If reforming welfare means cutting benefits, the Welfare Reform Bill should cause a reduction in the bloated federal budget. And it will, according to Robert Inman. But when asked to describe the budget savings to be gained, Inman gives a somewhat surprising answer: "small potatoes." He believes that Congress wants to save money but that desire was not the most powerful motive for reforming welfare. "If you look at the dollars proposed as budget savings from this bill, it's $55 billion over six years. In 1993 (the last year we have numbers for), the major welfare programs - AFDC, food stamps, and Medicaid - spent $179 billion, or about 6-10 percent of all government spending. The proposed welfare savings amount to a 5 percent reduction in the welfare bill and less than one-half of a percent overall savings. Pocket change. It's not going to balance the budget - or bankrupt America." Inman thinks it was the way welfare was structured that "drove Congress crazy." And the keystone of that structure was the idea of entitlement. Federal regulations said that anyone who met the qualifications of a federal assistance program was eligible for that assistance. People signed up in their states; the states enrolled them and sent the bills to Congress. Since the states and the federal government shared the welfare budget, Washington was obliged to send back roughly two-thirds of the cost, with the states and other local entities paying the rest. "The old system basically gave the states and poor families an open draw on federal budgets."
State welfare bills varied with the business cycle and with exploding health care costs; they were maddeningly unpredictable. Unable to predict or control welfare spending, Congress couldn't even negotiate when items were protected by the term "entitlement." The states, for their part, were irked by many federal rules and regulations. They wanted "the same amount of money coming in, steadily growing each year," but with the rules for its disbursement made by themselves, not by Congress. In the end, Congress took control of the situation by "breaking the federal entitlement." It will no longer pay for welfare with matching funds from the federal budget. Instead, states will receive given sums called block grants to spend with fewer restrictions from federal regulations. The states agreed to this arrangement on the understanding that the budgets wouldn't be damaging to them. "So there isn't a lot of savings in the reform bill."
What are the implications of the bill at the state level? "On the financial side, they will be pronounced. The old system gave the states a strong incentive to continue spending money on the poor. Entitlements were the beams under the floor of welfare. Now the beams have been knocked out. The question is how far the floor is going to fall." Some fear a "race to the bottom" among the states. States will compete to offer low welfare benefits because if Pennsylvania, for example, were generous, "poor families from Boston to Washington have an incentive to move into the state looking for benefits." Inman thinks that internal state politics will actually control the spending. "The blunt fact is that the very poor don't have a powerful political coalition when it comes to state budgets. When poor families in Philadelphia marched to Harrisburg to protest welfare reform, what happened? A few hundred people stood outside the governor's house and yelled at it for a few days - and that was the end of that." If states reduce their spending on the poor, it won't be because they're swamped by incoming tides of welfare recipients. Rather, politicians listen to taxpayers, who vote in large numbers, and "there are no votes when it comes to poor families."
How much will state spending on the poor drop? Inman's work with a colleague suggests that it could fall by as much as 50-60 percent in real (inflation-adjusted) dollars over the next five to ten years. Congress foresaw this problem and put a "maintenance of effort" provision into the Welfare Reform Bill. It says that spending cannot fall below 75 percent of a state's welfare budget in 1994. "But there's always the question of how enforceable these floors are. Is Congress going to go out and look at each state budget to determine if it's spending at a 75-percent level? It becomes virtually impossible to police that 75-percent limit." With maintenance of effort, welfare budgets may fall by only 25 percent; but the legislated limit is such a weak check that Inman places little faith in it. "My bet is that the reduction in state support for poverty programs will be 30 or 40 percent over the next few years. The burden is going to shift onto the cities."
That's why Philadelphia mayor Ed Rendell, and other big city mayors, are so nervous about welfare reform. "The fiscal responsibility for funding poor people is going to shift from taxpayers nationally down to a state maintenance of effort requirement that will only be marginally met. Ultimately, the tax burden for low-income support will be allocated to the taxpayers where poor people actually live, which is in big cities. You want to be cynical about it? The tax burden is moving from the suburbs to the cities."
It's a situation, he says, in which "everybody is passing the responsibility around. It will ultimately land on those who live closest to the poor. But it can't be handled that way. Cities can't support a sizeable poverty budget and remain competitive with their suburbs." What happens then? "You're going to push a lot of poor people into deeper trouble. This issue isn't going to go away. The cuts will be greatest in the poorest states. Cities will be asked to pay more and won't be able to. The problems will come back to Congress at some point."
And will Congress have to change the legislation it fought so hard to put through?
"Yes, I think so."
Robert P. Inman is Professor of Finance, Economics, and Public Policy and Management, holding a primary appointment in the Wharton School and a secondary appointment in the SAS Department of Economics. A public finance specialist, he has written extensively on government and the economy, while serving as a consultant for municipal, state, national, and international clients. In 1995, he won the Irving B. Kravis Award for Distinction in Undergraduate Teaching.