Assets and the Poor

New American Welfare Policy

Michael Sherraden

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781315288352
• Edition: 1
• Topic: History
• Subtopic: World History
• Index: History

This work proposes a new approach to welfare: a social policy that goes beyond simple income maintenance to foster individual initiative and self-sufficiency. It argues for an asset-based policy that would create a system of saving incentives through individual development accounts (IDAs) for specific purposes, such as college education, homeownership, self-employment and retirement security. In this way, low-income Americans could gain the same opportunities that middle- and upper-income citizens have to plan ahead, set aside savings and invest in a more secure future.

PART I

MAINTENANCE: WELFARE AS INCOME

1 • The Failure of Welfare Policy as a Failure of National Vision

Welfare policy is in trouble. In important respects, the policy is not working, and a majority of the population has lost confidence in it. Especially, there is widespread discontent with the failure of income transfers to the very poor, such as Aid to Families with Dependent Children (AFDC). After decades of federal programs, it cannot be demonstrated that means-tested welfare policies permanently change people’s lives for the better. For example, it has been shown that during a twenty year period, income transfers did not alter levels of pretransfer poverty. Although official poverty declined from 17.3 percent of the U.S. population in 1965 to 14.4 percent in 1984, pretransfer poverty did not decline—it was 21.3 percent in 1965 and 22.9 percent in 1984.¹ The basic conclusion is that while income transfers have helped to ease hardship, they have not reduced the underlying level of poverty. Welfare policy has sustained the weak, but it has not helped to make them strong.

Arising out of this perception of failure and the public’s discontent there has been, in recent years, a good deal of thinking and rethinking about welfare policy. However, most of this thinking, both conservative and liberal, has been circumscribed within a rather limited idea. In the advanced welfare states of Western Europe and North America, social policies for the poor have been constructed primarily around the idea of income, that is, flows of goods and services. Whether in health care, housing, direct financial assistance, education, or any other area of welfare, the emphasis has been on levels of goods and services received and, presumably, consumed. The underlying assumption is that poverty and hardship result from an inadequate distribution of flows of resources, and the solution is to make the flows more adequate. However, the income-based welfare state has not fundamentally reduced poverty (although it has alleviated hardship); it has not reduced class or racial divisions; it has not stimulated economic growth; and it has not developed a broad base of public support. Yet most welfare reform proposals, conservative and liberal alike, assume that income-based policies are the only answer.

I have come to believe that income is an insufficient basis for welfare policy. Income is only one measure of poverty, a measure that ignores the long-term dynamics of household well-being. The traditional approach to poverty analysis, counting income and who has it, has not led to meaningful change, nor is it likely to lead to meaningful change in the future. Income-based policy proposals sound familiar and tepid, and inspire little confidence. They are inadequate because the underlying vision, the foundation of the proposals, is itself inadequate. In my view, the current discontent with welfare policy results from an inadequate definition of household well-being, an inadequate understanding of how well-being is achieved, and a failure to integrate social policy with the broad goals and purposes of the nation.

Despite these shortcomings, income has been so completely taken for granted as the standard in antipoverty policy in the United States and other Western welfare states that we have few policy instruments with which to pursue a different approach. Perhaps this book can serve as a beginning step in constructing an alternative perspective. The purpose is to present and establish a logical foundation for a different concept of well-being and a different approach to social policy.

This is not to take up the mossy conservative argument that income transfers decrease motivation, breed dependence, and are therefore to be rejected, a very old line of thinking that Charles Murray has resurrected.² There is no substantial evidence that income transfers reduce individual motivation, although it is clear that income transfers reduce work participation, much as they were intended to do. The reduction is slight. A major review of available research estimates that all welfare programs together reduce total work hours in the economy by only 4.8 percent.³ Far more significant than lost hours of work is the remarkable persistence of work effort among recipients of public assistance and among the working poor, even though economic disincentives for work, in current welfare policy, are very strong.

During 1987, 1.9 million impoverished people worked full time, year round, but remained poor. An additional 6.6 million worked less than full-time, year-round, but remained poor. Of 32.5 million people living in poverty, 18 million, more than half, lived in households where at least one household member worked during the year. About 5 million of these lived in households where at least one household member worked full-time, year-round. The vast majority of poor adults who did not work were ill, disabled, or elderly, or were single mothers of young children.⁴

As a trade-off for slightly reduced work participation, income transfer policy has maintained, but not greatly improved, a minimum level of subsistence in the United States. Because a very large portion of today’s poor are children, the elderly, the ill, and the disabled, who surely cannot be blamed for not working, it would be difficult to oppose such measures. In addition, welfare policy has buffered the severity of economic cycles by providing strong countercyclical fiscal stimuli.⁵ In other words, when the economy declines, welfare policy has its strongest antipoverty effects. Altogether, these effects have greatly reduced human suffering in systems of advanced capitalism, especially during economic downturns.

But this is not the point. The point is that income-based social policy, even though humane and justifiable, is not the only way—nor necessarily the best way—to structure welfare assistance. There is, perhaps, another approach that would more fundamentally promote well-being of the poor and long-term growth of the nation.

Stakeholding: Assets Rather than Income

In this book, the concept of assets rather than income is proposed as a new frame of reference. While there is a strong relationship between income and assets, they are very different concepts. Assets refers to the stock of wealth in a household. In contrast, income refers to the flow of resources in a household, a concept associated with consumption of goods and services and standard of living. These are the two most fundamental financial concepts, illustrated in accounting by two basic types of financial reports, income statements (which document financial flows) and balance sheets (which document financial stocks or accumulation). In this regard, welfare policy for the poor has been constructed almost exclusively in terms of household income statements. The proposal here is that welfare policy should be constructed more in terms of household balance sheets. This new thinking would be based on the concepts of savings, investment, and asset accumulation rather than on the concepts of income, spending, and consumption that guide current policy. Such a reconceptualization would have profound implications for the goals, structure, and programs of the welfare state.

The chapters that follow examine current welfare policy and suggest that policy should be thought of in this new way. The major reason for this proposed policy shift is that income only maintains consumption, but assets change the way people think and interact in the world. With assets, people begin to think in the long term and pursue long-term goals. In other words, while incomes feed people’s stomachs, assets change their heads.

Wealth accumulation by the nonpoor occurs within a variety of institutional structures designed for these purposes, but the poor have few such structures within which to accumulate assets. For impoverished welfare recipients, asset accumulation is not encouraged. In most cases, it is not even permitted. Means-tested income transfer programs such as AFDC, Food Stamps, and Supplemental Security Income (SSI) have “asset tests,” which, in effect, prohibit accumulation of more than minimal financial assets. In a sense, this is indeed asset-based social policy for the poor, but it is going in the wrong direction.

The key test of antipoverty policy, from both the recipient’s and the taxpayer’s perspectives, should be: Is the recipient better off than he or she was prior to implementation of the policy? Specifically, d...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Tables and Figures
• Foreword
• Preface and Acknowledgments
• Part I. Maintenance: Welfare as Income
• Part II. Development: Welfare as Assets
• Selected References
• Index