Gingrich's Time Bomb: The Consequences of the Contract

The Republicans' Contract With America is a deceptive document. While its sponsors denounce the welfare state, the Contract itself calls for cuts in only two specific areas: Aid to Families with Dependent Children (AFDC) and the crime prevention initiatives of the 1994 anti-crime bill. At the same time, the Contract promises a variety of new social benefits in the form of tax breaks. These include tax incentives for adoption and for the purchase of long-term care insurance, an elderly dependent care tax credit, a $500-per-child general tax credit, an increase in the amount of earned income retirees may receive without any reduction in their Social Security payments, and a cut in taxes on Social Security payments for the elderly with incomes over $34,000 (singles) and $44,000 (couples). These new benefits would be equivalent to entitlements that is, no further action by government is necessary to make such benefits available to all eligible individuals.

Attacking the welfare state while creating new middle-class entitlements is a nifty political move. Conservatives can take credit for the new benefits for their more prosperous constituents while cutting benefits for the stigmatized poor. Deficit reduction may provide a cover for the cuts, but the immediate effect is a regressive redistribution of income.

The Contract's long-term consequences, as revealed in the details of their legislative package, are likely to be more insidious. Over time the new proposals would gut the nation's safety net while creating a budgetary time bomb. The devil was never more in the details. In addition to the new tax breaks for social benefits, the Contract also promises a new tax-exempt savings account, a major new tax break for businesses, and that long-sought Republican goal, a capital gains tax cut. After seven years, when the Republicans' proposed balanced budget amendment would become effective, escalating revenue losses from the tax cuts would almost surely force major reductions in all social programs, including Medicare and Social Security. The Republicans do not admit to these consequences because they would be unpopular. But the Contract's budgetary arithmetic makes it hard to avoid the conclusion that this is what Gingrich's Republican followers seek to accomplish.


The Great Rollback

While various elements of the Contract contribute to the overall strategy, the Republican attack on the safety net comes primarily from their welfare reform bill, dubbed the Personal Responsibility Act of 1995 (PRA). The bill would effectively return the United States to nineteenth-century policies toward the poor and public assistance complete with orphanages and even "indoor relief." Although provisions phasing in the new rules would soften their immediate impact, the legislation calls for radical changes, including:

  • new eligibility requirements that would deny benefits to more than half of current AFDC recip ients (if the requirements were fully effective immediately);
  • an end to the legal right of the eligible poor, including the elderly and disabled poor, to cash and food assistance;
  • a cap on total federal spending on cash, food, and housing assistance under a formula that would reduce real funds below current levels, impose larger cuts in the future, and force different groups of needy persons to compete for this diminishing pie;
  • a shift of responsibility to the states for designing, administering, and paying for cash and food assistance programs, thus subjecting all of these programs to the political and fiscal pressures that have led states to cut the real value of welfare benefits in half since 1970; and
  • a bar against legally admitted aliens, including children and many political refugees, from receiving virtually all forms of public assistance except for emergency medical care.

Such were the main provisions of the legislation as it stood when introduced in Congress in January. The Republicans estimate it would save about $40 billion during the first four years of operation (1996-1999). The Center on Budget and Policy Priorities (CBPP) estimates the cuts at $57 billion.

These provisions are bound to change, perhaps dramatically, as the bill works its way through Congress. Significant changes have already been voted by Republican-dominated subcommittees with jurisdiction over various pieces of the legislation. This article analyzes the PRA in its original form, which provides an index of the Republicans' intentions and a window on their underlying views. What they do not achieve in 1995 they may well return to do after 1996, especially if they have an all-Republican government extending from the Congress to the White House to the statehouses.

The biggest losers under the Republican plan would be children born out of wedlock, many of whom would no longer qualify for public assistance. The bill's sponsors say these changes would reduce out-of-wedlock births, which they blame for both poverty and crime in a "sense of the Congress" statement in the legislation. However, studies comparing states with different welfare benefit levels show decisively that benefits have little or no effect on out-of-wedlock birth rates. So other motives are clearly at work in these proposals: a search for scapegoats to blame for the nation's social problems, an expression of moral disapproval of unmarried teen parents, a need to target the least sympathetic groups even when cutting an unpopular program.

