To Make Welfare Work, Hand It To the States

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Nearly $20 trillion has been spent since the War on Poverty began 50 years ago, and the poverty rate has barely declined. In a new paper published by the Manhattan Institute today, I suggest that giving states flexibility to design their own welfare programs would catalyze state-based reforms designed to shift people out of poverty and into the workforce. This flexibility, combined with capping federal welfare funds to states at the rate of inflation and the number of people below the poverty line, could save billions of dollars a year.

If major poverty programs such as the Supplemental Nutrition Assistance Program, formerly known as food stamps; Medicaid; Temporary Aid to Needy Families; and housing vouchers had been devolved to the states in 1998, $1.3 trillion could have been saved by 2013.

Despite improvements in the unemployment rate and job creation, participation in welfare programs remains close to record highs and well above pre-recession levels. Spending on major programs, including Medicaid, was $412 billion in 2013. In 2014, 47 million people participated in the food stamp program, 20 million more than 2007.

One reason for this is that because many programs are funded by the federal government, states currently lack an incentive to get people off welfare rolls. Food stamps encourage states to expand enrollment and increase benefits as a way to receive more federal money, at no cost to state treasuries. Placing caps on the currently unlimited inflow of Washington funds would require states to focus on moving individuals off public support.

If states were allowed to direct savings from welfare spending to other uses, such as building bike trails and roads, they would have more of an incentive to cut costs and make programs more efficient.

Providing states with increased flexibility to shift resource levels between welfare programs offers other advantages. States with low food prices but high housing costs might shift resources from food stamps to housing programs. States could also use funding from existing programs to experiment with new ones, such as free community college education, a program far better funded by states than by the federal government, as President Obama has proposed.

State and local poverty reduction efforts have been successful in several states, including Rhode Island, North Carolina, and New York City.

Representative Todd Rokita (R-IN) introduced the State Health Flexibility Act in the 112th and 113th Congresses, and is planning to introduce the bill in this Congress. The bill would devolve Medicaid to the states and would give them the ability to design their own programs, potentially saving $2 trillion over the next decade from increases in efficiency and fraud reduction.

Mr. Rokita told me in a conversation yesterday that the Medicaid savings from reform in Rhode Island are especially noteworthy. Since 2009 Rhode Island has had a federal waiver from certain Medicaid rules that cap the state's Medicaid funds. The state is allowed to keep a portion of unspent funds, a strong incentive to keep spending low.

Through 2012, Rhode Island has saved $2.3 billion, thanks to the waiver. An audit found that despite the lower expenditure of funds, residents experienced fewer emergency-room visits and better access to physicians. The state succeeded in incentivizing healthy living and had more efficient care at a lower cost.

In another example of welfare reform, North Carolina shortened the duration of unemployment benefits from 63 to 19 weeks in June 2013, while benefits in neighboring states remained at higher levels. Over the next year, North Carolina's employment growth outperformed not only its neighbors but also the rest of the United States. North Carolina's success highlights the power of work-promotion.

New York City's welfare caseload declined by nearly 70 percent between 1994 and 2009, while employment rates for single mothers rose from 43 percent to 63 percent.

Robert Doar, New York's Human Resources Administration commissioner, currently a scholar at the American Enterprise Institute, credited the change to the city's requirement that welfare recipients work as a condition of benefits payments. The Human Resources Administration resembled an employment agency where work, not training, was a more effective path to getting people off welfare rolls.

House Ways and Means Chairman Paul Ryan (R-WI) proposed combining funding for food stamps, TANF, and various housing programs into single Opportunity Grants, without changing the amount that states receive, while offering states flexibility to use such funds in ways that best fit their particular circumstances. In order to receive an Opportunity Grant, states would have to present a plan for how funds would be used to move families out of poverty and require able-bodied recipients to work.
While such reforms may be politically challenging, they would give states extra flexibility to target welfare funding to those who need it most, and reduce the amount of federal funds flowing into these programs with poor results.

President Lyndon Johnson declared in his 1964 State of the Union Address, "This administration today ... declares unconditional war on poverty in America.... But this attack, to be effective ... must be supported and directed by State and local efforts.... [T]he war against poverty will not be won here in Washington."

Mr. Johnson was prescient. One of the reasons that the War on Poverty has failed is because programs were bankrolled by Washington and little attention was paid to outcomes.

The last major reform, the transformation of Aid to Families with Dependent Children into Temporary Aid to Needy Families, resulted in a halving of welfare caseloads, combined with increased employment and earnings. The bill was drafted in 1996 by a Republican Congress and signed into law by President Clinton. The new 114th Congress now has a similar opportunity to improve America's welfare system by devolving federal funds to states and allowing them to tailor programs to their own needs. Can history repeat itself?


Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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