The Welfare State A Cost Benefit Analysis

Essay, Research Paper

The Welfare State – A Cost Benefit Analysis

The role of welfare within our society has always been controversial. This problem emphasizes the need to understand the roles of variable factors when pertaining to the subject of welfare within our society. The proposed analysis will address the phenomenon of welfare assistance and several factors which may contribute to the increase or decrease of welfare assistance to the poor in 4 ways: (1) by defining major concepts and any other concepts about which there is likely to be misunderstanding (2) by further examining the past history pertaining to the subject of welfare assistance within the United States; (3) by developing the formulation of a hypothesis which will provide for an explanation of welfare; and finally (4) determining whether or not the benefits of welfare assistance outweigh the cost.

Ultimately, the purpose of this research analysis is to investigate variable factors that may contribute to the increase or decrease of welfare assistance. This cost benefit analysis is an attempt to explain the tentative assumptions of others pertaining to the subject of welfare, in order to determine and explain the relationship of welfare to the economic cost and benefits.

Cost-Benefit Analysis

Before welfare assistance can be analyzed there is a need to define the terms that will be used. Policies like welfare assistance are worthwhile only if the benefits to society are greater than the costs. When choosing among a set of policies, the policy with the greatest net benefit (benefit over cost) should be chosen. Hence, this is where the term cost-benefit analysis comes from. Cost-benefit analysis is a technique for determining the optimal level of an economic activity such as welfare. In general, an activity such as welfare assistance should be expanded as long as it leads to greater benefits than costs. In purely economic terms, does the benefit of welfare assistance justify the costs of welfare assistance? (Mishan 13)

Why Use Cost-benefit Analysis?

Since 1981, government agencies have been required to perform cost-benefit analyses called Regulatory Impact Analyses (RIA’s) for all major regulations within the United States. Many statutes require that cost-benefit analysis be undertaken and the results be reported to Congress (Mishan 2). Cost-benefit analysis can also be a good way to measure how effective a policy such as welfare assistance has been, or to find ways in which a program can be improved. But, regardless of how it is used, the preparation of a cost benefit analysis provides a useful framework for consideration of the possible effects of a proposed policy.

Past History of Welfare Assistance

One of the first welfare programs to provide income support to the poor was a federally backed plan called the Aid to Dependent Children (ADC) program. This legislation was introduced with the establishment of the Social Security program during the Great Depression. (Rowley, and Peacock 43) The ADC program which had started nearly sixty years ago is now better known as the Aid to Families with Dependent Children (AFDC) program, which provided a federal entitlement to economic support for single parents with children younger than 18 who fell below a threshold of assets and income (Rowley, and Peacock 44). Federal guidelines allowed for each state to set its own predetermined needs standards for families of different sizes and living locations. Both the federal government and the states supplied funding for the AFDC program (Rowley, and Peacock 50). In 1996 Congress adopted the Temporary Aid to Needy Families (TANF) program by enacting the Personal Responsibility and Work Opportunity Reconciliation Act which ultimately changed the structure of federal financial assistance to the states thereby abolishing the AFDC program.

Another social welfare program was the Supplemental Security Income (SSI) program. Congress established the Supplemental Security Income program in 1972, with payments beginning in January 1974. It replaced the former Federal-State programs of Old-Age Assistance (OAA), Aid to the Blind (AB), and Aid to the Permanently and Totally Disabled (APTD)( Myles, and Pierson 9). An individual may have qualified for payments on the basis of age, blindness, or disability. Any person aged 65 or older was also eligible. President Richard Nixon enacted the Supplemental Security Income program with the signing of the Supplemental Social Insurance Act. The benefits under this program were originally targeted to the elderly who did not qualify for social security and the blind and disabled whose income and assets fell below the specified thresholds.

A third major welfare assistance program is the Medicaid program. The Medicaid program is a health care support program targeted toward the poor. Medicaid was originally suppose to provide the same health care to the poor as privately insured Americans received with their health care programs. (Myles, and Pierson 9) The Medicaid program was originally set up so all families who qualified for AFDC or SSI were automatically entitled to Medicaid benefits. Today, Medicaid is the major mechanism for financing health and long-term care for the poor in the United States. As such, the Medicaid program covers the medical expenses for over 35 million Americans at a cost of more than $152 billion a year (Myles, and Pierson 12).

Explanations for Welfare

Although the United States is a country with an extensive amount of economic resources, problems still transpire. One such problem occurs with not the amount of resources but actually how those resources are distributed among its citizens. Because of this, some citizens live in squalor or complete poverty while others live in luxury. This poverty dilemma in the United States is usually referred to as an income distribution problem. (Sharp, Register, and Grimes 382) For example, some citizens have an annual income of several billion dollars while other citizens have no income whatsoever. The incidence of poverty in the United States is usually referred to as the poverty rate.