Under the legislation, any child without a legally established father would be ineligible for public assistance. The mother's full cooperation in efforts to establish her child's paternity would not be sufficient. Children would have to wait until the state identified their fathers even if it required lengthy legal proceedings. A state could make an exception only if it determined that efforts to establish paternity would result in physical danger to the mother or that the child was conceived as a result of rape or incest. The CBPP estimates that if this rule were effective immediately (rather than applying only to new applicants), approximately 2.8 million children would be stricken from AFDC rolls.

The bill would also permanently bar from AFDC any child born out of wedlock to a mother not yet 18, unless the mother either married the child's father or married someone else who legally adopted the child. Individual states could establish higher cutoff ages up to 21. This exclusionary rule would apply even to children conceived as a result of rape or incest. It would apply even if the mother later married, but her husband was unable to adopt the child because the natural father refused to relinquish his parental rights. Approximately 28 percent of all families on welfare were started by an unmarried mother under the age of 20. The CBPP estimates that approximately 12 percent were started by an unmarried mother under the age of 18.

Under these rules, a 30-year-old woman with a 13-year-old child born out of wedlock could never receive any welfare assistance for the child if she lost her job, even though she had never received welfare and had worked full-time ever since the child was born. States also would have the option of denying federal housing assistance to all families headed by a person who "has borne a child out of wedlock after attaining 18 years of age but before attaining 21." The exclusion would be permanent and would prohibit such a woman from ever living in housing that was subsidized under one of 14 federal programs. For example, subsidized housing for the elderly would be unavailable to a 72-year-old woman who had borne a child out of wedlock 52 years earlier.

The legislation would return some of the savings attributable to these changes to the states to promote adoption, establish orphanages, and pay for programs designed to reduce out-of-wedlock births. If the states wanted to provide income assistance to unwed mothers, they could do so in "closely supervised residential group homes for unwed mothers," or what Gingrich's nineteenth- century forerunners used to call "indoor relief."


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From Welfare to Work?

Work requirements for welfare have been a common theme of all recent welfare reform efforts. Usually, these take the form of "workfare" programs that require welfare recipients to earn their benefits. The Republicans' plan has elements of workfare, but it also incorporates a "work test" approach that requires recipients to work under a pay scale so meager and punitive that it is likely to deter anyone who is not truly desperate from seeking benefits.

The PRA would repeal all statutory exemptions from AFDC work requirements and require the states to put target percentages of recipients to work full-time in exchange for their benefits. The states would have flexibility only in deciding how to achieve these targets. By 2003 the minimum participation rate would be one person working full-time for every two families receiving assistance. Job training and education would not qualify as work. And beneficiaries excused from full-time work because they were sick or incapacitated or took care of infants or toddlers also would count toward a state's allowed total of nonworkers on welfare.

The bill would actually prohibit states from subsidizing education and training for more than two years during a recipient's lifetime. The JOBS program, established under the Family Support Act of 1988 to provide welfare recipients with job training and other services to enhance their employability, almost surely would wither under the PRA. States could use a restructured JOBS program to satisfy the PRA work requirements, but they would be under no obligation to do so. It would be cheaper for them to establish new work programs stripped of the extra services they are now required to provide to JOBS participants.

States also would no longer have to compensate welfare recipients at the minimum wage for their required work. In fact, under the Republican plan, many recipients would have to work for less than the minimum wage. If the new rules had been in effect in January 1994, a single parent with one child required to work full-time for her welfare benefits in Mississippi would have been compensated at a rate of only 63 cents an hour. If the state offered her the same level of food aid as the federal food stamp program which it would not have to do under the Republican bill this same mother would get paid at a rate of only $1.99 an hour for her combined cash and food benefits.

Time limits on welfare benefits have now become a central theme in the debate over welfare reform. The Republicans would limit a family's lifetime eligibility to five years and give states the option of limiting it to two years, provided the family had been required to participate in a work program for a total of at least 12 months.

The legislation recognizes no exceptions to the lifetime limits. High unemployment rates would be no excuse for failing to get a job, nor would the onset of a debilitating illness or accident or any other difficulties beyond an individual's control. Recipients unlucky enough to exhaust their benefits in the middle of a recession or an illness would have to be dumped from the rolls.

