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When forty-six-year-old Shahnaaz Reed was hired as a front-desk clerk at the Indianapolis Athletic Club for $9.50 an hour, she believed that her on-again,off-again days of welfare dependency were over. But after three years on thejob, Reed was laid off in December 2000 and, when her unemployment benefits ranout soon thereafter, she found herself counted among Indiana’s welfare caseload.

The story of Shahnaaz Reed is in many ways the story of welfare reform in America. Five years ago, the poor were leaving welfare benefits in droves for a better life outside the system. Today, welfare rolls are slowly climbing back up. This pattern has caused some to claim that welfare reform’s success was a false positive, more a product of a good economy than new policies or work-favoring services. Others counter that Reed’s story reveals the need for even stiffer work provisions, combined with measures intended to keep millions of people like her in the private workforce for the long haul.

The debate over these questions effectively put welfare reform on hold last year. The landmark welfare legislation adopted in 1996 operated under a five-year sunset provision. That five-year deadline was reached last October amid wide consensus that the new system was vastly superior to the old one. All major research reported that whatever should be up (work participation, for instance) was up, and whatever should be down (such as poverty) was down. So it wasn’t the direction of the first set of reforms that caused the trepidation, rather it was a question of which path should be taken to continue its success. Congress agreed to extend the provisions and funding levels of the 1996 act to June 30, 2003. During this time, the two sides have been arguing both ends of an ages’ old debate—whether the poor are better served by coddling or prodding.

The Utility of Work

This debate recently took shape in Minnesota, where newly elected governor Tim Pawlenty remarked, “There is nothing compassionate about paying able-bodied, able-minded people to stay home and not work.” The governor followed his rhetoric with a new state welfare reform plan that amplifies the state’s work focus. Opponents charged that Minnesota’s reforms have been among the nations’ most celebrated, so “Why change?” Governor Pawlenty retorted that too many people in the system escape work through the law’s loopholes. “I have one definition of work,” the governor told the Minneapolis Star Tribune. “You get a job. And youget a paycheck.”

Those who advocate softer work-participation requirements often defend what is becoming known as the “fallacy of the multi-barriered family.” Proponents of this view believe that many welfare recipients should be separated from others because they need more specialized care. Although this may be true of a slight minority of recipients, two of the most often cited characteristics of multi-barriered families—alcohol and drug abuse, and domestic violence—are found in roughly the same proportions across the general workforce. For example, studies show that 85 percent of heavy drinkers are employed, and violence is stated as the reason for divorce in 22 percent of all U.S. middle-class marriage breakups.

The point here is not to make light of these personal difficulties, but rather to underscore the point that segregating welfare recipients for these reasons perpetuates the myth that substance abuse and family violence are concerns only for the poor. The poor are by no means alone in facing such barriers, and we must teach them how to navigate their difficulties as other successful people have learned to do. (Later in this essay I will discuss some ways to do this.) The last thing we should do is weaken the work requirements in the law, because work has proven to be an effective antidote helping people recover from their problems.

What, then, about those loopholes Governor Pawlenty mentioned? After all, wasn’t one of the signature policies of the 1996 reform its “work first” provisions? Well, yes and no. Yes, the law did obligate states to place increasing percentages of their caseload into work activities. And the numbers sounded impressive: 25 percent of the caseload was required to work in 1997, and the number increased by annual increments up to 50 percent in 2002. The number of hours required for work activities also increased over time, from twenty hours per week in 1997 to thirty hours by 2000 and thereafter.

However, the reform law included a less well-known provision that effectively tilted the system back in the direction of the old one. Known as the caseload reduction credit, this proviso was created to reward (or at least not penalize) states for reducing their welfare caseload while also preparing welfare recipients for work. It worked this way: for every percentage point by which a state reduced its welfare rolls below 1995 levels, that state received a 1 percent reduction in the number of cases that it was required to assign to work.

Federal data reports that thirty-one states did not have to place a single welfare recipient in a work activity because their caseload reduction credit exceeded their work-participation requirements. Eleven additional states had required participation rates of less than 10 percent. Many states simply used the credit as a vehicle to favor an education versus work approach. Others, however, complied willingly. Wisconsin’s welfare declines were enough to warrant a work participation rate of zero, yet the state boasted the nation’s highest percentage of cases placed in work activities.

President Bush’s welfare reauthorization plan seeks to eliminate the caseload reduction credit as a means to prompt all states to serve their caseload more effectively. Some states oppose the move, claiming that it amounts to an unfunded mandate. But the President has also recommended funding equal to the 1996 block grant. With many fewer people on the welfare rolls today than six years ago, and the same amount of funding, states have more funds per capita with which to meet the law’s work provisions.

