Transcript Public Finance and Public Policy

Public Finance and Public Policy Jonathan
CopyrightGruber
© 2010Third
Worth
Edition
Publishers
Copyright © 2010 Worth Publishers
1 of 34
17.1 Facts on Income
Distribution in the United
States
Income Distribution and
Welfare Programs
17.2 Welfare Policy in the
United States
17.3 The Moral Hazard Costs
of Welfare Policy
17.4 Reducing the Moral
Hazard of Welfare
17.5 Welfare Reform
17.6 Conclusion
PREPARED BY
FERNANDO QUIJANO AND SHELLY TEFFT
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
2 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
On August 22, 1996, President Bill Clinton signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996
(PRWORA), more commonly known as the welfare reform law.
Before this law, cash welfare in the United States was a system in which states
received matching grants to provide time-unlimited benefits to low-income
single mothers.
After the law, states received a lump-sum block grant, a flat amount,
independent of state spending on welfare, earmarked to provide time-limited
benefits to a broader range of low-income families.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
3 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
4 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.1
Facts on Income Distribution in the United States
Relative Income Inequality
relative income inequality The amount of
income the poor have relative to the rich.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
5 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.1
Facts on Income Distribution in the United States
Relative Income Inequality
According to these
data, the share of
income received
by the lowest
quintile in the
United States is
smaller than in
any other nation,
and is less than
half of the
worldwide
average. The
share of income
received by the
highest quintile in
the United States
is higher than in
any nation except
Mexico, and is
nearly 25% higher
than the worldwide
average.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
6 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.1
Facts on Income Distribution in the United States
Absolute Deprivation and Poverty Rates
absolute deprivation The
amount of income the poor have
relative to some measure of
“minimally acceptable” income.
poverty line The federal
government’s standard for
measuring absolute deprivation.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
7 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.1
Facts on Income Distribution in the United States
Absolute Deprivation and Poverty Rates
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
8 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.1
Facts on Income Distribution in the United States
Absolute Deprivation and Poverty Rates
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
9 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.1
Facts on Income Distribution in the United States

APPLICATION
Problems in Poverty Line Measurement
The poverty line has remained a mainstay of U.S. public policy, with its exact
placement influencing billions of dollars of government spending each year.
There have been three types of criticisms:
Bundle Has Changed: The share of food in family consumption has fallen
over time relative to clothing, shelter, medical care, and other goods. As a
result, using the cost of food times three is no longer an appropriate way to
compute a minimum standard of living.
Differences in Cost of Living Across Areas Are Ignored: In 2008, the median
single-family home in the Boston–Cambridge–Quincy area of Massachusetts
cost $365,000. The median single-family home in St. Louis, Missouri, cost
only $133,200. Yet the same poverty line applies to both locations.
Income Definition Is Incomplete: If two individuals have the same cash
income but only one of them has Medicaid coverage, then the individual with
Medicaid is effectively richer because he or she doesn’t have to pay for
medical costs.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
10 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.1
Facts on Income Distribution in the United States
What Matters—Relative or Absolute Deprivation?
Once the poor can reach an acceptable level of consumption, why does it
matter how much money the rich have?
There are two reasons why relative income inequality measures may
matter:
• The “minimal” standard of living for a society may be best defined
relative to the standard of living of others.
• The level of inequality in society is itself negatively related to
measures of well-being.
A recent study by Luttmer (2004) also finds that individuals’ self-reported
well-being rises as their own income rises, but falls as their neighbors’
incomes rise, suggesting that it is relative income, and not absolute
income, that determines well-being.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
11 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.2
Welfare Policy in the United States
In discussing welfare policy, it is important to understand two characteristics
of each policy:
1. Categorical and Means-Tested Programs:
categorical welfare Welfare
programs restricted by some
demographic characteristic, such
as single motherhood or disability.
means-tested welfare Welfare
programs restricted only by
income and asset levels.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
12 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.2
Welfare Policy in the United States
2. Cash and In-Kind Programs:
cash welfare Welfare
programs that provide cash
benefits to recipients.
in-kind welfare Welfare
programs that deliver goods,
such as medical care or
housing, to recipients.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
13 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.2
Welfare Policy in the United States
Cash Welfare Programs
Temporary Assistance for Needy Families (TANF)
The TANF program provides support to low-income families with
children in which one biological parent is absent.
benefit guarantee The cash
welfare benefit for individuals
with no other income, which may
be reduced as income increases.
benefit reduction rate The
rate at which welfare benefits are
reduced per dollar of other
income earned.
