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michael b. katz The American Welfare State and Social Contract in Hard Times How has the American welfare state responded to economic hard times throughout its history? For two reasons, the question is hard to answer. No consensus exists on the defi nition of the American welfare state, a concept that remains for many an oxymoron. Even more, the attempt to identify common responses among the components of a welfare state with a mixed public/private economy of local, state, and federal governments as well as private charities and employer-provided benefi ts appears presumptuous, if not mad. Th e question is important because the welfare state has played an important role in both moderating and exacerbating inequality. Th e task of designing social policy for the current age of inequality requires that we understand how. Th is article takes up the challenge aware of the pitfalls in the path of a coherent answer. I begin with an overview of the origins and architecture of the American welfare state and take a broad, risk-centered view of welfare that embraces both public and private sectors. I then turn to the interaction of this welfare state structure with periods of economic recession. A short article such as this can only be suggestive, not defi nitive; a thorough examination of the topic would require a much longer and more detailed account. But the accu- mulation of research on the history of the American welfare state leads the author to conclude that none of the social science theories of welfare state For astute readings of a draft of this article in its fi rst incarnation, I would like to thank Daniel Amsterdam and Viviana Zelizer. the journal of policy history , Vol. 22, No. 4, 2010. © Donald Critchlow and Cambridge University Press 2010 doi:10.1017/S0898030610000242 MICHAEL b. KATZ | 509 development explain the history of America’s distinctive welfare state or its actions in economic hard times. Rather, the explanation lies in the responses of local, state, and federal governments to the confi guration of four factors: the social structure of poverty and risk, political coalitions and alignments, preexisting policies and institutional structures, and ideas about poverty and political economy. Together, the intersection of these four factors over time highlights the limits of America’s social contract and truncated version of social citizenship. Th ere is no right to housing, work, income, or, yet, for adults under the age of sixty-fi ve, to medical care. First-class citizens become party to the social contract by earning its benefi ts. Others remain outside, kept alive by the charity of the state and second-class medical care or by a penal system that substi- tutes for welfare. In hard times, these limits to the social contract become brutally clear.1 the origins and architecture of the american welfare state “Welfare” is the most pejorative term in the American social policy lexicon. It is applied in a narrow, disparaging manner and refers mainly to public assistance. But the common defi nition of welfare is myopic. “Welfare” originated as a positive term in the early twentieth century. It signifi ed attempts to pro- fessionalize and modernize old practices of relief and charity. Th is positive connotation of “welfare” and “welfare state” lasted through the New Deal of the 1930s and even through the 1940s. In 1949, an editorial in the S aturday Evening Post cautioned critics to avoid the term in discussions of President Harry Truman’s proposed extension of social benefi ts. “Th e opponents of such a system,” the magazine wrote, “have an excellent case, but they do not help it by adopting precisely the words which put it in a favorable light. ‘Wel- fare’ is the key word. Who’s against welfare? Nobody. . . . Fighting an election by opposing welfare is on a par with taunting an opponent for being born in a log cabin.”2 “Welfare” and “welfare state” came under attack in two stages. In the late 1940s and 1950s, as part of the Cold War, opponents associated them with European socialism and un-American ideas. Th en, in the 1960s, as unmarried women of color with children began to dominate public assistance roles, “welfare” acquired the combined stigmas of race, gender, and illicit sex. 3 510 | The American Welfare State in Hard Times Th is narrow, pejorative use of welfare obscures its true meaning and in- hibits understanding of the American welfare state. In their original sense— as used from the early twentieth-century through the post–World War II years—the terms “welfare” and “welfare state” referred to a collection of programs designed to assure economic security to all citizens by guaranteeing the fundamental necessities of life: food, shelter, medical care, protection in childhood and old age. Th e welfare state is how a society ensures against the risks inherent in human life—unemployment, poverty, sickness, and old age—that in one way or another confront everyone. Th is risk-centered, or economic security–centered, defi nition underlies the historical and struc- tural interpretations in this article. Th e American welfare state confronts universal risks with a distinctive architecture—much broader and more complex than is usually realized. It is not usefully described as either public or private. Instead, its economy is mixed, and its composition refl ects American federalism—the division of powers between the federal government and the states. Th e American welfare state consists of two main divisions, with subdivisions within each. Each of the subdivisions is rooted in a diff erent location in American history and to some extent has followed its own trajectory over time. Th e contemporary structure of the American welfare state only can be understood as a result of historical processes working sometime in tandem but more oft en indepen- dently over the course of the nation’s history. Th is history has produced a rickety, uncoordinated structure that defi es rationality and that no sane per- son would have planned. 