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Money Matters, Especially When It Comes to Children

by Steven Pressman

Mar 28, 2023 | Economy

True Touch Lifestyle, SergeMelkovart, JPRFPhotos

It is an article of faith among conservatives that government programs are wasteful expenditures. This is the standard line of the Wall Street Journal editorial pages and the Republican Party.

Going further, Charles Murray’s book Losing Ground: American Social Policy, 1950–1980, argued that expanding welfare programs during the 1970s increased poverty in the United States and generated social and economic problems. While critics of Murray pointed out that the problems of the 1970s stemmed more from OPEC raising oil prices, which led to higher inflation and then sharp interest rate hikes by the Federal Reserve, his book was highly influential.

President Reagan and Republican politicians pushed for large cuts in social spending. So did Democrats. Bill Clinton ran for president in 1992 promising to “end welfare as we know it.” As president, he signed legislation in 1996 abolishing Aid to Families With Dependent Children (AFDC), the program most people associate with welfare, and replacing it with Temporary Assistance to Needy Families (TANF), which (as the name implies) limited the ability of single parents with children to receive government benefits.

Murray won. Conservatives won. Republicans won. The United States lost.

With hindsight, the consequences of Clinton’s dastardly deed have become clear. Promised benefits failed to materialize. The economic problems that began in the late 1970s and early 1980s remain—stagnant wages and incomes, a shrinking middle class, and substantial poverty. Poverty rates rose from 11.3 percent in 2000 to over 15 percent in the early 2010s, before declining to 11.8 percent in 2019.

The data shows that reducing government benefits and ending spending programs, contra Murray, did not reduce poverty in the United States. The best that can be said in support of Murray is that it made very little difference, as poverty rates right after the 1996 legislation became effective and right before the coronavirus struck were not very different. My take on recent U.S. economic history is that ripping holes in the U.S. safety net aided and abetted the decline of the U.S. middle class, slowed U.S. economic growth in the twenty-first century, and nudged the poverty rate up.

While Murray was writing his book, it was already known that government programs led to positive economic and social outcomes. During the 1960s and 1970s, several negative income tax (NIT) experiments were conducted in the United States. A NIT is a basic income for households (on this, see my article in the November 2018 Washington Spectator) that gets taxed away as income rises. In the NIT experiments, some people received money with no strings attached; a control group received no money from the government. The experiments examined the consequences of giving people a little extra money.

NIT recipients fared better than non-recipients when it came to health, school performance, homeownership, and feelings of well-being. And of course, household income was up and poverty was down for those receiving a NIT. There were few negative effects. Work effort fell a tiny bit among those receiving the money—mainly married women who decided to stay at home and care for their young children rather than take paid jobs. The overall results were remarkably positive.

U.S. poverty data for 2021, released in September 2022, provides even stronger evidence that money matters. The share of Americans living below the poverty line increased a bit in 2021—to 11.6 percent, from 11.5 percent in 2020. Poverty thresholds are defined for families of different sizes ($27,949 for a family of four), and the poverty rate is the fraction of people living in a household with less than poverty-level income.

In making these estimates, the government surveys thousands of households and adds up all their income. Some, but not all, government benefits get counted as income. To count, income must be received as cash. As a result, SNAP (formerly Food Stamps) and free school lunches don’t count as income. Social Security and unemployment insurance payments are counted, but special government cash benefits provided in the March 2021 American Rescue Plan (stimulus checks and the refundable child tax credit) are not.

In 2011, the government introduced a supplemental poverty measure that also adds temporary cash payments and most in-kind benefits to household income before determining whether the household is poor or not. This makes it a more accurate measure of poverty. It also makes it possible to estimate the impact of government programs on poverty because these government benefits count toward income. Because more income gets counted in the supplemental poverty measure, the measure also employs higher poverty thresholds—a bit more than $31,000 for a family of four that rents or has a mortgage (the figure is lower for a family owning a home but having no mortgage). Comparing the official and the supplemental poverty rates highlights the impact of government programs on poverty.

According to the supplemental measure, U.S. poverty in 2021 was at its lowest level since the government began using this measure—7.8 percent (down from 9.2 percent in 2020 and 16 percent in the early 2010s). The best news was that child poverty fell to 5.2 percent from 9.7 percent in 2020 and 18 percent in the early 2010s. This puts U.S. child poverty close to that of the Nordic countries, which have the lowest child poverty rates in the world (under 5 percent).

The key to a 5.2 percent child poverty rate was the fully refundable child tax credit. Between July 2021 and December 2021, most low-income families received $300 a month for each child under age 6 and $250 per month for each child between the ages of 6 and 17. For a family with two children, one under 6 and one older than 6, this meant monthly payments of $550, or $3,300 over six months. In addition, most adults received a $1,400 stimulus check.

Unfortunately, the refundable child tax credit ended in 2002. Efforts by congressional Democrats to reinstate it were thwarted by opposition from West Virginia’s Democratic Senator Joe Manchin and every Republican in the Senate. The negative consequences of this can already be seen. A recent study published in the Journal of the American Medical Association found that ending the child tax credit increased food insufficiency by 25 percent in July 2002 compared to when families received child tax credits. It is a no-brainer to expect U.S. child poverty to again approach 20 percent.

Growing up poor has many negative consequences. Impoverished and hungry children do worse in school, are less likely to graduate from high school or go to college, and earn less than children who do not grow up in poverty. The more years one grows up in a poor family, the worse the future outcomes. Child poverty also has large costs for the nation—higher crime rates, greater health care spending, lower worker productivity, and reduced government tax receipts. This is why reducing child poverty pays for itself, and then some, over the long term.

The policy lesson here is inescapable—government benefits and programs matter, especially when it comes to children. Given the cost of child poverty to the nation, reviving the refundable child tax credit should be top priority for the Biden administration. If the administration cannot pass a generous version of the plan, a more conservative version would still do a lot of good. Even half the monthly amount of the 2021 refundable credit would reduce child poverty to 10 percent (on the supplemental measure), putting the U.S. child poverty rate near the level prevalent in Western Europe. Extra money will also make life a little easier for families with children that remain impoverished. And it will help create future generations of healthier and more productive workers.

Contrary to conservative pundits and politicians, we know what matters when it comes to reducing child poverty: money paid by the government to families with children. Firms won’t do this on their own. Those trying to do so are at a competitive disadvantage relative to less generous firms and can’t survive. The best example of this is the French firm Val-des-Bois Works, the first business to provide higher pay to workers with children. It failed because its higher labor costs required it to charge higher prices than its competitors. Every other developed nation has figured this out. They all employ a child or family allowance policy that is the equivalent of the U.S. refundable child tax credit (see my article in the May-June 2021 Washington Spectator). What is wrong with the United States?


Steven Pressman is part-time professor of economics at the New School for Social Research, professor emeritus of economics and finance at Monmouth University, and author of Fifty Major Economists, 3rd edition (Routledge, 2013).

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