Moreover, states would face considerable fiscal pressure not to extend benefits for the full five years. States that spent more than their federal allotment for welfare in any year would have to cut benefit levels, limit eligibility, transfer money from other programs, or raise taxes. The temptation to limit benefits to fewer than five years would be very strong. The PRA requires full-time work from single parents only after they have received benefits for two years. Requiring work is more expensive than sending checks, especially if child care is provided. So, continuing a family's benefits beyond two years could result in substantially greater costs than providing the same benefits to a family in the first two years of its eligibility.


Just Get a Job

Imagine a dog bone economy in which 100 dogs compete for 90 bones. Every morning the dogs fight over the available bones until an equilibrium is reached in which the 90 best fighters end up with the 90 available bones. The other ten dogs lick their wounds. A troupe of social scientists study the fighting and produce data showing that bigger, more aggressive dogs get bigger bones while dogs without bones tend to be weaker and dispirited. They conclude that bonelessness is caused by a lack of strength and spirit and propose exercise and motivational training for the weaker dogs as a means of ending bonelessness. Will their strategy work?

The PRA's work requirements are based on the assumption that welfare dependency stems primarily from the refusal of welfare recipients to take available jobs. How else can one justify a bill that would deny public assistance to the children of jobless parents except in orphanages or through state-subsidized foster care and adoption? How else can one justify requiring the jobless parents of dependent children to work at a scale lower than the minimum wage for a benefit far below the poverty line? Even ardent conservatives would find such treatment hard to stomach if they weren't convinced that joblessness among welfare recipients is voluntary.

But the facts do not support this view. Even at what many professional economists call "full employment," surveys of job availability consis tently show that there are not enough jobs for everyone who is actively looking for work, let alone for everyone society thinks should work.

In the Milwaukee metropolitan area for example, unemployment rates in May 1994 were at a level most politicians would kill to achieve 4.2 percent. About 32,000 people in the area were unemployed and actively looking for work. In addition, there were about 23,000 able-bodied welfare recipients not counted as unemployed in government figures. Based on national averages, about 19,000 people were probably working part-time because they couldn't find full-time jobs, and perhaps another 1,800 people wanted jobs and had looked for work in the past year but gave up the search as fruitless. Counting all these groups, probably about 75,000 people in Milwaukee were out of work and needed jobs.

A survey at the time showed that employers in the Milwaukee area were seeking to fill only 16,790 full-time and 13,845 part-time positions. There simply weren't enough jobs to go around, and the job shortage for unskilled workers or for residents of depressed neighborhoods was far worse than the area-wide averages suggest. Welfare reform that ignores this job gap and its devastating effects on families and communities is destined to fail. Proposals that blame welfare recipients for their own joblessness are not only cruel but shortsighted. Joblessness and its attendant social ills cannot be eliminated without creating more jobs.


The Eclipse of Legal Rights

Recipients of food assistance, the elderly, or the disabled poor aren't as attractive targets for welfare-bashing as unmarried mothers. Nevertheless, the Republicans go after them as well, drawing the purse strings tighter without saying who should be denied aid.

Our nation's major income assistance programs for needy persons are presently offered as legal and budgetary entitlements. Anyone who meets the eligibility requirements for the program is entitled to assistance. There are no waiting lists based on the availability of funds. This is true not only of AFDC but also of Medicaid, food assistance programs such as food stamps, and Supplemental Security Income (SSI), which provides cash assistance to the elderly and disabled poor.

Housing assistance is the most important form of support for the poor that the government does not provide as an entitlement, and the effects of this limitation are dramatic. For example, while virtually all welfare recipients receive food stamps, less than a quarter live in public housing or receive federal housing subsidies even though most of them would be legally eligible for assistance, if funds were available.

The Republican plan would eliminate legal rights to AFDC, SSI, and all food assistance programs. Only Medicaid would continue to be an entitlement. Henceforth, individuals could qualify for these programs but still not receive assistance because the year's budget had run out.

At the same time, the bill would put federal contributions to AFDC, SSI, and virtually all housing assistance under a single budget cap or limit. The limit would include spending on the new work programs mandated for welfare recipients, so their cost would have to be absorbed by other cuts. Federal spending on all of these programs would be permitted to grow beyond prior- year levels only to account for inflation and changes in the poverty population.

