The Cabinet met with the president in the Roosevelt Room of the White House on a sultry day in the summer of 1996. Many of us recommended that he not sign the welfare bill that the Republican Congress had sent him (the third one it had sent, only slightly less punitive than the first two, which he had vetoed). But an election was on the horizon, and the president's political advisers urged him to sign, lest Robert Dole use the president's timidity as a battering ram.
In the end, he did sign, of course, and since then he and many Democrats have celebrated the decline in America's welfare rolls without acknowledging that millions of people who are now at work but had been on welfare are not earning enough to support their families, that they are in dead-end jobs without a future, and that the greater harm will come when the economy slows and they will no longer be able to find work.
This special section of The American Prospect is about "making work pay," which was to have been one of the prerequisites for genuine welfare reform. The phrase originated with my friend and former colleague David Ellwood, a professor at Harvard's Kennedy School of Government, and was popularized by Bill Clinton in his 1992 presidential campaign when he called for an end to "welfare as we know it."
It resonated with Bill Clinton's own campaign pledge from 1992 that if you worked full time, you wouldn't be poor. But like other ideas that have had the misfortune of becoming political slogans, "making work pay" went from obscurity to meaninglessness without any intervening period of coherence. The following essays seek not only to restore coherence to the original notion but also to update it for the new century.
First, some background. In America work is a citizen's most fundamental economic responsibility. It is the essence of the Protestant ethic, the criterion for being considered a "deserving" member of society. Once this responsibility is fulfilled, the burden shifts back to society.
Three Moral Commitments
To the extent that there's a moral core to American capitalism, it consists of three promises based on an individual's willingness to work. You won't find them written anywhere, but they're bedrock American values: First, any adult needing to work full time deserves a full-time job. Second, that job should pay enough to lift that person and his or her family out of poverty. Third, people should have the opportunity to move beyond this bare minimum by making full use of their talents and abilities.
On these three promises rests almost every aspect of the modern social contract that still survives. Even the moral basis for welfare reform was based on them. Any possibility for strengthening the social contract and widening the circle of prosperity depends on further redeeming them.
Consider the first: Any adult able and willing to work full time deserves a full-time job. A high rate of unemployment is bad not only because it means the nation is wasting a lot of its human resources, but also because it signals a failure on the part of society. American society does not fault someone who is actively looking for a job if none is available. The fault lies with the economy. To the extent that public policies affect the economy, society is letting these people down.
This widely accepted principle should frame future public debate about macroeconomic policy. Now that federal spending no longer has any practical consequence for stimulating the economy--both parties are committed to balancing the federal budget, and Al Gore to the even more questionable goal of eliminating the federal debt altogether--the decision about how much joblessness to tolerate, and at what price, lies solely with the Federal Reserve Board's Open Market Committee. Even accepting the proposition that inflation is bad for everyone in the long term, Fed policy makers still have a great deal of discretion. They can decide whether to move aggressively to "preempt" inflation by raising short-term interest rates and thus pushing many people out of jobs, or to err on the side of allowing the economy to grow buoyantly, creating more jobs and lower unemployment, even at the risk of some inflation.
The public must understand that the Fed's decisions about when and how hard to fight inflation are profoundly distributive. The people who are most likely to be drafted into the inflation fight are at the end of most job queues. They tend to be relatively uneducated and unskilled, only marginally connected to the labor market, and poor. By the same token, these are the people most likely to move from joblessness to a job when the economy grows quickly and the labor market tightens.
Through most of the 1990s, the Fed commendably allowed the economy to grow quickly, with the result that the official unemployment rate as I write this, in May 2000, is 3.9 percent--lower than at any time since January 1970. But the Fed now seems bent on raising rates and thereby slowing the expansion. It has raised rates five times since last June. The most recent hike, on May 16, brought the federal funds rate to 6.5 percent--its highest level since the start of the 1990s. Many Wall-Streeters expect further hikes, until the economy cools.
Alan Greenspan and company appear plainly worried about the tight labor market and its potential inflationary consequences. But this first moral principle of American capitalism suggests that the Fed should not raise rates further--that it should, if anything, lower them--unless or until it finds clear signs that inflation is clearly accelerating. As of this writing, there is still no such sign. In fact, on May 16, the very day the Fed chose to raise rates, the consumer price index for April showed almost no evidence of inflation. There is no inflation "genie" that, once let out of the proverbial bottle, cannot be put back in. Yet the social benefits of low unemployment are significant.
