in appropriate work requirements for the able bodied and then just get out of the way! Really do “What Reagan would do.”

As the new Congress considers ways to get federal spending under control, it must build on and strengthen the proven block-grant model and not tie the states’ hands. The taxpayers — and the poor — will all be better off.

CCPP is guided by the simple rule, “What would Reagan do?” To learn more about welfare reform go to www.governmentistheproblem.us and www.theccpp.org.