4 In the description that follows, the bracketed divisions are ones that I am in the process of adding to the welfare state architecture laid out at greater length in Th e Price of Citizenship: Redefi ning the American Welfare State . Th e fi rst division is the public welfare state. Its subdivisions are public assistance, social insurance, taxation, public education, and veterans’ benefi ts. Public assistance, the oldest form of “welfare,” consists of means-tested programs. Its origins lie in the Elizabethan poor laws, which the colonists brought with them in the seventeenth century. Embodied in “outdoor relief,” aid given to people in their homes rather than in an institution, public assistance has a long and controversial history. For centuries, it has been widely despised; local governments at times abolished it, but, always, driven by human misery, it managed to return. Although subject to state law, public assistance, with a few exceptions, was administered locally, usually by counties. In the early twentieth century, state governments introduced a new form of public assistance, mothers’ pensions, small amounts of money given MICHAEL b. KATZ | 511 to a limited number of worthy widows. During the Great Depression of the 1930s, the federal government for the fi rst time introduced two public assistance programs paid for with matching state-federal funds. Th ey were Old Age Assistance, by far the largest until it was superseded in the 1950s by the expansion of Social Security (discussed below) and Aid to Dependent Chil- dren, a federalization of state mothers’ pensions, which in 1962 became Aid to Families with Dependent Children (AFDC), or what most Americans referred to as “welfare.” State and local governments also have administered their own public assistance programs. Usually referred to as “General Assistance,” these programs, already narrowly bounded and mean, were drastically reduced in the 1980s and never recovered. A fi erce critic of public assistance, President Richard Nixon surprised both his supporters and critics by proposing to replace AFDC with the Family Assistance Plan, a variant of a negative income tax or guaranteed annual income. Opposed by conservatives, who objected in principle, and welfare rights advocates, who thought its benefi ts inadequate, the plan died. Instead, in 1974, Congress bundled public assistance for the indigent elderly, blind, and disabled into a new program, Supplemental Security Income. 5 In 1996, welfare reform legislation—the Personal Responsibility and Work Opportunity Reconciliation Act—was passed overwhelmingly by both the House of Representatives and Senate with bipartisan support and signed into law by President Bill Clinton on August 22. Th e legislation capped a long process of negotiation between Clinton and the Congress and drew on wide- spread hostility to public assistance. Th e legislation, which reoriented public assistance around what was called the transition to work, abolished the quasi- entitlement to public assistance embodied in AFDC. Its overarching goal was a job in the regular labor market. States could meet this goal by contracting out welfare administration to private providers. Th e law replaced AFDC with a program called Temporary Assistance for Needy Families (TANF). TANF has two major components. Both are block grants to states intended to help families leave welfare. One gives cash to families in need to support their children while they look for work and discour- ages them from having any more children outside marriage. Th e other bundles together money for major child-care programs for low-income families. Two features of the new legislation attracted the most attention. One time-limited public assistance to a lifetime benefi t of fi ve years, although states could set shorter limits if they wished. Th e other took benefi ts away from legal immigrants who had been in the United States less than fi ve years; again, states could impose even harsher restrictions on immigrants than the 512 | The American Welfare State in Hard Times federal government. (Prodded by President Clinton, Congress restored some, but by no means all, of these benefi ts to immigrants in 1997 and 1998). One other important aspect of the bill was its emphasis on increasing payment of child support by absent fathers. Following the new legislation, welfare rolls dropped by more than half. Supporters of “welfare reform” hailed this decline as testimony to the bill’s success. With little debate, Congress inserted even tougher work require- ments into the legislation’s reauthorization, included as part of the Defi cit Reduction Act signed by President George W. Bush on February 8, 2005. Many observers, however, were not sure that the drop in the welfare rolls resulted only from the new rules or that it should be the measure of the success of welfare reform. Th e decline, which had begun before the passage of the 1996 bill, refl ected three major infl uences: job growth in a strong economy, individuals either discouraged from applying or sanctioned off the rolls, and work incentives. Moreover, leaving welfare did not mean escaping poverty. Many of the jobs held by former public assistance recipients paid poorly, lacked health and retirement benefi ts, and did not off er avenues for advance- ment. In short, a very large proportion of poor women with children exchanged public assistance for working poverty. Some