Of course, the best way to measure the effects of work requirements is by gauging improvements in the program participants’ quality of life. New research has found that single mothers leaving welfare in pro-work states are more likely to be employed and to have higher wages than those in non-work states. Moreover, states with the strictest work provisions have not experienced the increase in welfare cases that non-work states did during the recent economic slump.

No surprise there. A tour through some of the lagging states shows that their programs are much more the way things used to be than the way things are supposed to be. Clients in the non-work states are given a cursory front-end appointment in the welfare office and then effectively left alone to sit idle while their lifetime welfare limit dwindles away. When the benefits expire, that person is still woefully unprepared to manage life outside the system. Those who are actively working or preparing to work are much better prepared and motivated to navigate the real world. Therefore, making work requirements real is the compassionate next step in welfare reform.

The Role of Government

Requiring the poor to work has not been the only reason behind the success of the U.S. welfare reform experiment. If work-focused welfare reform is the “push” that helps the able-bodied to seek work, work incentives are the “pull” that keeps them there. Ron Haskins, widely credited as the chief thinker behind the 1996 act, has reflected on this push-pull dynamic in a paper entitled “Giving Is Not Enough.” Accordingto Dr. Haskins, work-based welfare

combining strict work requirements with generous work supports—is the only U.S social policy strategy proven to reduce child poverty in the modern era.

Increased work supports come with a price tag, of course. In 1996, per capita spending on welfare-to-work participants was $7,000. Today, that number has increased to $16,000. The primary driver of the per-person expenses is the broad array of services that support work, such as child care, transportation assistance, and health-care coverage. This trend reflects the bipartisan belief that those who work should be rewarded. At a recent event co-sponsored by the Hudson Institute, former Indianapolis mayor Stephen Goldsmith said, “The post-welfare reform world has seen a sea change. There is broad consensus thata work-based benefit system is where we want to be.”

The earned-income tax credit (EITC) exemplifies the “work-based benefit system.” Ronald Reagan referred to the EITC as “the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress.” Based on a sliding scale, the EITC augments earnings of poor workers through a negative income tax, a concept originated by Milton Friedman in his book Capitalism and Freedom (1962). The EITC has now become the largest federal aid program targeting the working poor. According to the Council of Economic Advisors, federal EITC expenditures in 1999 were $31 billion, nearly the combined total of the main cash welfare program (TANF) and the Food Stamp program.

The return on that investment has been more workers and less poverty. A study by the Urban Institute found that the EITC has had unambiguously positive effects on labor force participation. Other studies report that the EITC helps lift nearly five million people out of poverty every year. Benefits also extend to local economies. In a recent presentation to the nation’s governors, sixteen of whom offer earned-income tax credits through their own tax code supplementary to the federal EITC, Brookings Institution scholar Bruce Katz reported that over $30 billion in federal aid is transferred each year to working families in every state.

In order to be effective, a poverty-reduction strategy must match work requirements and income-enhancement efforts with a new emphasis on asset accumulation. A back-door approach would be to help the poor decrease their debt load. Among the poorest families, debt payments consume 20 percent of household income, the highest ratio in America. Such a debt load is devastating to households that own no assets beyond income. As a partial antidote, community-based debt counseling should replace the high-interest “payday” loan brokers in American cities today, who charge exorbitant interest rates for loans to people who are known to be great credit risks.

A 1997 study revealed that households earning under $20,000 saved twice as much with simple financial plans as those without them. One of the most effective vehicles for promoting this behavior is the Individual Development Account (IDA), which enables poor workers to save for homes, education, or business ventures. The state of Indiana operates an IDA program that contributes $3 for every $1 saved by its low-income residents. There are 1,500 such accounts in the state, including one for Angel Armstrong Rea, who found economic independence in large part thanks to the state’s IDA program. Ms. Rea recently wrote in the Indianapolis Star,

Your wonderful programs have given my kids and me shelter, sparked an interest for college, taught me to budget, allowed for a down payment to my own home, helped my youngest to go to camp for the first time in their lives, and helped my husband and me start a business that allows me to work and go to school. I cannot express how much these things mean to me. I thank my Lord for all your help.

Although these macroeconomic proposals meet important needs, they sometimes have the effect of merely helping the poor become less poor. Only increased earning power and the promise of a career will reduce the income gap and move the poor out of poverty altogether. Thus, effective microeconomic strategies are needed that bridge the gap between entry-level employees and good jobs,and between employers and the skilled workforce they desire.

One path in this direction is something called sectoral initiatives, which help workers learn skills that will enable them to earn more money in a career with long-term prospects. This approach, featuring local employers in worker-training programs in their communities, is being tested in pilot projects across the country. Rather than training all job aspirants in a general or randomly selected field of interest, innovative job-training agencies are preparing would-be workers specifically for jobs in their communities’ growing sectors. Employers, for their part, gain a better understanding of the unique characteristics of the entry-level work population and can calibrate their behavior to help these workers succeed. It is a case of enlightened self-interest.

