Leaving the Safety Net in Place

Contrary to the common impression, the brunt of President Reagan’s proposed cuts does not fall on the poor. The president is not asking for many changes in the “safety net.” It may look as though he is, but that perception is largely the result of confusion about the way subsidized housing is treated in the budget.

The 1986 budget continues the policy that the administration has followed since its first year: it seeks a small real cut in low-income benefit programs. When President Reagan came into office, real outlays for these programs had been rising rapidly for two decades and were projected to continue rising. President Carter’s last budget proposed an 11 percent real increase through 1983, from $66 billion to $74 billion (in 1985 dollars). President Reagan’s revised budget called for a 5 percent decrease, to $63 billion. Congress, approving about $69 billion, in effect split the difference. Since 1983 the president each year has asked for cuts of about 3 percent, which Congress has rejected. Real outlays from 1980 to 1985 have risen by about 12 percent (half of the rise was the result of the 1981-1982 recession rather than of policy changes) compared with 39 percent from 1975 to 1980. The 1986 budget contains a 4 percent cut, from $74.3 billion to $71.4 billion, much less than the 9 percent in the overall domestic budget or the 15 percent when social security is omitted.

Last year’s budget described the changes in the safety net largely in the past tense and stated that the president had achieved his primary goal of restraining the growth in these programs. Although this fact largely escaped notice during the political debate over “fairness,” the current budget is consistent with it. Cutting programs for the poor seems to be largely finished business for the Reagan administration.

The safety net reductions result primarily from freezes or other limitations on the growth of administrative costs, particularly for the state and local governments that actually run most of these programs. The budget also attempts to target child nutrition programs more narrowly on the poorest people. This attempt revives a proposal that Congress rejected in 1981 (although at the same time Congress accepted similar proposals in Food Stamps and other programs).

Few of the changes would actually reduce benefits for the poor. The largest cut is $940 million in Medicaid. The budget expresses concern that the program “now faces the threat of a return to double-digit inflation,” although cost-cutting efforts in the last year have sharply reined in the growth rate and projected real federal outlays would fall if the budget were adopted. There are also minor changes in eligibility for Aid to Families with Dependent Children; unmarried minor mothers could not become eligible for AFDC by leaving their parents’ home. Those are about all.

The one exception is subsidized housing, but it is more apparent than real. The Reagan administration is proposing no new commitments for subsidized housing, a departure from the past three years when it proposed 100,000 additional units each year. The key word is “additional.” In this year’s budget, the number of families being housed under HUD programs would remain at 4.2 million for the next two years. If, instead, the administration followed the pattern of the recent past, it would propose to add 100,000 families a year—for a total of 4.3 million in 1986 and 4.4 million in 1987.

Thus the proposal is essentially a freeze. It is often described as a large reduction, however, because of the peculiar political history and peculiar budgetary accounting of housing programs.

In housing—and only in housing—the politically important budget figure is the number of additional units to be subsidized each year. In Food Stamps and other safety net programs, the important figure is the total number of people being helped. This attitude toward housing goes back to the Depression, when public housing was part of public works, not part of welfare. Although the attitude has been out of date for many years, the budget is still discussed as if it were valid.

Something similar is proposed in the public housing modernization program. The amount for renovations and repairs is cut by more than 75 percent, from $761 to $175 million, in a one-year moratorium, to be followed by a return to $761 million. The $175 million is for “emergency” repairs. The merit of this proposal is problematical. Large and increasing sums have been spent for modernization in recent years, without making much of a dent in the problem of deteriorating public housing. Possibly a one-year moratorium might not make any difference—many repairs can be postponed for a while. But it could speed up the rate of decay and result in higher costs later.

The freeze in low-income housing programs thus does not have much effect on the people now living in subsidized units. It also does not have much effect on expenditures by the Department of Housing and Urban Development. Compared with last year’s budget, it would save about $350 million in 1986 and $700 million in 1987 and later. That is not a large share of the $10 billion HUD spends annually on subsidized housing. But the freeze has a huge effect on the amount of new budget authority, because each new subsidized unit involves a fifteen-year or longer commitment by the federal government, and the entire amount of that commitment is authorized in the budget for the initial year. Because of the freeze, the total amount of new budget authority would be reduced by more than $9 billion from 1985 to 1986.

