McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 13 EXPENDITURE PROGRAMS FOR THE POOR

13-2 Thoughts  Income Distribution?  Inequality?  Poverty?

13-3 A Quick Look at Welfare Spending  Means-Tested  Cash versus in-kind assistance 1968 = 48% 2003 = 20% ProgramFederalState and Local Medical care$163.8$118.7 Cash aid Food benefits Housing benefits Education Services Jobs/training Energy aid Source: Burke [2003, p. 3]. Figures are for 2002.

13-4 Welfare Reform  Aid to Families with Dependent Children (AFDC) ( )  Temporary Assistance for Needy Families (TANF) (1996- ) No Entitlement Time Limits  5 Years Work Requirement  50% of Single Mothers  90% of Two Parent Families

13-5 Welfare Reform  Temporary Assistance for Needy Families (TANF) (1996- ) Block Grants to States  More Flexibility Benefit Reduction Rates  AFDC $1 for $1  NE $1 for $0.80  CA $1 for $0.50

13-6 Work Incentives B = G – tE B = 0 if E = G/t The Basic Trade-offs G – basic grant if not working t – rate at which grant reduced when recipient earns money B – benefit received

13-7 Work Incentives Example  B = G – tE  B = 0 if E = G/t  California t = 0.5 G = $225 Earnings = $200 B = $125

13-8 w* Analysis of Work Incentives Hours of leisure per month Income per month 0T a D |Slope| = w b c 2w

13-9 Work Leisure Trade Off  Income (I)  Hours Leisure (h l )  Total Time (T)  Wage (w)  I = T*w – h l *w  I = w*(T-h l )

13-10 Analysis of Work Incentives Hours of leisure per month Income per month 0T D |Slope| = w i ii iii E1E1 F G

13-11 Work Leisure Trade Off  I = w(T-h l )  Consider Benefits  I = w(T-h l ) + B  I = w(T-h l ) + G – tE  Earnings (E) = w(T-h l )  I = w(T-h l ) + G – t*w(T-h l )

13-12 Work Leisure Trade Off  I = (1-t)w(T-h l ) + G until B = 0  B=0 => E = G/t => w(T-h l ) = G/t  T-h l = G/(tw)  h l = T-G/(tw)  I = (1-t)w(T-h l ) + G for h l ≥ T-G/(tw)  I = w(T-h l ) for h l ≤ T-G/(tw)

13-13 Analysis of Work Incentives Hours of leisure per month Income per month (= earnings + transfers) 0T D |Slope| = w Q F G S $100 V |Slope| = 3/4w K

13-14 Work Leisure Trade Off  I = (1-t)w(T-h l ) + G for h l ≥ T-G/(tw)  I = w(T-h l ) for h l ≤ T-G/(tw)  t = ¼  G = 100  I = ¾w(T-h l ) for h l ≥ V  I = w(T-h l ) for h l ≤ V

13-15 Analysis of Work Incentives Hours of leisure per month Income per month (= earnings + transfers) 0T D |Slope| = w Q F G S $100 V |Slope| = 3/4w K

13-16 Analysis of Work Incentives Hours of leisure per month Income per month (= earnings + transfers) 0T D P F G $338 R P1P1 Budget constraint with t = 100% S

13-17 Analysis of Work Incentives Hours of leisure per month Income per month (= earnings + transfers) 0T D P M G R E2E2

13-18 Earned Income Tax Credit  Tax credit for low income individuals  Annual Cost over $34 Billion

13-19 Earned Income Tax Credit

13-20 Medicaid  How Medicaid works  Crowding Out  The Medicaid Notch  Medicaid and Health

13-21 The Medicaid Notch Hours of leisure per year Income per year 0T D M N R S X Z $1,000

13-22 Overview Source: Holt [2005, Part D, Figure 1]. Figure 13.10: Estimated effective marginal tax rates for a one-parent, two-child household residing in Wisconsin (2000)

13-23 Work Requirements  Workfare  TANF Mandated work

13-24 Time Limits  Lifetime  Per spell of welfare

13-25 Family Structure  Marriage  Childbearing

13-26 National versus State Administration  Race to the Bottom  State experimentation

13-27 Empirical Evidence: The Effect of the Earned Income Tax Credit on Labor Supply  Labor force participation  Work hours

13-28 Supplemental Security Income  SSI versus conventional welfare Uniform minimum federal guarantee Benefit levels Work incentives

13-29 Unemployment Insurance  Why does government insure against unemployment? Adverse selection Moral hazard  Benefits Gross replacement rate  Financing Experience rated  Effects on Unemployment

13-30 Food Stamps and Child Nutrition  How food stamps work  Foods stamps as an in-kind transfer  Participation rates

13-31 Housing Assistance  How housing assistance works  Housing subsidies Section 8 certificates Voucher programs  Impact on stock of housing  Public housing and economic self-sufficiency of inhabitants

13-32 Programs to Enhance Earnings  Education Head Start  Employment and Training

13-33 New Ideas  Replace current hodgepodge with single cash assistance program  Benefit levels  Faith-based social services