The first step in defusing America's Ticking Bankruptcy Bomb, the title of my new book, is to restore a booming economy. I discussed last week how to do that by applying the lessons of Reaganomics.
The next step is fundamental entitlement reform, to reduce the overwhelming future burden of exploding entitlement expenses. As I argue in the book, we will never be able to solve the entitlement crisis by simply trying to cut benefits for the poor and seniors. We need fundamental structural reforms. We need to modernize our tax and redistribution entitlement programs to rely on 21st century capital, labor and insurance markets. Through such reforms, we can achieve all of the social goals of these entitlement programs far more effectively, actually serving seniors and the poor far better, at just a fraction of the current cost of those programs. Such reforms would include powerful market incentives driving the programs to contribute further to booming economic prosperity, rather than detracting from it.
Send Welfare Back to the States
All of the reforms proposed in the book, which theoretically halve the size of the federal government, are based on proven policies which have already worked spectacularly in the real world, in the U.S. and elsewhere. One of the major entitlement reform themes advanced in the book involves extending the enormously successful 1996 reforms of the old Aid to Families with Dependent Children (AFDC) program to all of the remaining 184 federal means-tested welfare programs. Those reforms, spearheaded by then Speaker of the House Newt Gingrich, implemented the ultimate welfare policies favored by President Reagan and his longtime welfare guru Robert Carleson, as explained in Carleson's recent posthumously published book Government Is The Problem: Memoirs of Ronald Reagan's Welfare Reformer. (I worked directly for Carleson in the Reagan White House.)
The reform returned the share of federal spending on the AFDC program to each state in the form of a "block grant" to be used in a new welfare program redesigned by the state based on mandatory work for the able-bodied. Federal funding for AFDC previously was based on a matching formula, with the federal government giving more to each state the more it spent on the program, effectively paying the states to spend more. The key to the 1996 reforms was that the new block grants to each state were finite, not matching, so the federal funding did not vary with the amount the state spent. If a state's new program cost more, the state had to pay the extra costs itself. If the program cost less, the state could keep the savings.
To give the states broad flexibility in designing the new replacement program, the entitlement status of AFDC was repealed, as states could not be free to redesign their programs if their citizens were entitled to coverage and benefits as specified in federal standards. The reformed program was renamed Temporary Assistance to Needy Families (TANF).
The reform was bitterly opposed by the liberal welfare establishment. Their view was well expressed by Senator Daniel Patrick Moynihan, the Urban Institute, and others who predicted that the reforms would produce a "race to the bottom" among the states, and that within a year a million children would be subject to starvation.
Nothing Succeeds Like Success
But quite to the contrary, the reform was shockingly successful, exceeding even the predictions of its most ardent supporters. The old AFDC rolls were reduced by two-thirds nationwide, even more in states that pushed work most aggressively: Wyoming (97%), Idaho (90%), Florida (89%), Louisiana (89%), Illinois (89%), Georgia (89%), North Carolina (87%), Oklahoma (85%), Wisconsin (84%), Texas (84%), Mississippi (84%). By 2006, the percent of the population receiving TANF cash welfare was down to 0.1% in Wyoming, 0.2% in Idaho, 0.5% in Florida, 0.6% in Georgia, Louisiana, North Carolina, and Oklahoma, and 0.7% in Arkansas, Colorado, Illinois, Nevada, Texas and Wisconsin.
In his 2006 book Work Over Welfare, in which he evaluates the 1996 welfare reforms, Ron Haskins of the Brookings Institution writes, "the number of families receiving cash welfare is now the lowest…since 1969, and the percentage of children on welfare is lower than it has been since 1966." Indeed, the percentage of American children on AFDC/TANF was reduced from 14.1% in 1994 to 4.7% in 2006.
As a result, in real dollars total federal and state spending on TANF by 2006 was down 31% from AFDC spending in 1995, and down by more than half of what it would have been under prior trends. At the same time, because of the resulting increased work by former welfare dependents, the incomes of the families formerly on the program rose by 25%, and poverty among those families plummeted. Haskins reports, "[B]y 2000 the poverty rate of black children was the lowest it had ever been."
This illustrates the book's entitlement reform theme: through fundamental structural reforms we can achieve the social goals of those programs far more effectively, better serving seniors and the poor at just a fraction of the costs of the current old-fashioned programs. This is what makes these reforms politically feasible, though these socially beneficial effects will have to be explained and argued for.
Building on What Works
There was only one problem with the 1996 reforms: they only reformed one federal program. As indicated above, the federal government sponsors another 184 means-tested welfare programs, including Medicaid, Food Stamps, 27 low-income housing programs, 30 employment and training programs, 34 social services programs, another dozen food and nutrition programs, another 22 low-income health programs, and 24 low-income child care programs, among others.
All of these programs could and should be block-granted back to the states, just as AFDC was in 1996. This would amount to sending welfare back to the states, achieving the complete welfare-reform dream of Reagan and Carleson in restoring the original federalism and state control over welfare. It also follows the spirit of the Tea Party movement in restoring power to the states and gaining control over government spending, deficits and debt.
With the states in charge, each state would have the flexibility to structure their welfare systems to suit the needs and circumstances of their particular state. State control would also allow experimentation among the states to try different reform ideas, with real-world results proving what works and what doesn’t. Economic and political competition among the states would then lead them to adopt the ideas that prove to work best.
I argue in the book that the states should use their newly restored powers to adopt an entirely new welfare system for the able-bodied providing benefits only in return for work first. The needy who reported for work early enough in the day would be assured a work assignment for that day. I explain in the book how this eliminates the perverse, counterproductive incentives in welfare for non-work, family break up, and illegitimacy.
Once the War on Poverty was adopted, the data shows that work among the bottom 20% of income earners plummeted. But with these reforms, instead of paying the poor not to work (as we are doing today), we would be paying them to work, preferably through private sector jobs, and contribute to the economy. This demonstrates how fundamental entitlement reform can restructure the programs to contribute to economic growth, rather than detract from it. I argue in the book that such a system would finally win the War on Poverty, eliminating involuntary poverty in America.
The best estimate of the total current cost of the remaining 184 means-tested welfare programs is $10 trillion for the period 2009 to 2018. If the results of these reforms are anything like those for the 1996 AFDC reforms, the taxpayers will save trillions. Indeed, given the thoroughly transformed incentives, the total savings could well be bigger than in the 1996 reforms, as I explain in the book.
The Heritage Foundation estimates that in 2008 total welfare spending in America amounted to $16,800 per poor person, or $50,400 per poor family of three. The Census Bureau estimates that this is four times the spending that would be necessary to bring all of America’s poor up to the poverty level. Indeed, Charles Murray wrote an entire book in 2006, In Our Hands, published by the American Enterprise Institute, explaining that we already spend far more than enough to completely eliminate all poverty in America. Through the above reforms, we can eliminate poverty in America, while saving taxpayers a large fortune, contributing mightily to defusing the ticking bankruptcy bomb.