6 Why We Have Government Programs to Aid the Poor Concern about equity-efficiency trade-offs.Creates the positive externality of social stability.
7 Entitlement Programs: Government programs that guarantee recipients benefits as long as they meet eligibility tests.Means Tests: typically income and wealth criteria that must be met for an individual or family to be eligible for a programStatus Tests: typically disability, children, and age criteria that must be met for an individual or family to be eligible for a program.
8 Cash Programs TANF: Temporary Aid to Needy Families Program most identified with a welfare check; may provide for child-care expenses or job retrainingSSI: Supplemental Security IncomeProgram provides cash payments to the widowed, orphaned and disabled.EITC: Earned Income Tax CreditA program that increases the take-home pay of the working poor by as much as $4140 in 2002 for a family with two children.
9 In-Kind ProgramsFood Stamps: vouchers that enable a broad class of poor people to purchase a wide variety of food productsWIC vouchers: enable poor, pregnant, and post-natal women to purchase a narrow variety of food products.Medicaid: federal and state funded program that provides health care services to the poorThe Children’s Health Insurance Program: federal program that subsidizes health insurance coverage for the working poor.
10 Major Federal Government Expenditures To Aid the Poor, 2003 ProgramFederal Spending Dollars (Billions)Percentage of Federal SpendingSSI$321.52TANF$261.23EITC$351.66Subtotal of Cash Programs$934.41Medicaid$1557.36Food Stamps$241.14Child Protection and Social Services$40.52Child Nutrition$119.21Subtotal of In-Kind Programs$28713.62
11 Price Distorting Subsidies Price Distorting Subsidies lower the price of a particular (subsidized) good relative to other goods for eligible people.
12 Figure 7.1 A Price Distorting Subsidy H1N1E1U1Expenditure on Other Goodsper Month (Dollars)Housing Services per MonthL'LU2E2IABH3N3E3H2N2SSubsidy
13 Dead Weight Loss or Excess Burden Dead Weight Loss (sometimes called Excess Burden ) measures the extra benefit a recipient can enjoy from the dollar amount of the price-distorting subsidy if instead the grant was received in a lump sum.
14 Figure 7.2 Excess Burden of a Subsidy Number of Apartments RentedRent (Dollars per Month)D = MSBAExcess Burden of SubsidyBEQ1400S = MSCQ2FE’S’200C
15 Figure 7.3 Full Subsidization of Medical Services Medical Office Visits per YearPrice (Dollars per Month)BMBLQ*E1QGE2A25 = P*Excess Burden
16 Additional Effects of Subsidies: The Case of Increasing Costs Taxpayers face a double burden: not only must they pay Medicaid costs through taxes,the program also increases the amount non-eligible patients pay for medical services by increasing demand for those services.
17 Figure 7.4 The Impact of The Medicaid Program on Price: The Case of Increasing Cost Price (Dollars)Medical Office Visits per YearS = MSC35Q2E2DODLDM'DM = MSBQO'QIE125QLQOQG
18 Subsidizing FoodFood Stamps: subsidies that allow recipients particular allotments of vouchers to buy food, but recipients may supplement the subsidy with their own cash. It is illegal to sell food stamps, though it may be in the recipients’ interests to do so.
19 Figure 7.7 The Impact of an In-Kind Transfer: Food Stamps BExpenditure on Other Goodsper Month (Dollars)AFood per MonthBFU3A'BLE2QF*CQFIU2IAU1M1QF1E1U2AU1QF2E1M1QFCA'M2QF2E2
20 The Impact of Government Assistance Programs on Work Transfers could cause people to work more or less, depending on whether leisure is a normal good.
21 Figure 7.8 The Income Effect of a Transfer Income per DayLeisure Hours per Day24U3E3CL2U2E2AL1U1E1DTransferPaymentB
22 Figure 7. 9 A Transfer that Declines with Earned Income e. g. T=$300- Figure 7.9 A Transfer that Declines with Earned Income e.g. T=$300-.7IE24Leisure Hours per DayIncome per DayABU2U1L*CL2E2L1E1MaximumDailyTransferD
23 Empirical EvidenceA 10% increase in welfare payments to individuals decreases work effort by 2%.
24 Negative Income Tax T = IG – tNIE The Negative Income Tax is a system with no status test, but there is an income guarantee and a take-back rate.T = IG – tNIEWhereIG = Income guaranteetN = take back rateIE = earned incomeT = Transfer
27 EITCThe Earned Income Tax Credit goes to the working poor and varies with the number of children. Typically, recipients receive the assistance with their tax refund, but papers can be filed to receive the money in their paychecks throughout the year.
28 EITC (2002; two-child family) Total Earned IncomeEITC$0$2,000$810$4,000$1,610$6,000$2,410$8,000$3,210$10,000$4,140$15,000$3,823$20,000$2,770$33,200
29 Figure 7.11 Earned Income Tax Credit in 1999, By Number of Children and Earnings
30 Welfare Reform of 1996 Time Limits: 5-year lifetime limit 2-years at a timeIf states meet certain goals, they can waive this rule for up to 20% of their caseloads.Work and Training:Half a states TANF recipients must be in work programssubsidized child care Teen Mothers:no longer eligible to receive their own paymentsmust live with responsible adult. Refusal to work:If recipients have children over five and the parents refuse to work, families can be denied aid and children may be placed in foster care.
31 Impact of Welfare Reform Welfare caseloads have declined.Labor force participation among less-skilled single mothers has increased more than expected.State governments have greatly increased their spending for work support programs, including:child care subsidies,transportation subsidies,help with job search expenses,subsidized wages.
32 Percent Share of Income by Quintile YearLowestFifthSecond FifthThird FifthFourth FifthHighest Fifth19475.011.917.023.143.019674.011.117.624.642.719764.310.424.743.619873.89.616.123.346.719973.68.915.022.249.420013.58.714.623.050.1