The formula mandated for calculating these changes, however, would in practice force further reductions. Under the formula used to calculate changes in the poverty population, for example, adjustments would lag by almost three years. Recessions would come and go before the federal government would raise a cap to reflect increases in poverty. Spending wouldn't necessarily catch up in prosperous times either. Each year's cap would depend on the prior year's actual spending. So, if spending came in under the cap either because the economy was performing well or because of shortfalls in federal or state appropriations, subsequent caps would be permanently reduced.

The Republicans have projected that their cap will cut federal expenditures for the poor by $18 billion between 1997 and 1999. Based on more current data, the CBPP projects the cuts at $26 billion. In either case, the cuts would grow larger after 1999.


Let Them Eat Cake

The PRA strategy for reducing federal food assistance is even more daring. It would repeal the Food Stamp program, the National School Lunch Act, and legislation authorizing the Special Supplemental Food Program for Women, Infants and Children (WIC), along with virtually every other federal food assistance measure. A single block grant to the states would replace these programs. States would be required to spend stated percentages of their block grant on substitutes for the WIC program and for school lunches for needy children, but otherwise they would be free to fashion whatever food assistance programs they wanted. The federal government would furnish food stamps at face value to any states that wanted to use them, but states would establish their own eligibility criteria and benefit levels.

The block grant allocation for 1996 would cut federal food assistance about 9 percent compared to 1995 levels and henceforth permit increases in spending only to reflect general population growth and changes in the "food at home" component of the consumer price index. No increases would compensate for the effects of recessions or changes in poverty rates. The PRA's sponsors estimate the cuts in federal food assistance at $11 billion over four years. The CBPP estimates the cuts at $18 billion.

While generally free to establish their own criteria for food aid, states would have to impose a work test on able-bodied recipients between the ages of 18 and 62 not caring for children or for an incapacitated family member. The legislation would require these recipients to perform at least 32 hours of work in the month before receiving assistance. The current maximum food stamp benefit is $115 for a single person. Thus, beneficiaries who received this much food aid (and many would not) would effectively be paid at a rate of $3.59 per hour, substantially less than the minimum wage. They would have to complete the work the month before they received the food aid.

The intent of this rule is obvious. It is to discourage single adults, including a large proportion of the nation's homeless population, from applying for food assistance. Soup kitchens funded from the block grants would have to turn away any "nonexempt individual" who had failed to satisfy the work test. Once again, the assumption seems to be that there's no such thing as involuntary unemployment.

Article Continues >>

Those Huddling Masses

Illegal aliens are already ineligible to receive benefits under most federal antipoverty programs. The PRA would extend this exclusion to virtually all noncitizens even if they are legally residing in the United States. The exclusion would apply to people granted political asylum because of persecution in their home country. Altogether, these exclusions would save about $22 billion between 1996 and 1999, about $20 billion of the total in reduced SSI, Medicaid, and food stamp benefits. Savings in AFDC would amount to only $1 billion. Legal aliens would also lose eligibility for 50 other federal programs.

Pregnant women could no longer get prenatal care under Medicaid, and they also would be ineligible for the nutrition benefits provided through WIC even though the children they carry would be U.S. citizens. The immigrant children of a legally admitted non-citizen working full-time in a low-wage job would be ineligible to receive subsidized school lunches or subsidized immunizations against polio. They could not receive subsidized screening for lead poisoning nor be treated (except in emergencies) in federally funded health centers for migrant workers. If they became homeless, the doors of federally funded homeless shelters would be closed to them. If the family breadwinner died, the children could not receive welfare benefits. If the children's sole remaining parent became disabled, they could not receive SSI benefits. If both parents died, they could not receive foster care benefits. These children would not even be welcome in the Republicans' new orphanages unless they were born out of wedlock.

There's just one thing missing. The legislation needs a supplemental appropriation for sandblasting the inscription off the Statue of Liberty.

P.H, T.R.M, & J.L.M

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Let the States Do It

The Republicans have touted their strategy as turning more power over to the states to design and administer social programs. Past performance gives little cause for comfort at this prospect. The federalization of social welfare programs in the United States occurred in response to a collapse of the capacity of the states to handle distress during the Great Depression. With luck we will never again experience such a crisis. Recessions, however, are a fact of life indeed, regional recessions have become common in recent decades even when the national economy is prospering. States simply do not have the resources of the federal government to increase spending when their economies go sour. Federal entitlement programs provide countercyclical benefits to the nation that boost the economy during hard times and even out the economic fortunes of different regions. To assume that states can or Congress will provide the extra aid that is needed in as timely and as well targeted a fashion is fantasy.

