Assessing the New Federalism Discussion Paper No. 01-02
Assessing the New Federalism is a multi-year Urban Institute project designed to analyze the devolution of responsibility for social programs from the federal government to the states. It focuses primarily on health care, income security, employment and training programs, and social services. Researchers monitor program changes and fiscal developments. Alan Weil is the project director. In collaboration with Child Trends, the project studies changes in family well-being. The project provides timely, nonpartisan information to inform public debate and to help state and local decisionmakers carry out their new responsibilities more effectively.
Key components of the project include a household survey, studies of policies in 13 states, and a database with information on all states and the District of Columbia. Publications and database are available free of charge on the Urban Institute's Web site: http://www.urban.org.
The project has received funding from The Annie E. Casey Foundation, the W.K. Kellogg Foundation, The Robert Wood Johnson Foundation, The Henry J. Kaiser Family Foundation, The Ford Foundation, The David and Lucile Packard Foundation, The John D. and Catherine T. MacArthur Foundation, the Charles Stewart Mott Foundation, The McKnight Foundation, The Commonwealth Fund, the Stuart Foundation, the Weingart Foundation, The Fund for New Jersey, The Lynde and Harry Bradley Foundation, the Joyce Foundation, and The Rockefeller Foundation.
The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
Contents
Executive Summary
Background and Overview
Recent Studies of Welfare Caseload Decline
Have Welfare Reform Policies Made a Difference?
Summary of Findings
Interpreting Differences in Results
Choosing between Competing Explanations
A Bottom-Line Assessment and Extension to TANF
Further Considerations
Lagged and Lead Effects
Estimating Effects of Individual State Policies
How Much Did the Economy Matter?
How Effects Vary over Time
Other Sources of Variation
Interactions between the Economy and Policy
What Do We Know about the Relative Importance of Policy versus the
Economy?
Summary, Extensions, and Implications
References
About the Author
Executive Summary
Between 1994 and 1999, welfare caseloads—initially Aid to Families with Dependent Children (AFDC), then Transitional Assistance to Needy Families (TANF)—fell by half. The conventional wisdom is that both falling unemployment and new work-oriented policies played major roles in this drop in dependence for low-income families. A number of economists and other researchers have lately sought to confirm this impression through scientific study of caseload levels and change, state to state and year to year. This paper summarizes the results of that effort—which remains ongoing—drawing from published reports of the President's Council of Economic Advisers and a set of academic papers.
Authors for all nine of the studies examined agree that the strong economy played a role in the caseload decline of the 1990s, reducing the number of AFDC and TANF recipients roughly 5 percent for every 1 percentage-point reduction in the nation's unemployment rate. There is less agreement on the influence of changes in welfare policy, including
reforms initiated by states in the mid-1990s (known as the "waiver" reforms) and federal welfare reform legislated in the Personal Responsibility and Work Opportunities Reconciliation Act of 1996. Most analyses show policy making a difference, albeit a smaller one than economic change.
However, three of the nine studies conclude that the association between policy reform and caseload change in the 1990s is misleading. They attribute caseload decline to two nonpolicy factors: lagged responses to economic growth and generally sluggish adjustment of welfare rolls to any change in external circumstances. This conclusion follows from the fact that, starting at least by the mid-1980s, sluggish caseload
adjustment is evident throughout the observational period. Once the resulting "persistence effects" of past caseload levels are factored into the data through 1996, policy reforms in certain states and years no longer associate with lower caseloads. (These three studies do not look at the TANF years following 1996.)
The remaining studies—six of the nine reviewed—conclude that welfare reform did have an important downward influence on caseloads during the mid-1990s, effects that grew following the federal reforms of 1996. There, researchers did not posit sluggish caseload adjustment as a general phenomenon (although they did provide for delayed reactions to
changes in economic conditions). At least one author justified this exclusion by suggesting that generalized "persistence effects" mask more important and fundamental factors at work in moving welfare caseloads up and down.
If persistence is not a factor, work-oriented policy reforms explain 15 to 35 percent of the drop in welfare dependence in recent years, with the economic expansion accounting for another 25 to 50 percent. (Twenty-five to 60 percent remains unexplained or relates to shifts in other factors such as demographics.) The analysts who do not see policy playing a part in falling rolls attribute an even larger share of the decline to the economy, up to 80 percent. None of these analysts has been able, in convincing fashion, to tie caseload declines to individual welfare reform components such as benefit time limits or increased
work sanctions; apparently, available data and methods focused on state-level variations in results cannot reliably decompose the general effect of adopting some work-focused welfare reform into the effects of different individual policies. The other reform components typically addressed are family caps, enhanced earnings disregards, and tightened work exemptions.
Which camp is right on the larger question of the overall role of welfare reform? What are policymakers and others to make of the conflicting evidence in this realm as attention turns toward the decision to reauthorize federal welfare reform in 2002? These are difficult questions. They should not be settled by simple "majority rule" among the published analyses—in part because other very new studies (as well as a few more peripheral studies) have not been taken into account. The case must be decided on the respective merits of the two different research approaches.
At present, two factors tip the balance toward caution in interpreting recent declines in welfare caseloads as the effect of policy reforms. First, recent work on the dynamics of caseload adjustment—that is, how families cycle on and off the rolls in response to economic change, and how those changes cumulate to determine the size of the caseload
year to year—provides a basis for expecting persistence and sluggish adjustment to influence caseload size independently of other factors. This suggests that analyses leaving out persistence effects miss something important, and that their conclusions on the role of policy may be off the mark as a result.
Also, even the researchers who found a persistent association between policy and dependency caution that this does not imply causation. There could be other reasons why welfare reform has been followed consistently by drops in dependency (e.g., states experiencing the greatest expansion of welfare dependence in the early 1990's recession might have been most eager to adopt policy reforms under the waiver system and—for the same reason—most likely to outstrip other states in the magnitude of caseload decline once the economy turned, even without experiencing any effects from the policy reforms).
The bottom line? At present, the models that incorporate sluggish caseload adjustment provide the most sophisticated assessment of the causes of reduced welfare dependency in the 1990s. This does not mean, however, that we should conclude that the waiver reforms, and their successor federal reforms, had no effect. Rather, what we have learned is that—constrained by available research methods and data, and facing a highly complex world—the research community is unable to show convincingly that work-oriented welfare reforms contributed to the caseload decline of the 1990s. Much more research is needed, starting with extension of analyses incorporating sluggish adjustment to the TANF era and increased attention to outcomes more central to the long-run success of welfare reform than simply getting families off benefits—outcomes such as parental employment, family poverty, and child well-being. These and other key extensions to the investigation identified here deserve priority.
For policymakers considering the future of welfare reform, the clearest lesson from this review is that the best evidence—like the best policy—changes over time and needs to be revisited regularly.
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