Ethics & Public Policy Center

Investing in Middle Class Families

Published in Big Ideas for Children: Investing in Our Nation's Future on September 15, 2008



**A complete version of this article with footnotes is available as a pdf download here.** 

As my Ethics and Public Policy Center colleagues, Peter Wehner and Yuval Levin, documented in an insightful Commentary essay last year, the United States has made substantial, if unheralded and under-reported, progress on a number of social indicators in recent years.

For starters, violent crime is down — way down. The number of reported violent crimes was 1,656,100 in 1991, but only 1,190,600 in 2005 — a reduction of 28 percent. Similarly, the use of illicit drugs by teenagers and children has fallen 24 percent just since 2001. And, perhaps most stunning of all, the number of American families and children enrolled in the primary cash welfare program — now known as Temporary Assistance for Needy Families, or TANF — has plummeted. In 1996, there were more than 4.6 million Americans receiving cash benefits through Aid to Families with Dependent Children (AFDC) — the predecessor program to TANF. By 2002, state caseloads had been cut by more than half, to just 2.1 million people.

Progress on these indicators didn't just happen. The much improved trend lines are the result of conscious changes in government policy, and particularly in federal policy.

Regarding crime, a bipartisan consensus emerged in the 1980s that the country was allowing too many violent criminals — a strong predictor of future criminal behavior — out of prison much too quickly. Tougher minimum sentencing requirements has swelled the population in prisons across the country, but it has also unquestionably contributed to the dramatic drop in violent crime — a decline much welcomed in many low-income, urban settings.

Similarly, progress on illicit drug use stems largely from a series of government initiatives aimed at reducing demand and disrupting supply. In the aftermath of the 1960s, many elites took a benign view of drug use, erroneously assuming its consequences were passing and insignificant. But attitudes changed with the Reagan era “Just Say No” campaign. Government-sponsored public service announcements have run in prominent media outlets with regularity ever since, hammering the point home that illicit drug use is not only dangerous and lethal, but also a dead end, leading to estrangement and loneliness. The message has largely gotten through to younger Americans, although this battle is far from over. Demand has ebbed somewhat, but the temptations remain strong as the flow of drugs into the country remains substantial.

The policy shift in the 1990s on welfare was particularly pronounced and consequential. AFDC was supposed to help poor single mothers and their children who had been abandoned by their fathers without a steady source of earned income. But the tragedy of AFDC was that, in trying to ease the consequences of counterproductive behavior, it only encouraged more of the same. Providing financial support to fatherless families without a bread-winner in the home effectively underwrote the formation of many additional such families. Out-of-wedlock births, already on the rise, soared, especially in minority communities, and work and self-reliance declined.

By the 1990s, a broad consensus emerged that reform was needed. The 1996 welfare reform program took the controversial step of terminating the previous federal entitlement to cash benefits, providing states instead with a limited block grant of funds, time limits on how long recipients could get cash assistance, and new requirements to encourage recipients to work their way off welfare dependency. These measures were coupled with a series of separately enacted expansions in the Earned Income Tax Credit (EITC) program, which provides a refundable tax credit to support low-wage households willing to forego government assistance for work.

Many predicted that this combination of policies would be calamitous for low income communities, with millions of children going without food or shelter once the entitlement to cash welfare assistance was time-limited. What happened?

Far from causing calamity, welfare reform and the emphasis on work has ushered in a new era of hope. Millions of American left welfare for paying jobs. Caseloads have plunged. And states have been able to use much more of their limited resources to provide child care and job training instead of subsistence.

A recent Congressional Budget Office (CBO) documented the stunning reversal of previous trends. As shown in Chart 1, between 1991 and 2005, the incomes of those households representing the bottom fifth of the distribution went up 35 percent in real terms. This was the second largest percentage gain in income among the five quintiles, behind only the highest income group (which enjoyed a real income increase of 53 percent between 1991 and 2005).

What's even more encouraging is the change in the sources of income over that period. CBO estimates that work-related earnings for these households increased more than 80 percent in real terms from 1991 to 2005, while cash welfare dependency plunged. In 1991, AFDC represented 30 percent of total income for the lowest income quintile of families with children. By 2005, TANF was contributing just 4 percent to total income for these families. Similarly, the participation rate in cash welfare dropped precipitously, from more than half of all families in the lowest quintile in 1991 to under 20 percent in 2005.

There are a couple of lessons that might be taken from these recent governmental successes. One is that a change in public policy can, under the right circumstances, make a difference. A key condition is clarity of purpose. If the goal is clear and widely supported, the federal government can marshal significant resources to achieve it. Another important lesson is that financial incentives matter enormously. It is close to an iron law in public policy analysis that whatever the government chooses to subsidize will, in time, become more prevalent. Thus, changing the tax law to supplement earned income expanded dramatically the number of hours worked by those potentially eligible for the subsidy. Similarly, paying households, even when they don't work or take steps to join the workforce, induces more dependency.

And so, the question becomes, what societal challenge now requires concerted governmental attention? The answer is the broader, middle class American family. Despite progress in other areas, the American family has been showing signs of stress in two important ways for many years now: Families are much smaller than they used to be, and a growing number of American children are being raised outside intact, two-parent households.

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