Tag Archives for public spending

Hunger and the limits of welfare reform

When the Mayor of Newark lives this week off food stamps, he will join one in every three children in America.

The number of Americans on food stamps has increased 70% since 2007, with now 45 million families on low-incomes receiving them. Last year, $78 billion was spent on food stamps federally. That’s more than double the entire federal spending on tax-credits. This sharp rise suggests that food stamps are extremely responsive to the economic crisis of the Great Recession – and the ways that the main welfare and work programs are not.

The 2009 American Recovery Act included an addition $29 billion for food stamps over three years. This money has now run out. But the Center for Budget and Policy Priorities does not project the spending on food stamps to return to pre-crash levels for a decade. That’s because the growth in food stamps not only reflects the impact of the Great Recession, but also the limits of welfare reform.

While food stamps may be a “band-aid” for poverty, its an essential one. In 2010, SNAP prevented 1.3 million children from falling below the poverty line – far more than welfare did. Although worth less than $5 a day, the program is a major source of income for families who are ineligible for TANF (Temporary Assistance for Needy Families). Unlike welfare in America, food stamps don’t come with time-limits and in many cases stringent work-requirements; and you can claim them whether, month-to-month, you are in or out of work. States and city governments also like food stamps, in part, because, while state block-grants for welfare are capped (at 1997 levels), SNAP is funded by the feds.

If there is one lesson to learn from the rise in food stamps, it is the limits of welfare reform. America must surely now have the toughest, most punitive, welfare model of any developed nation: benefits are time-limited and funding to states is capped in nominal terms. Initially such reforms did dramatically reduce caseloads  (although the drop reached at plateau the in mid-2000s). It meant some parents moved into work and – with the help of tax-credits, and food stamps – out of poverty. But what it didn’t do was reduce the overall public spend on poverty.

Even before the recession, and as the value of welfare declined in real-terms, eligibility tightened and caseloads fell, means-tested ‘safety-net’ spending grew. And, in the face of a jobs and wage crisis of the scale of the Great Recession America the costs of poverty have grown, even when the welfare rolls have not. Although far less than the spend on universal Medicare and Social Security entitlements, America’s ‘safety-net’ now comprises 13% of its federal budget. The simple way to reduce spending might seem to be to restrict the safety-net further. But the only sure way to is, through restoring work and work that pays, reduce the numbers needing it.

Health insurance, check. Health inequality, next?

Whatever else may happen, Obama’s re-election has secured universal healthcare insurance. This is a truly historical victory for Obama, and no doubt a huge relief for families across the United States. But America’s chronic poor health, and severe health inequalities, suggests a disease far more systemic than insurance enrollment alone can cure.

Compared to England, the US has both wider health disparities and a higher prevalence of major health problems. The latter holds true even after controlling for health insurance coverage, as well as differences in ethnic composition and body weight between the two nations. Researchers Martinson, Teitler and Reichman found this pattern across many major health issues. Cancer prevalence in women was five times that of the UK, a ratio so large that it had to be halved in order to fit on the graph below.

Source: Martinson, Teitler & Reichman, 2011.

Most evaluations find that having health insurance does improve child health, and removes health costs as a source of stress on families. But access to affordable health care is only part of what keeps people healthy. A study of the health of immigrants found that those who came to the US as children had higher odds of having low birth weight babies, a key indicator of later health and developmental problems. This led the researchers to question whether there isn’t in fact something toxic about American childhoods.

This diagnosis is alarming. But the good news is the US has successfully trialed programs that help prevent the spread of poor health. Health risks and health behaviors start in early childhood and within families. So too should public health programs. With universal health insurance coverage secured, the second Obama Administration should expand health-promotion programs so they cover all low-income parents from pregnancy, and their children from birth.

Head Start and the Family Nurse Partnership – which help build healthy behaviors as well as ensure new families get crucial immunizations and check-ups – have been found to improve child health outcomes. Obama’s American Recovery Act of 2009 included funds for Early Head Start, which aims to enroll poor parents from pregnancy, combining health efforts with those on child education and parenting. But still such home-visiting programs lack the funds and high-skilled staff to have the impact they could, while pre-school programs only reach 9% of low-income children under five.

Admittedly, health promotion is not easy; nor does it promise much political reward. But while America’s chronicly poor health holds back individuals, it also propels the nation as a whole toward the “fiscal cliff”. Although it covers only the low-income and over 65s, US public health spending is greater than in many countries in Europe, and than the US defense budget.

