Welfare Reform and Food Stamp Caseload Dynamics

We use state-level panel data for federal fiscal years 1980–1998 to estimate the impacts of welfare reform and the business cycle on food stamp caseloads. The model we employ is a dynamic function of past caseloads, economic factors, AFDC and Food Stamp Program policies, political factors, AFDC caseload levels, and unobserved fixed and trending heterogeneity. Our results suggest that the robust economy has substantially influenced the recent decline in food stamp caseloads, but that the estimated aggregate effect of welfare reform is modest—we attribute around 45 percent of 1994–1998 decline to the macroeconomy and about 5 percent to welfare reform. We do find substantial heterogeneity in the impact of AFDC waiver policies. States with JOBS sanctions policies but not family cap or earnings disregard waivers can expect a larger long-run decline in caseloads than those states with all three policies. In addition, we do find some evidence, albeit weaker, that states with waivers for unemployed able-bodied adults without dependents can expect higher caseload levels than states without the waivers and that the Electronic Benefits Transfer program is leading to food stamp caseload declines. An important finding of this study is that modeling food stamp caseload dynamics has implications for the estimated effects of policy changes and economic factors—when dynamic models are employed, we observe substantially reduced welfare-reform effects but significantly increased effects of the macroeconomy on food stamp caseloads. These results are robust to models that permit the simultaneous determination of AFDC and food stamp caseloads. Welfare Reform and Food Stamp Caseload Dynamics The number of food stamp recipients fell from a historic high of 27.5 million in 1994 to 17.4 million by the end of 1999. During this period of unprecedented decline, the cash welfare system was transformed first with state-level waivers from federal requirements on the Aid to Families with Dependent Children (AFDC) program, and then by passage of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA). The waivers, along with PRWORA, introduced new rules on cash-assistance recipients such as terminal time limits, work requirements, and personal responsibility measures, which also likely affected the food stamp caseload since almost all AFDC recipients receive food stamps. PRWORA also had a direct administrative effect on the Food Stamp Program by ending the eligibility of some recipients, reducing average benefit levels, and requiring states to replace paper coupons with Electronic Benefits Transfer (EBT) cards by October 2002. Concurrent with these reforms is the longest post-World War II economic expansion, a boom that has resulted in the lowest unemployment rates in 30 years and the highest employment rates for single female-headed households to date. The concurrent nature of the robust economy and the major changes in welfare policy make it impossible to casually ascribe credit for the recent caseload changes to policies or economic growth, but both seem highly likely to have contributed to the recent caseload reductions. In this paper we propose a model of food stamp caseload dynamics that quantifies the relative impacts of welfare reform and the business cycle on food stamp caseloads. Several recent papers have documented the relative contributions of the business cycle and welfare reform to AFDC caseload declines (Bartik and Eberts 1999; Blank 1997; Council of Economic Advisers [CEA] 1997, 1999; Figlio and Ziliak 1999; Moffitt 1999; Wallace and Blank 1999; Ziliak et al. 2000). Most of these papers focus on the pre-PRWORA period when the Department of Health and PRWORA also replaced the AFDC program with a new state block-grant program called Temporary Assistance for Needy Families (TANF). For convenience we will refer to the program as AFDC throughout the paper. 2 Human Services selectively granted states’ requests for waivers from federal AFDC requirements. While as much as one-third of the 1993–1996 decline in AFDC caseloads has been attributed to welfare reform (CEA 1997), Figlio and Ziliak (1999) and Ziliak et al. (2000) argue that this estimated relationship is, in large measure, spurious for the pre-PRWORA era. They argue that once caseload and business cycle dynamics are contolled for, little of the early caseload decline can be pegged to welfare waivers. The CEA (1999) updated its earlier work to include the 1997 and 1998 federal fiscal years and, when compared to its earlier work, found an even stronger welfare-reform effect. Although one would expect a larger role played by welfare reform because many of the initiatives required time to implement, the CEA continued to model the caseload process as static, not dynamic, and thus overstated the role of welfare reform. Figlio and Ziliak (1999), for instance, update their dynamic model to look at the post-PRWORA period and continue to find only a modest role for welfare reform in the aggregate national caseload reduction (although they find that welfare reform mattered greatly in some states). Hence, though welfare reform has contributed to the recent AFDC caseload decline, the consensus from this literature, as summarized in the recent book edited by Danziger (1999), indicates that the robust economy played the dominant role. Perhaps surprisingly, little research has been conducted on the impact of the macroeconomy and welfare reform on food stamp caseloads. Wallace and Blank (1999) are a recent exception in their use of both static annual and dynamic monthly food stamp caseload models based on state-level panel data for the 1980 to 1998 federal fiscal years. They found that food stamp caseloads were strongly countercyclical and that the reform of AFDC led to weak declines in total caseloads. Specifically, they attribute up to 44 percent of the food stamp caseload decline between 1994 and 1998 to economic conditions and about 6 percent of the decline to welfare reform. We improve upon the previous research on food stamp caseloads along several dimensions. First, we follow other research in estimating the impact of AFDC policy changes on food stamp caseloads, but we also examine the direct impact of food stamp policies on food stamp caseloads such as the introduction of EBT, waivers from the work requirement for unemployed able-bodied adults without 3 dependents (ABAWDs), and administrative error rates. Second, we consider several methods of modeling the policy variables. Specifically, aside from specifying the AFDC policy reform as an aggregate “any waiver” variable, we also consider models in which this variable is allowed to have a nonlinear impact before and after passage of PRWORA, models in which the waivers are disaggregated into their component parts such as time limits and work requirements, and models in which we use the implementation dates of the waivers rather than approval dates. Third, we permit general macroeconomic factors in the dynamic caseload models that will capture national reforms such as the expansions in the Earned Income Tax Credit (EITC) in the mid-1990s. Finally, we directly explore the possibility of simultaneity between food stamp and AFDC caseloads with a structural econometric model. Our instrumental variables estimator identifies the model parameters by exploiting the fact that a state’s need standard affects AFDC caseloads directly but only affects food stamp caseloads indirectly via its effect on