PPA786: Urban Policy
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Transcript of PPA786: Urban Policy
PPA786: Urban PolicyClass 16:Welfare Programs and Principles of Welfare Policy
PPA786, Class 16: Welfare Programs and Policy
•Class Outline
▫Welfare Programs
▫Work Incentives
Theory
Evidence
▫Marriage Incentives
PPA786, Class 16: Welfare Programs and Policy
•Cash Welfare Programs, TANF
▫Temporary Assistance to Needy Families
Replaced Aid to Families with Dependent Children (AFDC), which was set up in 1935
Provides assistance mainly to single parents
Has work requirements and time limits, which are covered in detail in the next class.
PPA786, Class 16: Welfare Programs and Policy
•Cash Welfare Programs, EITC
▫Earned Income Tax Credit
The EITC is part of the income tax code.
It subsidizes wages for the lowest-income earners in the form of a (refundable) tax credit.
The EITC is now the nation’s largest welfare program.
PPA786, Class 16: Welfare Programs and Policy /• EITC Rates (Richmond Fed)
Note: Solid line represents single/head of household filers; dashed line represents married filers.
PPA786, Class 16: Welfare Programs and Policy /• Participation in TANF and EITC (Caputo)
PPA786, Class 16: Welfare Programs and Policy
•Cash Welfare Programs, SSI
▫Supplemental Security Income
SSI is a cash welfare program for the elderly and disabled poor—a supplement to Social Security.
It appears to be the main reason that poverty has dropped so much among the elderly.
It is the least controversial welfare program.
PPA786, Class 16: Welfare Programs and Policy Sources of Income for Low-Income Families with Children (Urban Institute)
PPA786, Class 16: Welfare Programs and Policy
•In-Kind Welfare Programs
▫Some welfare programs provide goods and services, not cash.
Food Stamps provides coupons that can be used to pay for food.
Medicare (for the elderly) and Medicaid (for the poor) provide health insurance.
Housing assistance subsidizes rents for low-income families.
PPA786, Class 16: Welfare Programs and Policy
•In-Kind Welfare Programs, Continued
▫The distinction between cash and in-kind programs can be important.
Some in-kind programs (Food Stamps) are essentially like a cash program.
Others (Medicare, Medicaid, and housing assistance) are different than cash.
The following figures explain this distinction.
Other Goods Per Day0
Food per Day
Cash versus In-Kind Subsidies, Case 1PPA786, Class 16: Welfare Programs and Policy
Indifference curve
Original Budget Constraint
Budget Constraint with Food Stamps
Extension of Budget Constraint with Cash Grant
Choice with Food Stamps or Cash GrantOriginal Choice
Amount of Food Stamps
Other Goods Per Day0
Medical Care per Day
Cash versus In-Kind Subsidies, Case 2PPA786, Class 16: Welfare Programs and Policy
Budget Constraint with Medicaid
Extension of Budget Constraint with Cash Grant
Choice with Medicaid = In-Kind Grant
Original Choice
Choice with Cash Grant
Income Shift That Is Equivalent to Medicaid from Household Point of View
PPA786, Class 16: Welfare Programs and Policy •Work Incentives
▫One of the conceptual issues at the heart of the debate about welfare policy is that of work incentives.
Some welfare programs create financial incentives that discourage work.
This feature may harm recipients in the long run and it undermines support for the programs.
Today we develop conceptual tools; current program details are covered in the next class.
Leisure Hours per Day, L Work Hours per Day
Time Constraint
0 L1
Goods per Day, Y
The Labor-Leisure Choice
PPA786, Class 16: Welfare Programs and Policy
Indifference curve
Budget Constraint
Leisure Hours per Day, L Work Hours per Day
Time Constraint
0 L1 L2 L3
Income Effect
Substitution Effect
Slope = -w(1-t)
Guarantee
Goods per Day, Y
Leisure Choice with a Welfare Guarantee and “Tax” Rate PPA786, Class 16: Welfare Programs and Policy
Leisure Hours per Day, L Work Hours per Day
Time Constraint
0 L1 L2L3
Slope = -w(1-t)
Guarantee
Disregarded Income
Goods per Day, Y
Leisure Choice with a Welfare “Disregard”
PPA786, Class 16: Welfare Programs and Policy
Leisure Hours per Day, L Work Hours per Day
Time Constraint
0 L1 L4
100% tax rate
Guarantee
Disregarded Income
Goods per Day, Y
Leisure Choice with a Disregard & a 100% Tax Rate
PPA786, Class 16: Welfare Programs and Policy
Leisure Hours per Day, L Work Hours per Day
Time Constraint
0
Red= Household Initially on Welfare
Guarantee
Green= Household Initially Not on Welfare
Goods per Day, Y
Impact of Tax Rate Reduction on Aggregate Work Effort
PPA786, Class 16: Welfare Programs and Policy
Leisure Hours per Day, L Work Hours per Day
Time Constraint
0 L1 L2
Guarantee
Disregarded Income
Value of Medicaid
Medicaid Notch
Choice without Medicaid Notch
Choice with Medicaid Notch
Goods per Day, Y
The Medicaid Notch Blue = Budget Line with Medicaid Notch Black = Budget Line without Medicaid Notch
PPA786, Class 16: Welfare Programs and Policy
Leisure Hours per Day, L Work Hours per Day
Time Constraint
0 L1 L2L3
Income Effect
Substitution Effect
Slope = -w(1+e)
Goods per Day, Y
Leisure Choice with an EITC, 1 PPA786, Class 16: Welfare Programs and Policy
Leisure Hours per Day, L Work Hours per Day
Time Constraint
0 L1 L2
Slope = -w(1+e)
Slope = -w(1-t)
Goods per Day, Y
Leisure Choice with an EITC, 2
PPA786, Class 16: Welfare Programs and Policy
Leisure Hours per Day, L Work Hours per Day
Time Constraint
0 L1 L2L3
Budget Line After Training or Child Care Subsidy
Slope = -w2
Slope = -w1
Goods per Day, Y
Leisure Choice with Wage Boost or Child Care Subsidy
PPA786, Class 16: Welfare Programs and Policy
PPA786, Class 16: Welfare Programs and Policy
•Empirical Evidence on Labor Supply and the EITC
▫Many studies find that the EITC encourages labor force participation among unemployed parents (at least without a recession).
▫Many studies find that, despite strong work incentives, the EITC has little impact on the hours worked by employed parents.
PPA786, Class 16: Welfare Programs and Policy
•Welfare Reform and Marriage
▫The Negative Income Tax Experiments had a striking finding: Providing cash grants to poor families increased divorce.
▫Most commentators interpreted this finding as showing that financial desperation kept many women in unpleasant relationships.
▫But ever since, there has been a lively debate on welfare reform and marriage.
PPA786, Class 16: Welfare Programs and Policy • Welfare Reform and Marriage, Continued
▫AFDC/TANF clearly discouraged marriage for most recipients.
Adding earnings by a secondary earner cut benefits, and most states did not provide any benefits to married couples (although some had AFDC-UP).
The current time limits cut these incentives greatly.
▫The EITC has complex incentives for marriage.
It encourages marriage for some, discourages it for others.
The overall effects appear to be minimal.
PPA786, Class 16: Welfare Programs and Policy Marriage Rewards and Penalties with the
EITC
Source: Ellwood, NTJ, 2000
PPA786, Class 16: Welfare Programs and Policy
Source: Tax Foundation