Whether state legislators are as warm hearted as their federal counterparts is not the issue. States compete with each other to attract business investment. Low taxes are widely believed to be an important selling point, and the same people who argue that social welfare policy should be left to the states regularly argue on the state level that taxes and social spending should be reduced to make the state more "competitive." This conventional understanding of how best to compete for jobs acts as a brake on the more generous impulses of state legislatures and exerts a steady downward pressure on social spending.

The recent history of welfare benefits demonstrates the problem. States presently set AFDC benefit levels and completely control their own General Assistance programs, which serve destitute people not covered by federal programs. Over the past two decades states have permitted average welfare benefit levels to erode to approximately half their former value, and General Assistance programs have recently been the target of a flurry of draconian budget cuts. In Michigan, where General Assistance for "able-bodied" persons was entirely eliminated, only 20 percent of the program's former recipients found work lasting most of the year following the termination of their benefits and 25 percent reported being homeless seven months after their benefits ended.


The Right's Long-Term Strategy

The changes proposed for poverty programs under the PRA would be devastating to the affected families. The Republicans have designed the legislation, however, to soften its immediate impact. A number of key provisions would apply only to new applicants. The net first-year cuts in spending would be small compared to subsequent cuts. In many instances (such as food aid), they have also tried to hide responsibility for federal cutbacks by making the states decide whose ox to gore.

This may reflect a recognition by the Republican leadership that the changes they propose could easily create a backlash. "Welfare" is unpopular, but most Americans do not want to reduce help provided the poor. The Republicans thus call for big changes in "welfare" without hurting too many people in the short run. Their strategy is to call for changes with only small immediate effects that will grow dramatically over time.

Strikingly, the Republican counterrevolution against the welfare state does not include any cuts in the benefits that are the core of the welfare state: the social insurance programs that together account for over 70 percent of all income transfers. In fact, the only changes in Social Security proposed in the Contract with America would increase the cost to the federal government of benefits for wealthier recipients. And far from cutting the middle-class entitlements that are richly larded into the tax code such as the mortgage interest deduction the Republicans are promising the new tax breaks we mentioned earlier for adoption, long-term care insurance, elderly dependent care, and the costs of child rearing, not to mention that old favorite, the capital gains tax cut.

These tax expenditures, like the new rules for Social Security, would disproportionately benefit higher-income households. Based on existing federal income tax rates, any social welfare benefit provided as a tax deduction returns 33 cents on the dollar to high-income families, 28 cents on the dollar to middle-income families, 15 cents on the dollar to working-class families, and nothing at all to families too poor to have any income tax liability. Even the $500-per-child tax credit which looks deceptively like a European-style child allowance would offer a bigger subsidy to the better off, since there is no suggestion the credit would be refundable (that is, payable to people with little or no tax obligation).

Moreover, just as the Republicans backload their spending cuts concentrating them in future years so they backload their tax breaks for the wealthy. Small at first, the new tax expenditures will produce mushrooming losses in revenue beyond the five-year official budget horizon. Viewed in Machiavellian terms, the Contract appears to be a refinement of the strategy pioneered by the Reagan administration: use tax cuts to create budget pressures in the hope that forced austerity will eventually soften popular resistance to cuts in social spending. Under the balanced budget amendment, which would require the federal government to bring its spending and revenue into balance by 2002, Republicans will bewail the necessity, but Social Security will go on the chopping block.

The Republicans describe the Contract as calling for $190 billion in tax cuts over the next five years; they estimate $40 billion in spending cuts over the same period. This imbalance alone looks like a gun pointed at social insurance spending. But three of the tax cut proposals in the Contract could more than double the government's revenue loss between the sixth and tenth year after their introduction.