Supplemental Security Income (SSI)
SSI is a program that provides cash welfare to the aged, blind, and disabled.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
14 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.2
Welfare Policy in the United States
In-Kind Programs
Food Stamps
Individuals are issued a card for a certain value of food, which is drawn
down as they make purchases.
Households without elderly or disabled members must have income
below 130% of the poverty line to receive food stamps.
Medicaid
This is by far the largest categorical welfare program in the United
States, with expenditures of $333.2 billion in 2007.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
15 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.2
Welfare Policy in the United States
In-Kind Programs
Public Housing
The public housing system in the United States consists of two separate
programs:
• Public housing projects, typically large apartment buildings.
• “Section 8 vouchers,” which individuals can use to subsidize
private rentals from participating landlords.
Benefits are restricted to low-income families, typically those with
incomes below 50% of the median income in a metropolitan area.
Other Nutritional Programs
• The Special Supplemental Nutrition Program for Women, Infants,
and Children (WIC) provides funds for nutritious food purchases.
• The School Lunch and Breakfast Programs offer free or reducedprice meals to schoolchildren.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
16 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.3
The Moral Hazard Costs of Welfare Policy
Moral Hazard Effects of a Means-Tested Transfer System
This system is a simplified version of TANF or other redistributive
programs, but it allows us to clearly show the effects of moral hazard that
come with redistribution.
The benefit to any individual would be equal to
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
17 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.3
The Moral Hazard Costs of Welfare Policy
Moral Hazard Effects of a Means-Tested Transfer System
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
18 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.3
The Moral Hazard Costs of Welfare Policy
Solving Moral Hazard by Lowering the Benefit Reduction Rate
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
19 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.3
The Moral Hazard Costs of Welfare Policy
The “Iron Triangle” of Redistributive Programs
iron triangle There is no way
to change either the benefit
reduction rate or the benefit
guarantee to simultaneously
encourage work, redistribute
more income, and lower costs.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
20 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.4
Reducing the Moral Hazard of Welfare
Moving to Categorical Welfare Payments
By targeting welfare payments to observed earnings, the government
introduces incentives for individuals to work less hard in order to qualify
for larger welfare payments.
This problem could be eliminated if the welfare program could target
those who are truly less capable of earning, to ensure that benefits go to
those who really need them, not just to those who are working less hard in
order to qualify for benefits.
What Makes a Good Targeting Mechanism?
• Individuals have no way to change behavior in order to qualify.
• The best mechanisms target those with low earning capacity.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
21 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.4
Reducing the Moral Hazard of Welfare
Moving to Categorical Welfare Payments
Targeting by Single Motherhood
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
22 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.4
Reducing the Moral Hazard of Welfare
Using “Ordeal Mechanisms”
ordeal mechanisms Features of
welfare programs that make them
unattractive, leading to the self-selection
of only the most needy recipients.
The Paradox of Ordeal Mechanisms
If the government provides a benefit that is not attractive to the nonneedy but helps out the truly needy, then targeting will be more efficient.
The paradox of ordeal mechanisms is therefore that apparently making
the less able worse off can actually make them better off.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
23 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.4
Reducing the Moral Hazard of Welfare

APPLICATION
An Example of Ordeal Mechanisms
The government wants to set up a soup kitchen for low-ability individuals
who are poor, but the government cannot tell whether individuals are truly
low-ability, or high-ability and just lazy. The government can:
• Hire a large number of workers for this soup kitchen, so that no one
has to wait very long for a bowl of soup.
• Hire a small number, so that there is always a line outside.
The long line might prevent the more able from using resources that they
don’t need and are not really intended for them.