The figure below shows the trend in the poverty rate between 1960 and 1995.

During the beginning of the 1960s, 22.2% of the population, or 39.9 million individuals, officially lived in poverty. During the 1970s the incidence of poverty fell to 12.6% of the population. Since 1970, the poverty rate has steadily increased to 13.8% of the population in 1995, or 7.5 million families. The figures are even greater among certain family groupings such as single family households headed by females with children under the age of 18. In fact, the highest rates of poverty are found among this group living below the poverty threshold level. (Sharp, Register, and Grimes 202) Table 1 shows the poverty threshold levels in 1995.

Table 1 Poverty threshold levels in 1992

Family SizeThreshold Level

1$7,763

29,933

312,158

415,569

518,408

620,804

723,552

826,237

9 or more31,280

Again, the poverty issue affects a large portion of the United States population. It is because of the reasons mentioned above that social welfare programs have been established to help alleviate the suffering of the poor within our society. But, what causes poverty? At first, this would appear to be a simple question to answer. However, many factors are at play in determining the actual causes of poverty. They include low quality of resources, low market values on the services they provide in a market, low productivity, low pay of the poor due to low levels of education and training, misfortune, small or no inheritances, and discrimination. (Sharp, Register, and Grimes 206) Because of the many factors involved there is no one simple answer to what is the actual cause of poverty.

Does the Benefit of Welfare Assistance Outweigh the Cost?

Now that there is a general understanding of the establishment of social welfare programs, the next question to answer should be does the benefit of welfare assistance outweigh the cost? Beginning with the introduction of the Temporary Aid to Needy Families program, the United States has been at a turning point with social welfare programs. For example, during 1980 the expenditures for the old welfare program, AFDC, was $5.4 billion while the Earned Income Tax Credit (EITC, also a social welfare program), was $2.0 billion. The annual cost of the EITC grew from $2 billion to $12 billion between 1986 and 1992. By 1996, annual outlays reached $25 billion, almost double the level of federal expenditures on AFDC (see Table 2). While part of this growth is due to a rising demand, the main reasons for expansion have been sizable benefit increases and extensions of eligibility introduced in 1986, 1990, and 1993. (Myles, and Pierson 6)

Table 2 Federal Spending on EITC and AFDC, 1980-1996

($ In billions)

EITCAFDC

19802.05.4

19811.96.9

19821.86.9

19831.87.3

19841.67.7

19852.17.8

19862.08.2

19873.98.9

19885.99.1

19896.69.4

19906.910.1

199110.611.2

199212.412.3

199313.212.3

199419.612.4

199522.812.8

199625.113.2

Source: United States House of Representatives, Committee on Ways and Means, Where Your Money Goes: The 1994-95 Green Book (Washington, DC: Brassey’s, 1994), 389, 700.

Note: AFDC expenditures exclude state-level spending and Administrative costs.

Although the EITC expenditures have surpassed the old welfare program AFDC, cost-benefit analysis can help identify the optimal level of expenditures of welfare assistance programs, as long as estimates of the benefits and costs of welfare assistance are supplied. Once benefits and costs are estimated, cost-benefit analysis indicates that well being will be enhanced through an increase in welfare assistance programs so long as the benefit society derives from the increase is at least as great as the cost of the increased activities. (Sharp, Register, and Grimes 101)

The Opportunity Cost

The costs or money expense of welfare assistance to society is ultimately supplied through some sort of tax revenue. The economic cost to society is the value of the goods and services that resources used for welfare assistance could have produced if they had not been used for welfare assistance. This simple concept is also known as the opportunity cost principle which states that the true cost of producing an additional unit of a good or service is the value of other goods or services that must be given up to obtain it (Sharp, Register, and Grimes 8). The opportunity cost principle can be an effective means of identifying the actual costs of welfare assistance. To illustrate the costs of welfare assistance a production possibilities curve, which measures units of welfare assistance along the horizontal axis and units of all other goods and services along the vertical axis, will be used (Figure 2). Curve PP shows all goods and services as well as welfare assistance that the economy’s given resources can produce in a year. There are two combinations represented by D and J. When the economy is producing combination D, it is obtaining W1 units of welfare assistance and S1 units of other goods and services.

W1W2 represents one unit of welfare assistance per year therefore S1S2 units of other goods and services were sacrificed to produce one more unit of welfare assistance. This is the real cost of producing a unit of welfare assistance (Sharp, Register, and Grimes 7).