The Republicans' proposed new backloaded IRA "American Dream Savings Accounts" (ADSAs) would encourage taxpayers with existing IRAs to roll them over into new ADSAs. The rollover would generate tax revenue in the short-run, but the government would face major losses later on when the ADSAs are cashed out. The proposed capital gains tax cut would also generate new revenue in the short run by encouraging asset sales but would result in huge revenue losses later on. And proposed changes in depreciation rules would give businesses a tax break equivalent of 100 percent deductibility in the year capital equipment is purchased but extend realization of this benefit over the life of the equipment. This change is also structured to generate some immediate increases in tax revenue and major losses in the long run.

If these proposals are adopted, five years from now the pack of devils we have been describing will show up to collect the several hundred billion dollar debt left by the Contract. Where will Congress get the money? After defense spending and interest on the national debt, there is nothing left to cut in the budget that remotely approximates the requisite scale. Conservatives may then, as now, proclaim their fealty to Social Security. They will surely hope that Americans fail to see the connection between their Contract with America and the unraveling of the long-term social contract that Social Security has represented since the Depression. But if interest must be paid, defense is sacred, tax increases are unthinkable, and the budget must be balanced, Social Security programs will have to be cut both substantially and rapidly.


How Should Liberals Respond?

In responding to the Republican offensive, liberals would be wise to keep three things in mind. First, social spending is not unpopular as long as the public understands exactly who is being helped, how, and why. This is why conservatives prefer to attack "welfare" rather than specific entitlements (with the exception of AFDC). Liberals shouldn't let them get away with this sleight of hand. The public needs to understand that the Republicans want to deny food, shelter, and medical care to identifiable families whose needs are desperate and for whom this country does not have enough jobs.

Second, the American public has a strong sense of entitlement to social insurance benefits that goes well beyond the legal meaning of the term. Liberals should sound the alarm that the Republicans' Contract with America is designed to undermine those programs by so impoverishing the Treasury with tax breaks for the wealthy that Social Security programs will have to be cut.

Third, liberals should face up to the Achilles' heel in their vision of a socially responsible government. That weak spot is their lack of an effective, politically attractive answer to joblessness. The New Deal stood for jobs when unregulated markets proved incapable of providing them. In the eyes of the public, the Great Society stood for transfer payments delivered to people who should have been working. Liberalism's New Deal image is attractive. The Great Society image is not. It is no accident that the only transfer programs that conservative politicians are willing to attack openly and vociferously are those that provide benefits to employable persons.

The best answer to the Republican welfare plan is to tell the truth about job availability. There aren't enough jobs to go around. It's not just good jobs that are in short supply. There aren't enough bad jobs either. The labor market is a giant game of musical chairs in which there aren't enough seats for everyone who is actively seeking work, let alone for others who the public thinks should work. The private sector cannot provide work for everyone. That's not a condemnation of the market, just a recognition of its limitations. If the Republicans want to force welfare recipients to take jobs in the private sector any jobs they should be pressed to say who they want to go jobless instead.

Liberal support for measures designed to help welfare recipients compete more effectively for scarce jobs is insufficient. More jobs are needed. Instead of arguing with conservatives over whether welfare recipients should be expected to work, liberals should be arguing about the kind of work opportunities welfare recipients should be pro vided. Offering sub-minimum wage workfare is unconscionable. But so is minimum wage workfare when maximum earnings are limited to AFDC benefit levels and recipients are denied the earned income tax credit (EITC) as they would be under the Clinton welfare reform proposal. The principle of making work pay should apply just as much to jobs created for welfare recipients as it does to other jobs.

Denying public assistance to unemployed parents will only aggravate our nation's already severe social problems. We must remember that the (imaginary) laissez-faire past that Republicans seek to recreate was not a golden age. It was an age of Dickensian social conditions and enormous suffering. The do-nothing social policies that permitted such conditions to fester constituted a failed strategy that has been rejected for nearly a century throughout the industrialized world and for good reason. The gaps between rich and poor that an unfettered market permits are an engine of profound social and political distemper. It is this inescapable truth that welfare state programs recognize and that the Republicans' Contract with America seeks to deny.

We need a new social contract but surely not one that combines vicious treatment of the poor with fiscally irresponsible promises to the better off. Newt Gingrich has a flair for the dramatic. But his Contract with America is much too reminiscent of the bargain made by Faust. The Republican bargain should be rejected before it has to be broken, and the devil of social discord and unrest seeks to collect its debt with interest.

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