NBER Reporter: Fall 2000

Means-Tested Transfer Programs in the United States

The NBER held a conference on "Means-Tested Transfer Programs in the United States" on May 11 and 12 in Cambridge. Robert A. Moffitt, NBER and Johns Hopkins University, organized the following program:

Robert A. Moffitt, "The Temporary Assistance to Needy Families Program"

Discussant: Thomas E. MaCurdy, NBER and Stanford University

Janet Currie, NBER and University of California, Los Angeles, "U.S. Food and Nutrition Programs"

Discussant: Hilary W. Hoynes, NBER and University of California, Berkeley

Jonathan Gruber, NBER and MIT, "Medicaid" (NBER Working Paper No. 7829)

Discussant: David M. Cutler, NBER and Harvard University

Robert J. LaLonde, NBER and University of Chicago, "Employment and Training Programs"

Discussant: James J. Heckman, NBER and University of Chicago

David M. Blau, University of North Carolina, "Child Care Subsidy Programs" (NBER Working Paper No. 7806)

Discussant: James R. Walker, NBER and University of Wisconsin

Edgar O. Olsen, University of Virginia, "What Do We Know about the Effects of U.S. Housing Programs for the Poor? A Critical Appraisal of the Literature"

Discussant: John M. Quigley, University of California, Berkeley

Richard V. Burkhauser, Cornell University, and Mary L. Daly, Federal Reserve Bank of San Francisco, "The Supplemental Security Income Program"

Discussant: Kathleen McGarry, NBER and University of California, Los Angeles

Robert I. Lerman and Elaine Sorenson, Urban Institute, "Child Support: Interactions between Private and Public Transfers"

Discussant: Irwin Garfinkel, Columbia University

Mark R. Killingsworth, NBER and Rutgers University, "Wage Rate Subsidies"

Discussant: Lawrence F. Katz, NBER and Harvard University

V. Joseph Hotz, NBER and University of California, Los Angeles, and John Karl Scholz, NBER and University of Wisconsin, Madison, "The Earned Income Tax Credit"

Discussant: Jeffrey Liebman, NBER and Harvard University

The Temporary Assistance for Needy Families (TANF) program, established in 1996, replaced what previously was called the Aid to Families with Dependent Children (AFDC) program. TANF, like AFDC, primarily serves low-income single mothers and has as its central purpose the provision of cash support. The TANF program is distinguished from AFDC by strong work requirements and by time limits on receipt of benefits. Moffitt reviews the rules of the TANF program and discusses the research that has been conducted on it and on AFDC.

Currie explains that the U.S. government operates a wide variety of food and nutrition programs (FANPs) that reach an estimated one out of every five Americans every day. Her review focuses on the three largest programs: the Food Stamp Program; the Special Supplemental Nutrition Program for Women, Infants, and Children; and the National School Lunch Program. Some of the issues she raises concern the role of FANPs in an era when obesity presents a serious health problem; the effectiveness of FANPs as safety net programs; the value of in-kind versus cash benefits; and the likely effects of welfare reform on FANP participation.

Gruber examines the history, rules, and economic implications of the Medicaid program. He begins with a detailed overview of how the program works, and then provides information on spending patterns and on who is covered and eligible. Next he reviews the economic issues involved in studying the Medicaid program: assessing its impacts on insurance coverage (public and private), health, labor supply, family structure, and savings. He follows this with a review of the empirical literature on each of these topics. Gruber concludes with a discussion of the policy issues and unanswered questions surrounding the Medicaid program.

The passage of the Workforce Investment Act in 1998 reaffirmed U.S. policymakers' commitment to reshaping and upgrading the skills and employment prospects of the nation's low-income, disabled, and displaced workers via publicly subsidized employment and training programs. While the orientation and goals of U.S. training policy have shifted frequently over the last 40 years, the menu of services provided to these disadvantaged groups has not changed very much. LaLonde examines the history of such programs, shows how policy objectives have shifted, and describes both the services subsidized by these programs and their users. In addition, he surveys the contributions of the literature to the field of program evaluation. Although LaLonde finds that economically disadvantaged youths have benefited little from these programs, his evidence for adults -- especially adult women -- is much different. These programs not only appear to consistently raise the earnings of adult women, but their internal rates of return also may be quite high relative to their typically low costs.

Child care and early education subsidies are an important part of government efforts to increase economic independence and improve development of children in low-income families in the United States. Blau describes the main subsidy programs in the United States, discusses economic issues that arise in designing such programs and evaluating their effects, and surveys evidence on the effects of the programs. All child-care and early education subsidies affect both work incentives and inputs to child development. But a subsidy designed specifically to achieve one of these policy goals usually will be relatively ineffective at accomplishing the other goal. Blau finds that child-care subsidies that reduce the effective price to parents of all purchased child care, regardless of the type and location of care, cause the employment rate of mothers of young children to increase. But the magnitude of the effect is uncertain. The most reliable evidence suggests that the effect is fairly small, but the range of estimates in the literature is quite large. The three main difficulties encountered in research on this issue are in finding appropriate control groups, accounting for the wide prevalence of unpaid child-care arrangements, and identifying the effect of the price of child care.

