Yesterday at the NYU Tax Policy Colloquium, Diane Schanzenbach presented her paper (coauthored with Hilary Hoynes), Safety Net Investments in Children. This important contribution to research regarding the recent evolution of the U.S. safety net has three main findings:
1) Providing safety net benefits to households with children, especially when they are very young, offers society a large future payoff and could thus properly be described as investment. The payoff includes measurably better health and economic outcomes for the children when they grow up. Indeed, given the positive fiscal effects down the line of these improved outcomes, the present value fiscal cost of increasing such benefits should be significantly less than the current cost.
2) Since 1990, per capita federal spending on children has been fairly flat. By way of contrast (although one could debate the comparison's cogency), per capita spending on seniors has risen significantly (driven in the main, I presume, by rising healthcare costs).
3) Since 1990, virtually all gains in social safety net spending on children have gone to families with earnings, and to families with income above the poverty line.
The first of these three findings speaks for itself. Obviously, the partial fiscal offset to increased safety net spending to benefit children in poor households, by reason of its investment character, is not the only reason for doing it.
The second and third findings clearly reflect the two big policy pivots of the 1990s with respect to the safety net. The first was the significant expansion of the earned income tax credit (EITC) in 1993. The second was the enactment of welfare reform in 1996. This featured in particular the replacement of Aid to Families with Dependent Children (AFDC) with Temporary Aid to Needy Families (TANF). The latter not only was much smaller - especially as its block-granting to the states played out over time - but had work requirements and time-limited scope.
The net result, so far as the design and character of the safety net was designed, was a significant pivot away from what I call need-based aid and towards work-based aid. The underlying design question - should safety net spending be more need-based, or more work-based? - lies at the core of U.S. safety net policy debate. So, herewith a few words about each.
Need-based - Even without an investment rationale as to the children, the case for need-based aid rests on beneficence towards our fellow citizens. (As I'll discuss below, however, at least as to adults among the poor one could reasonably debate the extent to which its beneficence is rightly directed.)
Although AFDC was a key mechanism for providing need-based aid until its repeal (along with Food Stamps and Medicaid), its modern descendant in policy debate is universal basic income (UBI). While the former provided income-conditioned aid, and the latter would be structured as giving everyone, poor or not, the specified amount, they can be identical in practice, since income-conditioning aid creates an implicit marginal tax rate that could instead be explicit.
To illustrate, suppose that $20,000 was the poverty line, and that we wanted to make sure that everyone gets at least $10,000. (I'm ignoring here household and child issues.) Suppose also that the income tax had a $20,000 exemption amount. An AFDC-like income-conditioned grant might provide that the grant was ratably scaled down from $10,000 to zero as one's income increased from 0 to $20,000. This would be arithmetically identical to enacting a $10,000 UBI grant and raising the tax rate on one's first $20,000 of income from zero to 50 percent.
The case for need-based aid rests on the view that, to meet basic and urgent needs, we should be willing to tolerate adverse income effects on labor supply (that is, reduced "incentive" to work not in the economist's sense of marginal returns to labor, but in the urgency of needing to satisfy what might otherwise be unmet needs). In practice, it may also require tolerating high at least implicit marginal tax rates in low income ranges, if for whatever reason benefits must and will be rapidly phased out.
Work-based - The view that aid should be at least substantially work-based, rather than need-based, underlies support both for welfare reform and for the relative shift towards the EITC. It rests on claims of positive externalities and internalities with respect to poor people's entering the job market, accompanied (for some proponents) by claims about moral desert.
These beliefs may support viewing basic aid's adverse income effects on labor supply as pernicious, rather than as innocuous. (Such considerations aside, income effects on people's behavior merely reflects their optimizing their choices given their circumstances.) They also may support heightened concern about high marginal rates' substitution effects against labor supply, although this would also be relevant under a need-based view.
Absent the work-based claims, the EITC's positive wage subsidy could only make sense as an offset to high marginal rates from phasing out income-conditioned benefits. If we view labor supply as a mere commodity choice no different than any other (e.g., chocolate versus vanilla ice cream), then one wouldn't want to distort choice towards it, by causing people to work even when the wage on offer was below their reservation wages.
Even granting strong arguments in favor of a work-based, EITC-like approach, it constitutes anti-insurance so far as involuntary unemployment is concerned. A and B both seek work, only A exceeds, so only A gets the wage subsidy. This feature is essentially important during economic downturns, when jobs are more scarce.
The need-based versus work-based debate is a longstanding one, and unlikely to be settled conclusively any time soon. Moreover, the differences in view between reasonable people are often a matter of degree - i.e., how far to one side or the other should one go, rather than which view one should exclusively adopt.
The Schanzenbach-Hoynes paper does not intervene in that debate, so far as the optimal safety net treatment of adults (considered in isolation from any children in their households) is concerned. But it suggests that, even insofar as one leans towards the work-based view as to the adults, one should take a need-based, UBI type of view with respect to the children in poor households.
Things would be simpler if we could easily combine significant work-conditioning of benefits for adults with need-based aid to children who live in the same households. This, however, is not so easy, given that households tend to pool and allocate the members' combined resources based on their own internal decision structures.
The problem is not just that adults in a poor household might "steal" the kids' benefits for themselves. Even targeted, in-kind aid to the children may free up discretionary resources for the adults, or reduce their need-based "incentive" (in the income effects sense) to work. Insofar as one can't succeed in combining a more work-based approach with respect to the adults in a household with a more need-based approach with respect to the children, one may have to trade off and compromise between them, leaving each sub-optimal relative to what one would have done if one could set the two sets of policies entirely separately.
How might the tradeoff be mitigated, in the direction of increasing one's policy to run both policies at the same time despite their reaching the same households? The possibilities include at least the following:
1) Use suasion rather than incentives to encourage work.
2) Provide specific aid that is directed to the needs of working parents, such as for quality childcare.
3) Expand jobs programs. This might involve, not just job training (the efficacy of which may vary), but also actual provision or even guarantees of employment, if this can be done sufficiently well.
4) Use in-kind benefits for children that are not entirely cash-equivalent in practice. Obvious examples include SNAP (aka Food Stamps), Medicaid, and direct or indirect aid for children's education.
Apart from its contributions to empirical knowledge, the Schanzenbach-Hoynes paper reminds us of how fecklessly short-sighted (even when not deliberately cruel) current U.S. policy is in many respects. I suppose it's no surprise that a country that has lately been pursuing policies that appear consciously designed to increase global warming would also manifest so little concern about the investment, as well as the beneficent, rationales for seeking to improve the lives of children in poor households.