Government’s role does not end in simply stipulating new policies, however. Too often policymakers simply add their latest prescriptions on top of old ones, adding unnecessary cost and unintentionally creating confusion and obstructing effective service delivery. This is especially the case in employment and training, where the federal government has created over a hundred separate programs spread among multiple cabinet agencies and subject to even more congressional oversight bodies.

It is the challenge of state and local public administrators to pursue strategies that reduce duplication and leverage resources across these disparate government programs. If we are committed to a work-based solution to the poverty problem, we must build a new system that supports individual workers and their families and also the employers who hire them. The operative term here is system. Although community leaders today refer to their employment and training “system,” what they really have is an overly fragmented mix of services that compete with each other, cost too much because of duplication, and generally confuse users and taxpayers alike.

Omaha, Nebraska, officials understand this strain and recently won approval from the Department of Health and Human Services (HHS) to experiment with a plan pulling together various federal programs into a single system of aid. The money currently is allocated in separate programs for transportation, housing, vocational education, food stamps, job training, and childcare.

In approving this request, HHS Assistant Secretary for Children and Families Wade Horn said that Omaha’s goals dovetail with the administration’s desire for service integration. “We need to get out of this fragmented system . . . with so many different funding streams, and instead turn the focus on the recipients.” Such a focus would move from how many people get aid under various programs to how the aid can meet the overall needs of families.

Other states, including Wisconsin and Utah, ventured down the path of welfare-workforce integration several years ago. They reorganized cabinet agencies to consolidate the functions of welfare-to-work and job training. Former Wisconsin Works (W-2) welfare reform leader Jennifer Noyes recently noted that the merging of economic support and workforce development simply made sense. Given the dramatic declines in welfare caseloads and subsequent surpluses in welfare funding, Wisconsin directed funds toward the non-welfare working poor in activities that prevented them from having to go on welfare and that promoted job success. Today, with strenuous budget shortfalls, these states can’t afford a return to redundant offerings.

Paradoxical Mix

Even with more efficiencies created by cross-system integration, some wonder how we can sustain all the previously mentioned new work-support programs without creating a European-style welfare state. This is valid concern. Given the relative novelty of these programs, it is important for Congress to monitor closely the costs and benefits of combining programs rather than maintaining isolated categorical program silos. It is also imperative that governmentpolicies consistently promote personal responsibility and reward self-sufficiency.

Work-favoring welfare policies appear to be passing both scrutiny tests. A new study conducted by researchers June O’Neill and Anne Hill reports that the poverty levels of single mothers fell from 41.9 percent in 1996 to 33.6 percent in 2001. The authors persuasively make the case that poverty “drops steadily” as former welfare recipients become integrated into the workforce. Like other workers, the longer they remain in the workforce, the more they will earn; and as they escape poverty, they earn their way past government support of all forms. (Gaining Ground, Moving Up, June O’Neill and M. Anne Hill; Manhattan Institute; March 2003.)

Nonetheless it is worth recalling the words of former Wisconsin governor Tommy Thompson, who often said, “You can’t do welfare reform on the cheap.” He imposed stricter requirements than any state in the nation, then and since; in Wisconsin, all cases are required to pursue some sort of employment and training activity in exchange for their benefits. Even as Thompson’s government vastly increased per-capita spending, it saved more than enough money from welfare case reductions to cover the cost. During the past fifteen years, Wisconsin’s caseload dropped from nearly 100,000 families to fewer than 10,000.

New York University professor Lawrence Mead explains the success of this paradoxical mix of increased demands and increased supports by employing Daniel Elazar’s theory of state political culture. In his book American Federalism (1984), Elazar distinguishes three types of political cultures. The first kind is what he calls moralistic; these states are defined by their pursuit of the public interest. The second group is individualistic, those possessing an agenda largely shaped by interest groups. The third group is the traditionalists, which tend to preserve traditional values.

In a recently conducted a study of state welfare-to-work strategies using Elazar’s grid, Professor Mead found that the moralistic states (such as Wisconsin, Michigan, and Oregon) yielded the best welfare-reform outcomes. These states, spurred by some sort of higher-order ethos, preferred problem-solving to partisanship and possessed a relatively higher-performing bureaucracy. They also imposed stricter work tests and extended more generous safety-net services.

This combination of compulsion and compassion has resulted in nationwide welfare reform successes that are difficult to comprehend. More than five million people left welfare over the past six years, a figure approximating the combined populations of Maine, New Mexico, Alaska, and Vermont. To sustain that success, state welfare systems must continue to help mainstream the poor by requiring work in exchange for welfare and supporting those same workers until they are able to trade poverty for self-sufficiency.