PPA786: Urban Policy

1. PPA786: Urban Policy Class 16: Welfare Programs and Principles of Welfare Policy

2. PPA786, Class 16: Welfare Programs and Policy • Class Outline • Welfare Programs • Work Incentives • Theory • Evidence • Marriage Incentives

3. PPA786, Class 16: Welfare Programs and Policy • Cash Welfare Programs, TANF • Temporary Assistance to Needy Families • Replaced Aid to Families with Dependent Children (AFDC), which was set up in 1935 • Provides assistance mainly to single parents • Has work requirements and time limits, which are covered in detail in the next class.

4. PPA786, Class 16: Welfare Programs and Policy • Cash Welfare Programs, EITC • Earned Income Tax Credit • The EITC is part of the income tax code. • It subsidizes wages for the lowest-income earners in the form of a (refundable) tax credit. • The EITC is now the nation’s largest welfare program.

5. PPA786, Class 16: Welfare Programs and Policy / • EITC Rates (Richmond Fed) Note: Solid line represents single/head of household filers; dashed line represents married filers.

6. PPA786, Class 16: Welfare Programs and Policy / • Participation in TANF and EITC (Caputo)

7. PPA786, Class 16: Welfare Programs and Policy • Cash Welfare Programs, SSI • Supplemental Security Income • SSI is a cash welfare program for the elderly and disabled poor—a supplement to Social Security. • It appears to be the main reason that poverty has dropped so much among the elderly. • It is the least controversial welfare program.

8. PPA786, Class 16: Welfare Programs and Policy Sources of Income for Low-Income Families with Children (Urban Institute)

9. PPA786, Class 16: Welfare Programs and Policy • In-Kind Welfare Programs • Some welfare programs provide goods and services, not cash. • Food Stamps provides coupons that can be used to pay for food. • Medicare (for the elderly) and Medicaid (for the poor) provide health insurance. • Housing assistance subsidizes rents for low-income families.

10. PPA786, Class 16: Welfare Programs and Policy • In-Kind Welfare Programs, Continued • The distinction between cash and in-kind programs can be important. • Some in-kind programs (Food Stamps) are essentially like a cash program. • Others (Medicare, Medicaid, and housing assistance) are different than cash. • The following figures explain this distinction.

11. 0 Other Goods Per Day PPA786, Class 16: Welfare Programs and Policy Cash versus In-Kind Subsidies, Case 1 Food per Day Indifference curve Choice with Food Stamps or Cash Grant Budget Constraint with Food Stamps Original Choice Original Budget Constraint Extension of Budget Constraint with Cash Grant Amount of Food Stamps

12. 0 Other Goods Per Day PPA786, Class 16: Welfare Programs and Policy Cash versus In-Kind Subsidies, Case 2 Medical Care per Day Income Shift That Is Equivalent to Medicaid from Household Point of View Budget Constraint with Medicaid Choice with Medicaid = In-Kind Grant Extension of Budget Constraint with Cash Grant Choice with Cash Grant Original Choice

13. PPA786, Class 16: Welfare Programs and Policy • Work Incentives • One of the conceptual issues at the heart of the debate about welfare policy is that of work incentives. • Some welfare programs create financial incentives that discourage work. • This feature may harm recipients in the long run and it undermines support for the programs. • Today we develop conceptual tools; current program details are covered in the next class.

14. Time Constraint  0 L1 Leisure Hours per Day, L Work Hours per Day PPA786, Class 16: Welfare Programs and Policy The Labor-Leisure Choice Goods per Day, Y Indifference curve Budget Constraint

15. Time Constraint Slope = -w(1-t)    Substitution Effect Guarantee 0 L1 L2 L3 Income Effect Leisure Hours per Day, L Work Hours per Day PPA786, Class 16: Welfare Programs and Policy Leisure Choice with a Welfare Guarantee and “Tax” Rate Goods per Day, Y

16. Time Constraint Slope = -w(1-t)  Disregarded Income  Guarantee 0 L1 L3 L2 Leisure Hours per Day, L Work Hours per Day PPA786, Class 16: Welfare Programs and Policy Leisure Choice with a Welfare “Disregard” Goods per Day, Y 

17. Time Constraint 100% tax rate Disregarded Income  Guarantee 0 L1 L4 Leisure Hours per Day, L Work Hours per Day PPA786, Class 16: Welfare Programs and Policy Leisure Choice with a Disregard & a 100% Tax Rate Goods per Day, Y 

18. Red= Household Initially on Welfare Time Constraint Green= Household Initially Not on Welfare Guarantee 0 Leisure Hours per Day, L Work Hours per Day PPA786, Class 16: Welfare Programs and Policy Impact of Tax Rate Reduction on Aggregate Work Effort Goods per Day, Y

19. Time Constraint Medicaid Notch Value of Medicaid Disregarded Income Guarantee L1 0 L2 Choice without Medicaid Notch Choice with Medicaid Notch Leisure Hours per Day, L Work Hours per Day PPA786, Class 16: Welfare Programs and Policy Blue = Budget Line with Medicaid Notch Black = Budget Line without Medicaid Notch The Medicaid Notch Goods per Day, Y

20. Time Constraint  Slope = -w(1+e)  Substitution Effect  0 L3 L1 L2 Income Effect Leisure Hours per Day, L Work Hours per Day PPA786, Class 16: Welfare Programs and Policy Leisure Choice with an EITC, 1 Goods per Day, Y

21. Time Constraint Slope = -w(1-t) Slope = -w(1+e) 0 L2 L1 Leisure Hours per Day, L Work Hours per Day PPA786, Class 16: Welfare Programs and Policy Leisure Choice with an EITC, 2 Goods per Day, Y

22. Budget Line After Training or Child Care Subsidy Time Constraint  Slope = -w2  Slope = -w1  0 L3 L1 L2 Leisure Hours per Day, L Work Hours per Day PPA786, Class 16: Welfare Programs and Policy Leisure Choice with Wage Boost or Child Care Subsidy Goods per Day, Y

23. PPA786, Class 16: Welfare Programs and Policy • Empirical Evidence on Labor Supply and the EITC • Many studies find that the EITC encourages labor force participation among unemployed parents (at least without a recession). • Many studies find that, despite strong work incentives, the EITC has little impact on the hours worked by employed parents.

24. PPA786, Class 16: Welfare Programs and Policy • Welfare Reform and Marriage • The Negative Income Tax Experiments had a striking finding: Providing cash grants to poor families increased divorce. • Most commentators interpreted this finding as showing that financial desperation kept many women in unpleasant relationships. • But ever since, there has been a lively debate on welfare reform and marriage.

25. PPA786, Class 16: Welfare Programs and Policy • Welfare Reform and Marriage, Continued • AFDC/TANF clearly discouraged marriage for most recipients. • Adding earnings by a secondary earner cut benefits, and most states did not provide any benefits to married couples (although some had AFDC-UP). • The current time limits cut these incentives greatly. • The EITC has complex incentives for marriage. • It encourages marriage for some, discourages it for others. • The overall effects appear to be minimal.

26. PPA786, Class 16: Welfare Programs and Policy Marriage Rewards and Penalties with the EITC Source: Ellwood, NTJ, 2000

27. PPA786, Class 16: Welfare Programs and Policy Source: Tax Foundation