Chapter 8 Expenditure Programs for the Poor

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Chapter 8 Expenditure Programs for the Poor
- Welfare programs in the US are means-tested,
making up almost 5 of the current GDP.
- However, these programs are not the only ones
that have redistributional implications. Ex
Social security - AFDC (Aid to Families with
Dependent Children) was in existence until 1996.
It provided permanent cash assistance to poor
families, those under a certain level of income.
Total benefits around 22 in 1995. - About half
of the AFDC benefits was provided by the federal
government. Each state determined its own benefit
levels and eligibility details. - (One-for-one)
Federal law required that every additional dollar
of earnings reduced the AFDC benefits by one
dollar. This corresponds to a 100 tax on
earnings below the eligibility level. - In 1996,
AFDC was removed and another progmra, TANF
(Temporary Aid to Needy Families) was
introduced. - Under TANF, a) Cash assistance is
temporary, generally not more than 5 years b)
After two years of assistance, able-bodied
recipients are required to take part in some
activity to become employed c) States have much
control over the way the program is run. Most
states discontinued the use of one-for-one.
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A. Issues in the Design of Programs Work
Incentives - An ideal redistributional program
has to address the conflict between adequate
support and incentives to work. - Consider
Smith, who is deciding how much leisure to
consume. Let T denote his monthly time endowment
in hours and w the hourly wage, such that he can
earn up to wT dollars per month. - Then, without
any transfers, his choice is represented in the
diagram on the left.
- The diagram on the right depicts the aftermath
of a welfare system with 100 tax on earnings
below a certain level. Since U2 gt U1 , the
person will choose point P, not working at all.
- This result will change, of course, if the
individual likes income more than as depicted, so
that the pre-welfare equilibrium, E1 , was higher
up on the budget constraint than point P. B.
Other Issues in the Design of Programs - Welfare
Dependence Does the receipts of AFDC create a
welfare mentality? - Can the welfare program
change peoples preferences such that they become
lazy?
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- Theres no empirical evidence for such a broad
claim. - Theres some evidence that being on
welfare may be transmitted across generations,
though this does not mean that AFDC is the
culprit. Rather, the educational system may be to
blame. - Work Requirements Recall that unless an
individual under welfare had a sufficient
appreciation of income, he/she would not work at
all. Work requirements may induce people to work
so that they choose some point along line segment
RP smaller than P. The new program TANF has such
an approach. D. Other Programs - Earned Income
Tax Credit (EITC) Lower income families get a
reduction in tax liability or even a transfer
from the government. Currently costs about 31
billion. - Lower income families get a reduction
in tax liability or even a transfer from the
government. - In 2001, a family is allowed a tax
credit of 40 of all wage until 10,020. The
credit is constant at 4008 between incomes of
10,020 and 13,090. Then, it is phased out, with
about 20 marginal tax rate between 13,090 and
32,121. - Does EITC create disincentives to
work? Recent research suggests that EITC has in
fact increased labor supply. However, the
research also depends on data from boom years.
- Medicaid (NOT MEDICARE!!!!) Health
expenditure program for the poor. Expenditures of
about 200 billion in year 2000. - Usually, those
who receive TANF are eligible. - Covers a broad
range of benefits free of charge to eligible
individuals.
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- Why should govt be involved in in-kind
transfers such as Medicaid, instead of giving
cash which could be used for health insurance?
- Also, in many instances people who are in
Medicaid had some form of private insurance at
some point. Why provide Medicaid to people
already covered? - Nevertheless, Medicaid seems
to have improved the health of the poor. However,
as usual, the actual effects are hard to weed
out. - Food Stamps Govt issued voucher that can
be used to buy certain food items. Current
expenditures about 19 billion. - As discussed
before, in-kind transfers are usually viewed as
inefficient, since one dollar of such a transfer
is usually less than one dollar of cash transfer.
Empirical evidence for food stamps supports this
view. - However, if one takes the paternalist
view, such that the poor, left alone, would not
spend to purchase a healthy diet, then food
stamps may in fact be increasing welfare. - The
problem is one that evades economists at this
point Can someone be irrational in judging her
actual welfare? Can others be better in judging
it than the person in question? Paternalists
answer these questions affirmatively.