Welfare reform in the mid-1990s was a major public policy success, leading to a dramatic reduction in welfare dependency and child poverty. Little-noted provisions in the just-passed stimulus bill will actually abolish this historic reform.
In addition, the bill will add nearly $650 billion in new means-tested welfare spending over the next decade. This new spending amounts to around $18,500 for every poor person in the U.S. The cost of the new welfare spending alone amounts to nearly $8,500 for each taxpaying family.
The welfare reform of 1996 replaced the old Aid to Families with Dependent Children (AFDC) with a new program named Temporary Assistance to Needy Families (TANF). The key to welfare reform’s reduction in dependency was the change in the funding structure of AFDC.
Under the old AFDC program, states were given more federal funds if their welfare caseloads were increased; by contrast, federal funds to a state were cut whenever the state caseload fell. This created a strong incentive for states to swell the welfare rolls. Prior to reform, 1 child in 7 was receiving AFDC benefits.
When welfare reform replaced the old AFDC system with TANF, this perverse financial incentive to increase dependence was eliminated. Each state was given a flat funding level that did not vary whether the state increased or decreased its caseload. In addition, states were given the goal of reducing welfare dependence (or at least of requiring welfare recipients to prepare for employment).
The stimulus bill will overturn the fiscal foundation of welfare reform and restore an AFDC-style funding system. For the first time since 1996, the federal government will begin paying states bonuses to increase their welfare caseloads.
Indeed, the new welfare system created by the stimulus bill is actually worse than the old AFDC program because it rewards the states more heavily to increase their caseloads. Under the stimulus bill, the federal government will pay 80 percent of the cost for each new family that a state enrolls in welfare - a matching rate far higher than in the old AFDC program. The stimulus bill eliminates the reform goal of reducing dependence.
Proponents of the stimulus plan might argue that these changes are necessary to help TANF weather the current recession. This is not true. Under existing TANF law, the federal government operates a TANF “contingency fund” with ample funding that can be quickly funneled to states that have rising unemployment. (Note: The existing contingency fund ties increased financial support to states to the objective external factor of unemployment; it specifically avoids a policy of funding states for increased welfare caseloads, recognizing the perverse incentives this could entail.)
If the authors of the stimulus bill merely wanted to provide states with more TANF funds during the recession, they could have increased funding in the existing contingency fund. But they deliberately did not do this. Instead, they completely overturned the fiscal and policy foundations of welfare reform.
But overturning welfare reform is just the beginning. Of the $791 billion in new spending and tax cuts in the stimulus bill, 28 percent, or $224 billion, is new means-tested welfare spending, providing cash, food, housing, medical care and social services to poor and low-income Americans.
And it’s only the tip of the iceberg. The real long-term cost of expanded welfare is actually hidden by a budgetary gimmick: The stimulus bill pretends that nearly all of its welfare expansions will lapse after two years. While some of the increases in the bill will terminate after two years, there are half a dozen provisions (including growth in food stamp benefit levels, increases in Pell grants and the creation of three new refundable tax credits) that will almost certainly become permanent.
If these welfare expansions are made permanent - as history indicates they will - the added welfare cost will rise to nearly $650 billion over 10 years.
Candidate Barack Obama promised to make government “more open and transparent.” But, in office, President Obama has done the opposite, promoting a massive spending bill riddled with secret provisions unrelated to economic stimulus. The stimulus bill is being used as a Trojan horse to secretly overturn welfare reform, massively expand long-term welfare spending, and permanently “spread the wealth.”
The public and taxpayers deserve far better than this exercise in deception.
Robert Rector is senior research fellow in domestic policy studies at the Heritage Foundation (heritage.org).