IPR Research Notes

Hard Times Spur State Spending on Social Assistance

Winter 2008 , Volume 30, Number 1

Since the passage of the 1996 welfare reform bill, analysts worried that states might cut back on their social assistance spending during economic downturns. Yet states actually increased such spending during the last recession, according to research by IPR Faculty Fellow Therese McGuire and her co-author David Merriman.

The two economists’ research compares state spending during the 2001 recession to spending in two prior recessions. They find that states did not cut social welfare programs disproportionately during the last recession, but in fact, they were actually more responsive in spending on social welfare programs in times of economic distress than in pre-welfare reform recessions. McGuire and Merriman find this responsiveness surprising given the fact that states had more flexibility to cut aid programs because of the new funding mechanism of block grants.

Following welfare reform, social assistance spending became more counter-cyclical, or spending increased with rising rates of unemployment, while total state spending followed economic up- and downturns. They suggest that this might be due to a more diverse social safety net.

These new programs, an example of which is the Earned Income Tax Credit, are now playing a much larger role in providing economic well-being to low-income families than cash welfare did in the past.

McGuire and Merriman also find that state spending on public welfare programs increased as a share of total state spending, and this growth was driven largely by medical vendor payments for Medicaid. In fact, Medicaid spending has far outpaced social assistance spending over the last 25 years.

“This explosion will continue to be a major concern for states, even if state revenues stabilize,” McGuire said.

“State Spending on Social Assistance Programs over the Business Cycle” appeared in Working and Poor: How Economic and Policy Changes Are Affecting Low-Wage Workers, edited by Rebecca Blank, Sheldon Danziger, and Robert Schoeni (Russell Sage Foundation, 2006).

McGuire is ConAgra Foods Research Professor in Strategic Management at Kellogg. Merriman is a professor at the University of Illinois at Chicago with a joint appointment between the College of Urban Planning and Public Affairs and the Institute of Government and Public Affairs.