The Biden administration’s new — but for now temporary — expanded Child Tax Credit will significantly reduce child poverty and deliver many secondary and tertiary benefits. One of the big political questions of this year is whether that expanded CTC will be extended into the future and then, if it is, if we can improve some of the program design aspects of the CTC to help even more families.
Though this program provides aid to families with dependent children, it is not at all the same as the old Aid to Families With Dependent Children program.
Nonetheless, many opponents of the new CTC insist on portraying it as an undoing of the 1996 welfare reform law that scrapped AFDC. And this is an important discourse battle because surveys consistently show that the public supports spending more money on assistance to the poor but is very hostile to spending money on “welfare.”
So here is the reality: Because the new CTC goes to the vast majority of families and not just to poor ones, it winds up hitting the bank accounts of people in all kinds of different situations. The impact on work levels will be complex and will vary from case to case. But I see no reason to believe that it will create the situation that welfare reformers feared in which you have a large number of unmarried parents doing zero hours of paid work for many years in a row, regardless of the macroeconomic situation.
The design of the programs is totally different, so the impacts will be different.
AFDC punished work, expanded CTC rewards it
The question CTC skeptics like Mickey Kaus ask is “Why will people work if they can get money whether or not they work?”
But this doesn’t seem like a hard question. The reason people who collect CTC benefits will also work is that when you work, they pay you money. When I had a job that paid $18,500 a year, I did a second job on the side to make more money. And tried to put in the effort to get a promotion and a raise, because nobody looks at $18,500 a year and says to themselves “well I’m set for life, what more could a person want?”
The difference with AFDC is that AFDC didn’t give you benefits whether or not you worked. It gave you benefits if and only if you didn’t work.
That’s because the basic structure of the program came from an earlier era when it was assumed that unwed parenting would be highly stigmatized and that married mothers wouldn’t work outside the home. The implicit purpose of the program was to subsidize widowed mothers so that they didn’t need to work and could continue to play a homemaker role.
Social, economic, and bureaucratic changes in the 1960s transformed this into a program that kept never-married mothers out of deep poverty but also discouraged them from participating in the labor force. If you read Jason DeParle’s book about welfare reform, “American Dream,” he finds that a lot of AFDC recipients were in fact working — they were just working off the books so as to not have their labor market earnings crowd out their benefits. Some AFDC recipients participated in criminal enterprises involving drug dealing.
Neither off-the-books work nor crime are desirable social outcomes. But their presence tends to suggest that the non-participation in formal, above-board work was about the incentive to not lose benefits rather than that the benefits were so cushy nobody felt like working. And that’s why the Biden CTC doesn’t phase out until you’re well into six figures of income. Everybody will retain the exact same incentive to work that they have today; if you work, you get paid money — it’s just that every parent also gets some extra cash.
A world of possibilities
Now note that because the expanded CTC goes to lots of married couples and non-poor families, I do think it’s plausible that you will see diminished labor force participation in some of these cases.
In particular, imagine a married mother whose after-tax labor market earnings exceed the cost of child care but not by a huge amount. Now suppose this mother is the kind of person who has a “job” rather than a “career.” She’s working to live, she doesn’t live to work. With the CTC (and especially considering the reduced child care costs), she and her husband run the numbers and decide that they could make things work with her staying at home, and she decides she’d be happier doing that.
I don’t know how many people will find themselves in that situation, but it is probably more than zero. And there will be cognate cases where one member of a married family drops back from full-time to part-time work.
From an abstract macroeconomic perspective, you might think that’s undesirable. Personally, I don’t really see what the big deal would be.
But more than that, at least as I understand it, this is not what the “welfare” worriers are worrying about. They’re not sweating the macroeconomic implications of non-work among never-married mothers, they’re sweating the idea of a “culture of poverty” in which people are raised in communities where none of their friends’ moms are married or working.
The reason I don’t think we need to worry about that is that at the bottom of the income spectrum, the marginal value of money is very high. Remember, the CTC is worth $3,600 a year for kids under six and $3,000 a year for older kids. Trying to raise two kids on $6,600 a year is not exactly easy street. You’re going to want to try to earn more money than that.
And conversely, it’s worth recalling that the potential upside for the poorest families is really big. We are talking about fewer kids going to school hungry or having their lives upended by evictions. We’re talking less parental stress and more stable family lives. We’re going to have healthier, better-educated kids who grow up to have better lives and higher labor force participation.
Making the CTC better
The biggest problem with the Biden CTC is that it seems likely that a relatively large share of the poorest households won’t get it because they don’t normally file taxes.
The program is intimately tied to the tax administration system for basically path-dependent historical reasons, but the IRS is not really in the habit of dealing with people who have near-zero earnings. And the biggest official response was to create a CTC sign-up website for nonfilers that is kind of lame and clunky.
We can do better than this on several levels:
Make the website better (mobile-friendly, foreign languages, etc).
Enroll kids when they are born through hospitals.
Work with K-12 schools to make sure parents are all enrolled.
Make it possible to sign up at Social Security Administration offices and everywhere that people sign up for other welfare-state programs like SNAP and Medicaid.
But I have a friend who works in the public sector on trying to help agencies make their offerings more user friendly, and she’s shared that one thing she always emphasizes is there is rarely a technological magic bullet to solve program administration problems — you also have to look at the actual design of the program.
In order to save money, the Biden CTC is designed to phase out and not give benefits to more affluent families. That’s fine as far as it goes, but it means that to get the benefits, everyone has to prove they’re not rich. Absent the means test, all you’d need to verify is that a child in fact exists.
I don’t want to hand-waive past the point that dropping the means-test would cost money. Yes, you can “just raise taxes” to cover it, but raising taxes is politically difficult. What I’m really saying here is that there’s a whole bunch of stuff in the Democrats’ proposed reconciliation package, and I’d be happy to see them drop some of it in order to create the best possible version of the Child Tax Credit.
Work is mostly macroeconomic
Last but by no means least, it needs to be said that Kaus’ view that the late-1990s bump in labor force participation was all about welfare reform seems at least 20 years out of date.
What we know from the vantage point of 2020 is that labor force participation rose for years after welfare reform but then fell during the dot-com crash. And we know that labor force participation remained muted throughout George W. Bush’s administration, peaking in 2007 at a lower level than it had been eight years ago and then crashing during the Great Recession. And we know that the recovery from the Great Recession was painfully slow, with the steady growth during the Obama years still leaving labor force participation depressed when he left office relative to where it was under Bill Clinton.
We also know that a lot of policymakers in both parties wrongly proclaimed that the state of the economy circa 2015 was about the best we could do.
Then a strong confluence between Lael Brainard’s principled advocacy at the Fed Board and Donald Trump’s unprincipled advocacy on Twitter pushed Jay Powell to try to do better. And it worked! Labor force participation kept rising in 2018 and 2019, and by early 2020, we were in striking distance of late-1990s levels.
If you want a really robust culture of work where people who face barriers to employment can nonetheless get jobs, that’s the kind of macroeconomic policy we need. So far, Joe Biden and the Powell Fed are trying to do the right thing. But it’s not entirely uncontroversial. This big macroeconomic fight, along with some regulatory stuff like making it easier for people to set up their hair-braiding businesses, is where the action is. We don’t need to condemn millions of children to avoidable poverty.