Economic Efficiency

AFDC executives and welfare reformers have continually struggled over the issue of work incentives for recipients. One overriding work incentive, stronger among some groups than others, is the stigma associated with AFDC status. The complexities of the application process and subsequent eligibility testing also provide some deterrent to program use and thus may serve as a work in-

centive. As a group, however, AFDC mothers tend to have low levels of education, job skills, and work experience. So even those who are eager to work, as most initially are,^[23] have difficulty finding jobs that provide either much job security or income sufficient to support their families. For many, earnings from even full-time employment fall below official poverty levels or, in some cases, below the value of AFDC grants in conjunction with the benefits of other programs—food stamps, Medicaid, and housing—for which AFDC recipients are generally eligible.

Despite these obstacles to household support, adult AFDC recipients generally do work, frequently part-time, using the program episodically when work runs out. Recipients thus do not constitute a perverted culture whose members are unwilling to contribute to the support of their households. Instead they generally do contribute, but their economic position is fragile and highly contingent on periodic changes in family composition and employment status.^[24]

This fragile situation is complicated by AFDC's design features. Since 1962 AFDC has experimented with different approaches intended to encourage recipient self-help. But in practice these measures have penalized recipients who are too diligent. For example, until 1967 recipients' earnings, less work-related expenses, were deducted from their program benefits, a practice that "taxed" earnings at about 70 percent. In 1967, in connection with the WIN program, Congress effectively reduced this rate to about 50 percent.^[25] Then in 1981 the Reagan administration limited the more generous treatment of earned income to the first four months of a claim. Thus recipients eventually encountered a "notch," a point at which additional earnings cause a drop in total household income because they render the household ineligible for AFDC benefits and programs such as Medicaid and food stamps.^[26]

Although the term work incentives arises repeatedly in discussions about AFDC, it is fair to say that there is no agreement as to what work incentives or disincentives are associated with the program. Some critics of the program argue that the very distribution of resources to working-aged adults reduces their incentive to work. Other critics cite the high rate of benefit reductions against earnings and the aforementioned notches as the major disincentives.^[27] Proponents and detractors of AFDC also disagree on the inter-

pretation of the program's results. For instance, attrition rates in job training programs are high, but some people do achieve independence from AFDC through WIN training and job placement.^[28] Yet the attrition rate is commonly interpreted as an index of the failure of work incentives, rather than as a measure of the difficulty of the circumstances faced by recipients.

The various social services introduced in 1962—child-care, basic adult education, family planning, work training—are frequently viewed as work incentives. The delivery of these services, however, has been spotty, largely because funding has been much more limited than the initial program announcements suggested. Additionally, the objectives of services such as basic adult education have never been clearly defined and are sometimes delivered in ways that serve the needs of providers more than those of program recipients. For instance, since the federal government picks up a higher portion of costs associated with social services, state welfare agencies have renamed offices that scrutinize recipients' budgets as budget-counseling services.^[29]

Regarding incentives for household savings, AFDC's means test is clearly counterproductive. State regulations vary, but in general means tests restrict program eligibility to households that have virtually no income or saleable assets.^[30] Means tests thus mesh poorly with the episodic character of most AFDC usage: families are not eligible for assistance until they have depleted their resources—a small savings account, marketable possessions—a practice that only reinforces a sense of hopelessness with respect to savings. Means tests also make leaving AFDC protection risky, since the recipient will have to fall back into destitution in order to reenter the program.

Guaranteed-income experiments conducted in Seattle and Denver suggest that means tests which ignore assets in determining eligibility may be a more constructive approach to aiding the working poor and encouraging savings.^[31] The abolition of means testing would reduce target efficiency but would bring AFDC in line with social security and unemployment insurance, both of which use current earnings as a measure of eligibility. (No one would ever suggest that laid-off workers covered by unemployment insurance sell their homes, cars, and other possessions before applying for benefits.) Since AFDC serves as a substitute for unemployment insurance for

a high proportion of workers on the fringes of the economy, parity in the type of eligibility rules does not seem unreasonable.