Public debate should also focus on the inconsistency between a welfare system that now strictly limits individuals to five years of lifetime eligibility, and a macroeconomic policy in the hands of a Federal Reserve Board bent on fighting inflation. "New economy" gurus to the contrary notwithstanding, the business cycle hasn't been repealed. Many poor people will endure several business cycles during their lifetimes featuring periods of relatively high unemployment, yet the new welfare system makes no allowance for this. America hasn't succumbed to a recession since the new welfare law was put into effect, but undoubtedly the Fed eventually will raise interest rates until the economy slows. The landing may be hard or soft, but it will be a landing in any event, and unemployment will rise.
Unemployment insurance is not nearly up to the task. States have tightened eligibility for unemployment insurance to the point where only one in three people who are temporarily unemployed qualifies. If we continue with the new welfare system and don't do anything to expand unemployment insurance, and if most Americans would be troubled to find large numbers of poor families on the streets, the nation will have no choice but to provide a significant number of publicservice jobs. Public-service employment raises a number of hard questions, of course. How diligently must people search for full-time jobs without success in order to be eligible for such jobs? What sort of public-service job qualifies as real work as opposed to morally questionable "make work"? What should these jobs pay, and should workers within them be allowed to unionize? Yet the moral imperative that anyone able and willing to work deserves a full-time job logically requires the creation of such jobs or else abandonment of the strict time limits contained within the new welfare law.
A Living Wage
Consider the second promise: A job should pay enough to bring a worker and his or her family out of poverty. The one clearly positive consequence of welfare reform has been to move several million people from being considered "undeserving poor" because they don't work, to being viewed as "deserving" poor because they do. Most former welfare recipients are as poor as they were before, but the fact that they now work for their meager living has altered the politics surrounding the question of what to do about their poverty because it has sharply raised the second moral tenet of capitalism.
Thus has the minimum wage become more salient. When I came to Washington at the start of 1993, Democrats didn't want to talk about raising the minimum wage (and Bill Clinton didn't want to get near the issue) because it was seen as something that "old" Democrats worried about. Its real monetary value had eroded for years, and the poor workers who directly benefited from it were politically inactive. Yet as welfare reform came closer to becoming a political certainty, the moral argument for a higher minimum wage gained credence. How could America in good conscience expect millions of welfare recipients to work for a living if they couldn't earn enough to live on? By the time the Republican-controlled Congress tried to block passage of a minimum wage increase in 1996, public-opinion polls showed that 80 to 85 percent of Americans were in favor of raising it, even though the vast majority of people who were polled would be unaffected. With a presidential election looming, the Republicans had no choice but to get out of the way. At this writing, the Democrats are seeking another increase in the minimum wage, and with another presidential election only months away, the Republicans are once again scrambling.
A sensible approach would be to raise the minimum wage to its historic level--roughly half the median wage (which would put it at about $7 an hour)--and thereafter index it to the median wage. When combined with the Earned Income Tax Credit (EITC)--now the biggest antipoverty program in the federal government--and with food stamps, this higher minimum wage would lift a family of two children and one full-time adult worker out of poverty. Of course, the official poverty line drastically understates the true needs of a typical family; it was calculated in the mid-1960s, when a family could survive on a budget totaling about three times the cost of feeding itself adequately. Since then, housing and health care costs have soared. If a family is unable to secure housing assistance or Medicaid, it can be technically above the poverty line yet still be deeply impoverished.
How else to ensure that a full-time worker earns enough? The other options pose tricky problems. Making the minimum wage a "living" wage--at $10 or more an hour--could deter employers from hiring many low-skilled workers; the employers would sooner substitute automated machinery or not have the work done at all. Alternatively, expanding the EITC to cover the gap might deter employers from paying their workers adequately, knowing that taxpayers would make up the difference. We don't know exactly how high the minimum wage could be raised or how far the EITC could be expanded without causing these undesirable results, so there's room to experiment. And experiment we should.
Unionization fills in another piece of the puzzle. Although it's difficult to unionize low-wage workers--they tend to work in small establishments and are easily intimidated by employers who don't want unions--the fact that most low-wage workers are in the local service economy means their jobs won't drift abroad if employers have to pay more for them. And recent successes in unionizing health care workers in California and in conducting a national campaign to lift the wages of janitors suggest larger possibilities ahead. But here, too, we eventually run into the same economic wall. As with the minimum wage, there's a limit to how high unionized wages can go before employers find it cheaper to automate the jobs, cut back on staffing, or not offer the services to begin with.
The key to making work pay is encouraging employers to pay higher wages to people at the bottom. This would happen if the Fed allowed the economy to grow so fast that demand for low-wage workers exceeded the supply, with the result that their wages were bid upward. This strategy would take us only so far; as noted, at some point, it would ignite inflation. The nation might also try to limit the influx of low-wage immigrants, whose ready availability in certain large urban areas has depressed the wages of low-income workers already there. Finally, we could ensure that everyone had an education sufficient to raise their productivity and thereby warrant higher pay. This is a good and noble goal, worth pursuing. Problem is, there's no magic formula for accomplishing it. And even if we succeed, the beneficial results are years away.