The Explicit Costs

Other types of cost pertaining to welfare assistance are explicit costs. Explicit costs are the cost incurred by the producer to buy or hire the resources required to accomplish its objective (Sharp, Register, and Grimes 69). Although welfare assistance is provided by the government and not a business it does have an objective and that objective is to provide for the poor. The explicit costs of the services provided by the government be it state or federal are the costs of the resources that it buys and hires to provide such services. Such expenses include land, employees, buildings, equipment, and etc. Welfare assistance is provided in all 50 states with offices throughout each state and probably each county. The explicit costs alone to provide for welfare assistance are tremendous.

The Implicit Costs

Another type of cost is implicit cost. Implicit costs are the costs induced by the producer for the use of self-owned, self-employed resources (Sharp, Register, and Grimes 69). These costs are sometimes ignored or tend to be hidden costs. Such costs can also be identified by the opportunity cost principle. The cost to society of producing welfare assistance could exceed explicit costs. By the government concentrating resources or providing for welfare assistance they reduce the amount of other goods or services, for example, military hardware available to society. By the government cutting back on military hardware, which could have been sold for a profit, it is able to provide more welfare assistance to the poor. These forgone earnings are implicit costs to the government and to society of the welfare assistance obtained by the poor (Sharp, Register, and Grimes 71).

Benefits

The poor, the government, and society all receive an abundance of benefits on account of social welfare assistance programs. The most obvious benefactor is the poor. Without welfare assistance some individuals might not make it in this world. Also, the poor benefit from other social programs such as job training, childcare, educational grants, medical expenses, and tax credits. If not for social welfare assistance programs, a large majority of these individuals would have a hard time obtaining such programs.

The poor aren’t the only people to benefit from welfare assistance; the government also benefits from such programs. If welfare assistance programs weren’t available to the poor eventually the poor would have to support themselves. There are only a couple of ways to support yourself and it’s legally or illegally. If a person can’t get a job because of scarce employment or no or little job skills that individual is going to try to “obtain” money some way to put food in his/her stomach. Without a prospering economy and social welfare assistance programs the crime rate would probably skyrocket.

Finally, society in general benefits from social welfare programs. Again, if welfare assistance programs didn’t exist the crime rate would probably be very high due to the lack of the equal distribution of resources. This unequal ownership pattern of resources gives rise to an unequal distribution of income in society (Smith, and Zietz 208). Because of the higher crime rate, resources would have to be reallocated to try and put a stop to such problems. This wouldn’t be using resources efficiently due to the high expenditures of crime prevention compared to welfare assistance programs. Also, problems such as drug use, prostitution, and many other deviant behaviors associated with crime would become rampant in a society that got rid of social welfare assistance programs.

Conclusion

To some extent, the results of analysis in relation to welfare reform are in a state of waiting. The predictions following the passage of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 have yet to be assessed, in part because they demand more time or major events such as an economic recession for a full evaluation. Nonetheless, a cost benefit analysis has shown that programs such as welfare assistance can be beneficial to a society but, at the same time be somewhat costly at times. Then again, the recent welfare reform measures that are setting time limits and job training have proven to help alleviate and shrink the welfare rolls. Do the benefits of endorsing welfare assistance programs outweigh the cost? Cost benefit analysis shows that as long as the government can stay on track with the new social welfare reform measures that have taken place over the past few years, then yes it is beneficial. However, when the day comes that it is no longer beneficial to support such programs should society follow economic indicators or follow it’s moral obligations?

Work Cited

Mishan, Edward J. Cost-Benefit Analysis. New York: Praegor Publishers, 1976.

Sharp, Ansel, Charles, Register, and Paul, Grimes. Economics of Social Issues. Boston: Irwin/McGraw-Hill, 1998.

Rowley, Charles, and Alan Peacock. Welfare Economics. London: Martin Robertson & Co. Ltd., 1975.

Smith, Russell, and Dorothy, Zietz. American Social Welfare Institutions. New York: John Wiley & Sons, Inc., 1990.

Myles, John, and Paul Pierson. Friedman’s revenge: the reform of “liberal” welfare in Canada and the United States. Politics & Society, Dec 1997 v25 n4 p443(30).

Work Cited

Mishan, Edward J. Cost-Benefit Analysis. New York: Praegor Publishers, 1976.

Sharp, Ansel, Charles, Register, and Paul, Grimes. Economics of Social Issues. Boston: Irwin/McGraw-Hill, 1998.

Rowley, Charles, and Alan Peacock. Welfare Economics. London: Martin Robertson & Co. Ltd., 1975.

Smith, Russell, and Dorothy, Zietz. American Social Welfare Institutions. New York: John Wiley & Sons, Inc., 1990.

Myles, John, and Paul Pierson. Friedman’s revenge: the reform of “liberal” welfare in Canada and the United States. Politics & Society, Dec 1997 v25 n4 p443(30).