Extending health promotion programs for new families would be a tiny fraction of current Medicaid spending, but could significantly reduce health costs in the US over time. Research within California has found that the highest-cost 25% of recipients accounted for 95% of Medicaid spending. Affordable healthcare for the nation, and for families, requires health insurance – but also health promotion.

Britain’s False American Idol

No doubt going into the UK budget this week, the British Chancellor would have liked to have been able to claim Obama’s 2.5% growth and three-year unemployment low. But the irony is the aspect of American political economy the UK Coalition government is seeking to emulate to get there – its smaller public sector – is a false idol.

If the British Treasury has a model in mind for how it envisages the British state beyond 2015, it has to be America. The US is the only major developed western nation to have privatised more social welfare services and social insurance than the UK. Few argue this apparently ‘smaller state’ is fairer. But is it even truly smaller?

Policy Professors Irwin Garfinkel, Lee Rainwater and Timothy Smeeding have shown that once health and education services and employer benefits are included in measures of public spending, the myth that America has an exceptionally smaller welfare state is bust. Most comparisons between the US other OECD nations look only at cash transfers. But when public health and education are included as well, per capita public spending on welfare in the US is actually the third biggest welfare spender in the world.

Even as a proportion of GDP, when employer-paid insurance benefits are included, US social welfare spending jumps from 21% to 32% GDP, nearing UK and surpassing Canadian levels. While average tax is lower in US, for most Americans, the proportion of income pooled and deferred as insurance towards human welfare needs and services is on a par with other advanced economies.

Much of this reflects America’s very high health care costs. Employers pay health insurance for most of the working population. Apart from the fact that they pay more in the US, for employees or employers there is little practical difference between paying health insurance and paying tax and national insurance. Even the directly publicly funded Medicaid and Medicare, despite providing patchy health care only for the poor or old, costs more than the entire US defense budget.

But it is not only in health that the US welfare system is more ‘European’ than the radical small state imagined abroad. In the UK, the incoming Universal Credit benefit ends any contributory element to out of work benefits, and limits the period it can be claimed. Meanwhile, the length one can claim US Unemployment Insurance payments, based on work history and pay, has been extended to over two years. The US is also a country where many people still have public pensions, something of an anachronism for the wonks at Her Majesty’s Treasury. The dedicated Social Security Trust Fund paid out $1 trillion – or 7% of GDP – last year.

In education, where quality and equity most directly impact on growth, the US was once a leader. Historically well-funded and widely accessed universities have given the US a competitive edge, one the government fears losing as college tuition costs mount. At primary and secondary levels, while some states have funded education below average OECD levels, many states have chosen to raise and spend funds for education at significantly higher levels. Overall, the US stills spends more on education than Germany. And, to “race to the top”, the federal government is funding national ‘common core standards’ in English and Maths, similar to pupil entitlements the UK Coalition quickly dismantled.

Even when it comes to the poor, the more punitive and privatised approaches which have inspired the UK’s work programme, seem to be shifting public costs more than lowering them. Time-limited benefits for families, and strong work incentives did get more people off welfare caseloads for the first few years. But an initial decline has not been sustained, while other costs have grown. US government expenditure on food stamps reached $64 billion in 2010, to say nothing of costs of services for poor children, homelessness and a 6-million strong prison population.

The American case suggests that governments can privatise more welfare services, without seriously or sustainably lowering public welfare spending. The truth is no rich nation is spending much less than a third of GDP in meeting welfare needs and risks.

But are welfare costs better met privately? Not even on classic economic criteria. For employers, taking on a greater burden of health and unemployment risks doesn’t make retaining or creating jobs any easier. For many families, more private welfare spending is simply another squeeze on living standards. The US Consumer Price Index has the average American spending 5.8% of their income on health and 2.8% spending on education. So a typical American paying 18% tax will pay a almost half as much again on welfare services. With low or no wage growth, essential out-of-pocket health and education expenses look like increased consumption, but feel like a tax hike.

Shifting services between the public and private lines in national accounts is quick way to show private sector growth and a lower deficit. But it’s also a cheat’s way, not necessarily reflecting any real improvement in society’s productivity, income or welfare. Indeed, through further privatisation, the British Treasury risks giving up its prized powers of cost control. Even if the goal as a government is simply to spend less, the strategy should be to spend wisely.