Olsen analyzes the justifications that have been offered for housing subsidies to low-income households and their implications for the evaluation and design of housing programs. He also describes the evolution of the rules regarding operation of the major housing programs for low-income households in the United States, and summarizes and appraises the evidence on the major effects of these programs. Olsen specifically considers the effects of these programs on: housing occupied by recipients of the subsidy; their consumption of other goods; the labor supply of recipients; the distribution of benefits among recipients and all eligible households; the types of neighborhoods in which subsidized households live; relationships with neighbors; and the cost-effectiveness of alternative methods for delivering housing assistance.

Burkhauser and Daly provide an overview of the Supplemental Security Income (SSI) program, a means-tested program that provides cash payments to the elderly, blind, and disabled. Begun in 1974, SSI is now one of the largest federal government means-tested programs, with over 6.6 million recipients in 1998. While it once primarily served an aged population, the majority of SSI recipients now are working-age adults and children with disabilities. To better understand why SSI grew, why the composition of SSI recipients changed, and how SSI is likely to evolve, the authors study SSI program rules and the behavioral responses they induce, placing each in the context of the broader social welfare system. After describing the program's eligibility criteria and benefit structure, the authors show that there continues to be substantial variation among states in both allowances and benefits. They then review trends in SSI growth and consider how changes in eligibility criteria, outreach efforts by the Social Security Administration and state governments, local economic conditions, and the generosity of SSI benefits relative to other programs have affected that growth. Finally, Burkhauser and Daly consider the role of SSI in protecting the economic well-being of low-income populations, discuss how recent changes in welfare policy are likely to affect SSI caseloads, summarize their findings, and discuss areas for future research.

Child support is a private transfer that is an integral part of the means-tested public transfer system. Support payments generally lower the budget costs of welfare as well the incentives for parents to participate. The Child Support Enforcement (CSE) program, which establishes and enforces support obligations, also affects the incentives of the non-custodial parent donors and ultimately the distribution of incomes. While not formally income-tested, CSE still targets low-income families because so many custodial families are poor. Lerman and Sorenson review the history of the CSE program, the economic rationale for the government's role, and trends in support awards and payments. The authors also examine the importance of child support to low-income families; the capacity of noncustodial parents to pay child support; trends in costs, financing, and effectiveness of the CSE program; the effects of child support on behavior; equity issues in child support; and proposals for reform. Despite efficiency gains in the CSE program, especially in establishing paternity, the authors find that a shift in the composition of cases has offset these improvements, causing support payments per custodial mother to rise only modestly in real terms.

Killingsworth reviews wage subsidies, which are often seen as a macroeconomic stabilization tool or an antipoverty measure (or both). Marginal-employment subsidies, paid to employers who increase their employment, are more cost-effective than subsidies paid for all employment: the former policy does not subsidize workers who would have been employed even without a subsidy. "Targeted" subsidies, paid to employers for hiring disadvantaged workers, have been only modestly successful precisely because workers must identify themselves as disadvantaged (and thus possibly undermine their longevity with a particular employer) to qualify for subsidization. Recently, much attention has been paid to subsidies for actual or prospective employees. In the United States, subsidies paid to unemployed persons who find jobs have had only limited success in reducing joblessness and unemployment duration. However, experiences in other countries are somewhat more encouraging. Several experiments in the United States and Canada have evaluated the effect of "work incentive" programs, which make income-conditioned payments to persons only if they work a certain number of hours per week. The evidence suggests that such programs can significantly increase labor supply. However, somewhat less than half of those eligible to receive such payments actually do so.

Since its inception in 1975, the Earned Income Tax Credit (EITC) has grown into the largest federally funded, means-tested cash assistance program in the United States. Hotz and Scholz review the political history of the EITC, its rules and goals, and its growth and coverage. They also note that the predicted effects of the EITC are not all pro-work, especially with respect to hours and its labor market incentives for two-earner couples. They then summarize the existing empirical research on the behavioral effects of the EITC, emphasizing in particular the effects of the 1986, 1990, and 1993 expansions of the credit on labor force participation and hours of work. The literature provides consistent evidence, generated from a variety of empirical approaches, that the EITC positively affects labor force participation. There are also smaller, negative effects on hours of work for people already in the labor market and for secondary workers.

These papers and their discussions will be published by the University of Chicago Press in an NBER Conference Volume. In advance of publication, these papers will be available at Books in Progress.

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