Separately, none of these measures will suffice. Together--a somewhat higher minimum wage, a somewhat expanded EITC, more unionization of low-wage workers, lower short-term interest rates, faster growth, some limits on low-skilled immigration, and better education--they probably could lift full-time working families out of poverty, with few or no negative effects. We don't know the ideal combination of these measures, but the nation is surely rich enough and clever enough to try until we get it right.
Talent, Education, and Making It in America
Finally, the third promise: All workers should be allowed to get ahead by making full use of their talents and abilities. Here again, there is broad consensus, and it has existed for a long time. This was the basic argument underlying the free-school movement of the nineteenth century, the high school movement of the early twentieth, and the vast expansion of public universities after World War II. It should now be the basic argument for ensuring that a good system of education and job training be available to all Americans, not just the better-off. And it should be the grounds for arguing against state welfare schemes now requiring that former recipients go to work immediately--that they "work first" rather than gain additional skills enabling them to secure better jobs.
The original welfare bill that quietly emerged from the innards of Bill Clinton's own administration called not only for a higher minimum wage and expanded EITC to make work pay, but also for a system of supports to give people the capacity to stay employed and build their futures. Job training was included. In addition, there was provision for health care: If moving from welfare to work meant a loss of Medicaid benefits, the journey would be perilous. Transportation assistance (or a good infrastructure of public transit) was also assumed to be necessary because poverty is becoming more concentrated geographically in areas where there are few if any jobs, while most of the job growth is occurring in suburban rings. The cost and time entailed in getting from home to work and back again puts an especially onerous burden on the poor. An allowance for child care was in the original bill as well, in recognition of the fact that poor mothers could not otherwise afford decent care for their young children.
Needless to say, none of these supports made it to the bill that the president eventually signed. Together with an expanded EITC, they would have cost several billion dollars more than the total cost of welfare at the time, which was assumed by the White House to be a political nonstarter. And yet, 70 percent of welfare recipients were even then managing to get off welfare and into a job. Their problem was remaining in the job. Without such supports, most of them fell back into welfare. We do not know exactly how many of the people who are no longer collecting welfare are still working productively, but it seems a safe bet that without these supports and without adequate training and education, they will not remain at work for very long. At best, they're in jobs with no real possibility for promotion.
Almost all states now have sizable surpluses in the funding they receive from the federal government to cover welfare "reform." They should be using these surpluses for child care and other work supports. Instead, they're using the surpluses for tax cuts and highways.
Welfare had become deeply unpopular in America partly because of race. Even though more recipients were white than black, it was viewed by most Americans as a program for "them." But welfare had also lost legitimacy among America's blue- and pink-collar workers because they did not see why they should suffer economic hardship while people poorer than they appeared to get a free ride. Starting in the 1970s, the loss of manufacturing jobs required many women to work in order to maintain family incomes that previously had been sustained by one male worker; many of these women were mothers of young children. These families saw no reason that women who were only slightly poorer than they should be able to stay home with their children and receive welfare benefits.
But now that all struggling Americans are more or less in the same sinking boat, there's less reason for working-class families to resent the poor. It is now possible to argue that all people on the bottom half of the income ladder should have access to better education and training, health care, transportation, and child care if they're going to be able to get ahead.
In fact, it is possible to redeem all three of the promises implicit within the American social compact. There are now only "deserving" working people, many of them very poor, along with the disabled who cannot work. There is thus an opportunity to build a new structure of social responsibility upon the foundation stones of our common morality. Regardless of who you are, if you need a job, you should have one; your work should pay you enough to lift you and your family out of poverty; and you should have an opportunity to make the most of your talents and abilities. That there is widespread agreement on these basics brings us more than halfway home. To get the rest of the way, we will need a politics that puts these principles to work.
We are grateful to the Annie E. Casey Foundation and the Foundation for Child Development for making possible this special double issue of The American Prospect. In it, a distinguished group of authors takes stock of all the important policy levers and their politics, for people coming off welfare rolls and into the work force, and for the working poor generally. What does it take to make work pay? Our collection of articles suggests that it takes all of the above: welfare policy designed not just to cut the rolls but to reward work; stronger unions; a better-designed EITC; and more effective wage regulation. It takes high-quality child care and smarter training programs. Reading these articles, one appreciates that the elements of such a national policy are already in place, piecemeal, and that the country could easily afford a national commitment to make work pay. What's lacking is the political will. ¤