Through the use of ordeal mechanisms, such as waiting in line, welfare
programs can use the fact that the low-ability want the good more, and have a
lower disutility from this ordeal, to more effectively target the redistribution of
scarce resources.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
24 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.4
Reducing the Moral Hazard of Welfare
Increasing Outside Options
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
25 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.4
Reducing the Moral Hazard of Welfare
Increasing Outside Options
Training
Training programs lead to modest declines in welfare receipt and
increase the earnings for welfare recipients.
Labor Market Subsidies
Subsidizing work increases employment and reduces the number of
people on welfare, and this impact rises with the size of the subsidy.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
26 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.4
Reducing the Moral Hazard of Welfare
EM P I R I C A L E V I D E N C E
THE CANADIAN SELF-SUFFICIENCY PROJECT
This program randomly offered wage subsidies to a treatment group of
Canadian welfare recipients who had been on welfare for more than
one year.
If these individuals found a full-time job within one year of leaving
welfare, the program would, on average, double their earnings over the
first three years they held the job.
This treatment group was compared to a control group of long-term
welfare recipients randomly selected to not receive this wage subsidy.
• The employment rates of those offered the subsidy rose by 43%
relative to those who were not offered the subsidy.
• The rate of welfare enrollment fell by roughly the same amount.
After five years, the treatment and control groups appeared similar in
terms of work and welfare utilization.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
27 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.4
Reducing the Moral Hazard of Welfare
Increasing Outside Options
Child Care
Subsidizing child care has been shown to raise female labor supply:
recent estimates suggest that for each 10% rise in child care subsidies,
female labor supply increases by about 2%.
Child Support
child support Court-ordered
payments from an absent parent to
support the upbringing of offspring.
The major advantage of stronger enforcement of child support is that it
potentially reduces the incidence of single motherhood by making it
financially costly for fathers to abandon their families.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
28 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.4
Reducing the Moral Hazard of Welfare
Increasing Outside Options
Remove “Welfare Lock”
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
29 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.5
Welfare Reform
Changes Due to Welfare Reform
1. Cash welfare was changed from an entitlement to a block grant.
2. States were allowed, and encouraged, to experiment with alternative
structures of cash welfare payments.
3. Time limits were imposed on welfare recipients.
4. Work requirements were imposed on welfare recipients.
5. New efforts to limit unwed motherhood were introduced.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
30 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.5
Welfare Reform
Effects of the 1996 Welfare Reform
• Led to a large financial windfall for the states.
• Most studies find that single mothers as a group have not seen a drop in
their income or their consumption.
• There has been no noticeable effect of welfare reform on fertility rates.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
31 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.5
Welfare Reform
EM P I R I C A L E V I D E N C E
ESTIMATING THE IMPACT OF WELFARE REFORM
The time series evidence for the effects of welfare reform is not entirely
convincing for two reasons:
• The caseload decline began in 1994, well before welfare reform began
taking effect.
• This period saw one of the largest economic booms in the history of the
United States, and better labor markets have always been associated
with reductions in welfare rolls.
So many different aspects of the welfare laws changed that it is hard to assign a
causal impact to any one of the changes.
Analysts of the 1996 welfare reform have proposed two solutions to this
problem:
• Compare the outcomes of single mothers to other control groups, such
as married mothers, who were subject to similar economic shocks but
were not much affected by welfare reform.
• Use the fact that some states received waivers from the federal
government to experiment with particular aspects of welfare reform
before the national law was in place.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
32 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.5
Welfare Reform
Effects of the 1996 Welfare Reform
Was Welfare Reform a Success?
Whether these reforms were ultimately “successful” depends on four
additional factors:
• Costs for a small share of women may exceed the gains from
reduced government welfare spending.
• Although incomes for single mothers were not down on average,
they did not rise much either, and leisure clearly fell.
• This reform was passed in the midst of one of the largest
economic expansions in U.S. history.
• The most important long-run effects of welfare reform are likely
to be on the children in welfare-eligible families.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
33 of 34
CHAPTER 17 ■ INCOME DISTRIBUTION AND WELFARE PROGRAMS
17.6
Conclusion
Welfare programs have been a source of contentious debate for many years,
and the past decade has witnessed the most radical reform of cash welfare
since the program’s inception.
Despite the apparent success of the 1996 welfare reform, welfare debates will
no doubt continue in the future.
Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers
34 of 34