researchers estimated that at most 10 percent to 20 percent of former welfare recipients earned enough to leave poverty permanently.6 Social insurance, whose origins lie in nineteenth-century Europe, constitutes the second subdivision in the public side of the American welfare state. Social insurance programs are not means-tested. Th ey provide benefi ts to everyone who meets certain fi xed criteria, such as being sixty-fi ve years of age. Th ey are based on a rough insurance analogy because potential benefi - ciaries pay premiums in advance. Th ey have been either federal, state, or federal-state programs. Always much more generous than public assistance, their benefi ts increased at a more rapid rate over time. Th e result is that the gap between them and public assistance has progressively widened. States, not the national government, introduced the fi rst social insurance programs, beginning with Workers’ Compensation in the early twentieth century. A few states developed old-age or unemployment insurance. Federal social insurance emerged in a burst during the Great Depression with the Social Security Act of 1935, which introduced a complicated federal-state program of unemployment insurance and a federal program of old-age insurance known as Social Security. Workers’ Compensation remained a series of state programs. At fi rst, the new federal programs were restrictive. Social Security excluded agricultural and domestic workers, which meant most MICHAEL b. KATZ | 513 African Americans and women, and did not pay benefi ts until 1940. Initial benefi ts were low. Subsequent amendments extended Social Security to sur- vivors (mainly widows) and to previously excluded groups. Congress added disability benefi ts in the 1950s; benefi t levels rose markedly in the 1960s; and in 1972, Congress linked them to infl ation. In the burst of social spending during the Great Society years from the mid-1960s through the early 1970s, Congress passed a major extension to social insurance: Medicare, health insurance for the elderly, along with Med- icaid, a medical public assistance program for the poor. Largely as a result of Social Security’s benefi ts, the elderly, who, as late as 1960, had a poverty rate three times that of any other age group, by the late 1970s were the least likely to be poor, while Medicare and Medicaid transformed access to medical care for the elderly and poor. In recent years, the rising cost of health care, the decline in the proportion of former workers receiving pensions, and the stock market collapse have combined to erode the economic security of older Americans among whom the inequality trend has reversed direction and started to increase. Taxation is the third division of the public welfare state. 7 Low-income people receive benefi ts indirectly through tax credits given to businesses and real estate developers to create jobs and housing. But the most important program is the Earned Income Tax Credit. Started in 1975, the EITC was expanded greatly under President Bill Clinton in the 1990s. It supplements the income of workers whose earnings fall below a predetermined level. Th e EITC costs more than AFDC ever did and more than TANF does now. It has eff ectively boosted people from slightly below the poverty line to just above it. Th e national government also uses tax credits to encourage the construction of low-income housing and to try to entice businesses and industries into the deindustrialized cores of American cities.8 Tax breaks also are the major source of middle-class welfare. Th ey operate through the deductibility of home mortgage interest from income taxes and the exemption of employer-provided medical benefi ts from taxation. Th ese are huge benefi ts. Th e home-owner mortgage deduction is much larger than the amount spent on housing subsidies for people with low incomes.9 Forgone taxes on medical benefi ts amount to many billions of dollars. In one way or another, at some point in their lives, if just through Social Security, the welfare state touches every American. Only it touches some Americans with more generosity than others. (Th e public welfare state contains two more divisions: public education and veterans’ benefi ts. Both have long histories. In its modern form, public 514 | The American Welfare State in Hard Times education originated in the second quarter of the nineteenth century. Vet- erans’ benefi ts date to the early days of the republic, but they fi rst became a major and controversial program aft er the Civil War. 10 Th eir origins and subsequent history have shaped the features of both public education and veterans’ benefi ts today. Each constitutes a huge, redistributive package of benefi ts that share characteristics with both public assistance and social insurance. My fi rst attempt to integrate public education into the welfare state, “Public Education as Welfare,” is in the summer 2010 issue of D issent; I plan to add veterans’ benefi ts in the near future.) 