For businesses and corporations AFDC's consequences for risk-taking are mixed. Because the program is financed from general revenues, rather than payroll taxes, the association between levels of program support and the costs of doing business are small and indirect. The program's deleterious effects on work incentives may hurt recipients but should have little influence on business. The argument that AFDC curtails participation in the labor force by offering a limited and unrepresentative segment of the labor market roughly comparable levels of financial support for rearing children may have considerable face validity for businessmen, but this contention is of dubious empirical accuracy. Nor can AFDC be implicated in debates about the competitiveness of American goods and services in global markets. The taxes that sustain AFDC are paid largely by individuals, not by business enterprises, and they represent less than 0.5 percent of GNP (compared to 5 percent for social security), or about 1.5 percent of the federal budget (compared to 20 percent for social security).

The total costs of AFDC are modest: less than $15 billion to serve about 11 million persons in 1986. Herein lies one of the program's virtues from the standpoint of economic efficiency. It is inexpensive—far less expensive than any program attempting to achieve self-support among AFDC's adult recipients would be.

Slightly more than half of AFDC's costs are covered by the federal government from general revenues. The redistribution of resources is thus strongly vertical: since the incomes of AFDC recipients are low, few of them pay federal income tax, and higher-earning citizens shoulder the bulk of AFDC's costs.

States fund the balance of AFDC expenditures through a variety of taxes that are usually more regressive than the federal income tax. The tax burden that AFDC poses for residents of different states varies sharply. Nearly one-half of the benefits are disbursed in three states (California, New York, and Massachusetts) that provide high benefits, based on high costs of living, to large numbers of recipients.^[32] But other states do not share these exceptional fiscal problems.

Overall AFDC is a highly focused program that concentrates on a particular swath of urgent need. Consequently, AFDC has a

reputation for target efficiency; that is, AFDC benefits—in contrast to those of social security—go to extremely needy households. Prior to the late 1960s varying interpretations of what constituted a "suitable home" and other restrictions combined to deny aid to many needy families within the ostensible target population.^[33] Between 1967 and 1981 target efficiency was diluted somewhat by more lenient rules covering earnings retention, but only a small proportion of AFDC households were able to take advantage of these rules.^[34]

Specific aspects of AFDC's highly focused design, critics claim, exacerbate the plight of destitute households and undermine economic efficiency. One argument of this sort is that by supporting only single-mother households, AFDC encourages family dissolution.^[35] Fathers who cannot or who are reluctant to take responsibility for the support of their dependents either leave the household or never become a formal part of it. Empirical evidence for this argument is sparse: one analysis shows that the variation in the level of AFDC benefits across states has no effect on family structure and living arrangements, but other data suggest that the incentive structure to which this feature of AFDC contributes is not overlooked by some of the males associated with AFDC families.^[36] Nonetheless, experiments with the negative income tax, particularly the Seattle/Denver work, suggest that programs that aid households regardless of composition may facilitate family dissolution as well, through an independence effect—that is, women who have independent resources are apt to leave a bad marriage.^[37]

A second troublesome feature is the wide variation of benefits among states and their subdivisions. Economic efficiency is not well served if poor households migrate from the rural south, where benefits are lowest, to northern and western cities. Any concentration of AFDC-dependent households in cities already facing impressive structural unemployment problems produces a permanent urban underclass. A program of standardized national benefits, in contrast, might encourage poor households to move to areas in which the cost of living is lower and job opportunities are more plentiful. Social security, for instance, has probably facilitated a migration of elderly citizens from the frost to the sunbelt, and the Denver guaranteed-income experiment suggests a similar migration pattern.^[38]

In summary, little about AFDC contributes to economic efficiency, but programs that target narrow, highly vulnerable segments of the population are, by nature, not intended to realize economic efficiency. Nevertheless, extending help to the impoverished and economic efficiency may not be as incompatible as is generally thought. As we will see, the economic efficiency of a program aimed at helping the poor can be enhanced, but such improvements exact a price in terms of program budget.