Another, totally separate, change also distorts the HUD budget and gives the appearance of a major cutback in subsidized housing. Project construction and modernization are financed by tax-exempt securities, issued by local governments with the principal and interest paid by the federal government. Traditionally, short-term notes have been issued during the development stage and are replaced by long-term bonds when the project is completed. In 1974, however, when long-term tax-exempt interest rates seemed extremely high (6 to 7 percent!), HUD decided to save money by waiting for rates to come down before issuing the bonds. It therefore continued to roll over the short-term notes after projects were completed. This, of course, did not prove to be a wise decision, but it has been the policy ever since, except for a brief period late in the Carter administration; nearly all projects completed since 1974, including modernization, have been financed on a short-term basis. About $19.4 billion of short-term notes are now outstanding—about two-thirds of them for completed projects. But last year’s tax reform bill subjected public housing notes to the Internal Revenue Code provisions on tax-exempt securities, in effect making it impossible to continue rolling them over. The administration therefore proposes to pay them off and stop using long-term financing altogether. Some $14.5 billion would be paid in the current fiscal year, and another $1.8 billion in 1986. This action is much cheaper in the long run; the federal government no longer would pay interest as well as principal.

Whichever way the projects are financed will not affect the people who actually live in them. But the $14.5 billion swells the outlays for housing assistance this year to $25 billion; in 1986 the budget shrinks back to $12 billion, comparable to 1984. A number of analysts have apparently heard of the freeze in subsidized units, seen the change in the budget, and assumed that one caused the other.

The change in public housing financing has been excluded from the safety net outlay figures cited above to avoid distortion. Unadjusted data would give the misleading impression of a substantial cut in expenditures for the poor. Indeed, the public housing change is large enough to distort the overall change in the budget. The administration proposes a $14 billion increase, about 1.5 percent. But when the public housing outlays are excluded, the increase in the total budget nearly doubles, to $26 billion.

The freeze concept is also applied to the other major budget category of programs for the poor—those programs providing education, training, and other services intended to help the poor become more productive and self-supporting. Elementary and secondary education is held constant in nominal dollars, implying a 4 percent real decease, following the pattern of the president’s first term. Training and employment and social services are also held constant, with a few exceptions. The administration seeks to eliminate the work incentive program for those on AFDC, the Job Corps for disadvantaged young people, and the community services block grant. The last two are the sole survivors of the original War on Poverty programs. Only the proposal to eliminate the Job Corps is new; the administration since its first year has been trying to replace the work incentive program with a requirement that employable AFDC recipients look for jobs. The Job Corps has been described as “a relative success story within the disappointing overall performance of the federal employment and training system”; it survived the radical restructuring of the system in 1981 and retains political and intellectual support. Any debate about the specific proposals, however, should not obscure that the program category is little changed in this year’s budget.

In contrast, there really are substantial reductions proposed in aid to local governments: the elimination of general revenue sharing and Urban Development Action Grants and a 10 percent cut in Community Development Block Grants combined with a redirection toward non-metropolitan areas. These reduction amount to $5.5 billion annually, about double the change in the safety net. But the grants do not primarily benefit the poor. Instead they help local government, and some give local officials the chance to decide which private businesses and developers receive federal subsidies. The latest round of UDAG grants, for example, includes money for Sony, Burroughs, and Sherwin-Williams, as well as for a large bank and a brewery.

These changes have galvanized mayors and other local officials, who have roundly criticized the president’s budget. They do have reason to be unhappy with it but much more because of what it does to their own budgets than what it does to housing or to the poor people who live in their cities.

The 1986 budget makes some tough choices in the effort to bring the deficit under control. The cuts will hurt, but by and large they will not hurt the poor.

Author

  • John C. Weicher

    At the time this article was written, John C. Weicher held the F.K. Weyerhaeuser Chair in Public Policy Research at the American Enterprise Institute. He is now a Senior Fellow at and Director of Hudson Institute's Center for Housing and Financial Markets.

tagged as:

Join the Conversation

in our Telegram Chat

Or find us on
Item added to cart.
0 items - $0.00

Orthodox. Faithful. Free.

Signup to receive new Crisis articles daily

Email subscribe stack
Share to...