A New, Cynical Assault on the Poor : Reagan Project Would ‘Cash Out’ the Social Safety Net

<i> Robert Kuttner is economics correspondent for The New Republic, and author of "The Economic Illusion" (Houghton Mifflin 1984). </i>

Shortly after the election, the Reagan Administration will unveil its version of an efficient poverty program. The idea is that poor people get too much money from various levels of government. The Administration’s welfare officials reportedly want a poverty-level ceiling--$10,990 for a family of four--on the amount of total government assistance that any needy household can get.

Charles D. Hobbs, the White House staffer in charge of the project, is a former researcher for the conservative Heritage Foundation. Hobbs has argued that if you took all the money that government spends on the social safety net and simply gave it to the poor, you would solve the poverty gap.

He recommends a “cash-out” of most income transfer programs. Instead of a public housing subsidy here, some food stamp assistance there, perhaps some school lunch help, or subsidized Head Start, day care assistance, job training, or Medicaid (Medi-Cal in California), the poorest people would have a kind of line of credit equal to the poverty level, to be used for cash or services. When their total benefits reached that annual limit, there would be no more assistance.

Reagan advisers propose to sell some version of this idea as a pilot program to be tried in a few states. They have been working all year to market the idea to friendly Republican governors, including California’s George Deukmejian. Instead of federally mandated and financed entitlement programs, each state would get a “mega-block grant” to replace all present income supports for the poor. The participating state would decide how to spend the money. In theory, a lot of waste would be eliminated and case workers would have more flexibility in deciding how to assist needy families.


In reality, this is the most cynical of the Administration’s assaults on what is left of the social safety net. Consider the arithmetic. Supposedly, all government transfer programs to the poor total about $120 billion dollars a year. The total “poverty gap"--the difference between the cash income of the very poor and the poverty line--is only $60 billion. By cashing out entitlement programs, presto, you eliminate poverty.

What this sleight of hand leaves out, of course, is that most of those transfer payments cannot be readily translated into disposable income. For example, much of the money counted in the White House arithmetic goes for education and job training. Surely it makes more sense to educate and train low-skilled people for better jobs, and get them off the dole for good, rather than cashing out expenditures that now go for job training and programs like Head Start. A poor family forced to choose between Head Start, and paying the rent, will pay the rent.

Nearly half of all the safety net expenditures for the poor is spent for Medicaid. It exists because very poor people have no private health insurance. If the federal government were to cash out Medicaid, the poor would be forced to choose between health care and eating. State and local governments would have to choose between letting the sick go without treatment, or finding another way to pay the bills, perhaps through higher insurance premiums, or higher state taxes. The social expense would not vanish, Reagan would just shift it elsewhere.

Close to half of Medicaid outlays do not go to poor people at all, but are used to pay for long-term nursing home care for senior citizens. Some of those are middle-class people who have had to pauperize themselves to qualify for Medicaid in order to pay the enormous cost of nursing home care; others have substantial hidden assets. Many other moderate income people receive Medicaid because they have been hit by a catastrophic illness.


Thus Medicaid has become a kind of back-door national health insurance and there is no practical way of redirecting money that goes to pay for the cost of, say, cancer, into money to pay ordinary household living expenses.

In its eventual proposal, the White House may well decide it is not feasible to cash-out Medicaid. But without Medicaid, the logic of the arithmetic unravels for suddenly there is a lot less money to redeploy. Even most of the remaining federal anti-poverty funding, it turns out, goes not for basic income support but for special needs.

The Administration’s concept also is fiscally devious. Block grants to the states were invented during the Nixon Administration. Their short history suggests that whenever the federal government is running in the red, block grants to the states are the first thing to be axed.

If Reagan’s poverty warriors get their way, the statistically fraudulent prospect of eliminating poverty would be used simply as the first wedge of a long-term program to end federal responsibility for the neediest. Then, when the states take the block-grant bait, the government would begin a slow fiscal squeeze. And with no federal mandate or entitlement to protect them, the poor would find that many states have simply cut outlays accordingly.


Despite the pressure to balance the budget, and the current distaste for social spending, Congress and the governors should recognize this latest Administration ploy for what it is. The states, which already have been the victims of several block grant bait-and-switch maneuvers, should reject the Reagan Administration’s cynical design for a new war on the poor.