- The Washington Times - Friday, April 7, 2000

How can Washington and the states keep up the momentum on welfare reform? The latest U.S. government statistics reveal that welfare caseloads have fallen by an astonishing 46 percent since 1993. That is a reduction of almost 6,000 welfare families per day.

Starting in the early 1990s the nation's governors began to craft welfare fixes aimed at uprooting this dysfunctional system. These new laws generally require work in exchange for benefits. They impose time limits on the dole. They end additional payments for having more children while on welfare. And they stress aggressive job placement efforts. The result has been that the transition from welfare to work is proceeding more smoothly than anyone expected.

Consider the case of Wisconsin, where Gov. Tommy Thompson has been the pre-eminent welfare innovator. In his famous W2 program, Mr. Thompson mandated that all able-bodied welfare recipients to work for benefits. He has also promoted other novel welfare reforms, including one program that rewards welfare recipients with a cash bonus if they marry and another that provides bonuses for staying in school.

In 1987, the number of households on welfare in Wisconsin was about 100,000. Now that number is below 10,000. In most of those cases a paycheck has replaced a welfare check.

But here's the not so good news. Success in ending welfare dependency has been wildly uneven among the 50 states. Most states have fallen far short of Wisconsin's stunning progress. There are still 3 million American households on welfare. That is far too many lives being ruined by a corruptive system.

The coldhearted reality of the problem is this: despite the reform ethic of recent years, benefits remain incredibly generous in many states. The system deters recipients from ever leaving the rolls for work. In a widely publicized 1995 Cato Institute study (with Michael Tanner), we found that in all but a few states the full array of welfare programs Aid to Families With Dependent Children (AFDC, food stamps, Medicaid, heating subsidies, and public housing pays better than the after-tax payment from working in most starter jobs.

In high benefit states like New York, Massachusetts and Hawaii, the value of the full package of welfare benefits including food stamps, housing benefits, AFDC, and others can reach $12 an hour. That's more than many starter jobs pay. In New York City, welfare paid the equivalent of almost $14 an hour. For many welfare recipients, to take a job means a pay cut.

The higher the benefit levels in a state, the harder it is to get people off welfare. We found that there is a statistically significant negative relationship (-0.54 correlation) between the level of benefits in a state and the percentage reduction in caseloads.

The 10 states with the lowest benefit levels slashed their caseloads by 58 percent since 1993. The 10 states with the highest benefit levels only trimmed their caseloads by half that much. For example, Hawaii, which offers the most generous welfare benefits of any state, totaling more than $30,000 a year, has recorded the smallest reduction in caseloads in the nation. Conversely, Mississippi, whose welfare package provides less than $11,000 a year, reduced their rolls by an impressive 70 percent.

The best way to end welfare dependency is to make the system less enticing to enter in the first place. The welfare state is like the Hotel California: you can check in but you can never leave. High benefit states in particular must make the benefit package less attractive relative to work if they hope to reduce dependency.

The most valuable step the Congress could take to help dismantle the welfare-poverty trap would be to abolish all programs that provide benefits for not working: food stamps, AFDC, and public housing, for example. The savings should be used to make the Earned Income Tax Credit (EITC) more generous. The EITC is a variation of Milton Friedman's famous proposal of a Negative Income Tax. The EITC has many flaws, but its great virtue is that you only receive the benefit if you work. (Most other federal welfare programs only provide benefits if you don't work.) The EITC program also doesn't encourage out-of-wedlock births as a means of gaining financial independence.

The enduring public policy lesson of the last quarter-century is that incentives matter in life. We learned this lesson with the supply side tax cuts in the early 1980s which cut tax rates to encourage more investment, risk-taking, and work.

We are learning the same lesson with the first round of welfare reform successes. The job is not near done. In the states and in Washington the politicians must understand that if we truly want to end welfare as we know it: We must ensure that virtue (work) pays and that vice (welfare) doesn't.



Stephen Moore is director of fiscal policy studies at the Cato Institute. Michael New is a research assistant at Cato.

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