Essay, Research Paper: Welfare State

Economics

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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 Size Threshold Level 1
$7,763 2 9,933 3 12,158 4 15,569 5 18,408 6 20,804 7 23,552 8 26,237 9 or more
31,280 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) EITC AFDC 1980 2.0
5.4 1981 1.9 6.9 1982 1.8 6.9 1983 1.8 7.3 1984 1.6 7.7 1985 2.1 7.8 1986 2.0
8.2 1987 3.9 8.9 1988 5.9 9.1 1989 6.6 9.4 1990 6.9 10.1 1991 10.6 11.2 1992
12.4 12.3 1993 13.2 12.3 1994 19.6 12.4 1995 22.8 12.8 1996 25.1 13.2 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).

Bibliography
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).

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