11 Th e private welfare state has two main subdivisions. Th e fi rst consists of charities—some of which stretch far back into American history—and social services. Contrary to American myths, this private welfare state never has been adequate to relieve the needs of individuals and families without adequate health care, income, or housing. American governments operate rela- tively few services themselves. Instead, they have responded to social needs by funding private agencies. In the nineteenth century, for instance, many nominally private orphanages were supported primarily by state government funds. Some charities are old, stretching far back in American history; others are much newer, while social services expanded as a consequence of federal legislation in the 1960s. As they began to receive a large share of their budgets from federal, state, and local governments, the character of nominally private agencies and social services changed. In eff ect, they have become government contractors, dependent for survival on government support.1 2 Th e second subdivision in the private welfare state consists of employee benefi ts.1 3 More than six of ten Americans receive health insurance through their employers. Many receive retirement pensions as well. Although a few businesses and governments provided pensions before World War II, employee benefi ts developed into mass programs only in the 1940s and 1950s. Th ey were the product of strong trade unions, which were legitimized in 1935, when Congress passed the Wagner Act. Trade unions’ decision to fi ght for a private welfare state for union members rather than for universal public programs cemented the link between benefi ts and employment, but it also gave unionized American workers an unprecedented standard of living and economic security. 14 Fought for by trade unions, employee benefi ts received government sanction from 1949 decisions of the National Labor Relations Board, which required employers to bargain over (though not to provide) them. Em- ployee benefi ts fi t within the framework of the welfare state because they have been encouraged by the federal government, which allows employers to deduct their cost from taxes, and are regulated by federal legislation. Without MICHAEL b. K ATZ | 515 them, the public welfare state would have assumed a strikingly diff erent form. In recent decades, the percentage of workers covered by health insurance and retirement benefi ts has decreased. Employees pay much more for their health care than in the past and receive it through some variant of a group health- care plan. In the private sector, most pensions now require defi ned contribu- tions, which leave future benefi ts to the vagaries of individual investment decisions and the market, rather than as in the past off ering defi ned benefi ts, which guaranteed the income employees were to receive in retirement. (A vast, complicated array of informal social protections constitutes the third division of the private welfare state. Philadelphia’s “recovery houses,” described by Robert Fairbanks II in How It Works: Recovering Citizens in Post-Welfare Philadelphia , provides an example.1 5 Fairbanks unearths a set of nominally private institutions that serve some of the city’s most impoverished and marginalized residents. Th e recovery houses have no legal standing. Th ey exist beyond the framework of city- or state-administered regulations. Yet they perform a vital role by saving money for the city government, which, in their absence, would need to fi nd some means of preventing recovery house residents from starving or freezing to death. Th ey also serve a police function by containing and monitoring potentially disruptive or unlawful activities. Th us, they are at once agents of survival and social control. Although they are private, their revenue derives almost entirely from government: residents turn over their state welfare checks, SSI payments, and food stamps. Th e op- erators of the houses, oft en themselves former addicts, aggregate these to buy food and meet operating expenses. Informal social protection of course is not unique to the present or to the United States. Examples can be found throughout modern history, and today it is ubiquitous throughout the world and has been written about most interestingly by scholars who focus on non-Western countries.)1 6 In the 1980s, public social policy coalesced around three great objectives that began to redefi ne the American welfare state. Th e fi rst objective was ending dependence—not only the dependence of young unmarried mothers on welfare, but all forms of dependence on public and private support and on the paternalism of employers. Th e second objective was to devolve authority, that is, to transfer power from the federal government to the states, from states to counties, and from the public to the private sector. Th e third was the application of market models to social policy. Everywhere, the market tri- umphed as the template for a redesigned welfare state, attenuating the already fragile social contract. Used loosely and oft en unrefl ectively as the organiza- tional model toward which public programs should aspire, the market model 516 | The American Welfare State in Hard Times emphasized competition, privatization, and a reliance on supply and demand to determine policies and priorities. Examples are the replacement of AFDC with TANF and the shift to managed health care and defi ned contribution pensions; other examples are found everywhere throughout the public and private welfare states. 17 None of the forces redefi ning the welfare state originated in the 1980s, but in those years they burst through older tendencies in public policy and joined to form a powerful and largely bipartisan tide. With only a few exceptions, political arguments about the welfare state revolved more around details than great principles. An exception was the battle over the future of Medicare and Social Security, which escalated during the administration of George W. Bush. Conservatives wanted to move both programs toward privatization, which would fundamentally change the model on which they were built, but massive public opposition prevented Bush’s plans for Social Security from reaching the fl oor of Congress. With Medicare, Bush had partial success. On December 8, 2003, he signed the controversial Medicare Modernization Act, which introduced a prescription drug benefi t known as Medicare Part D. Instead of a uniform benefi t administered by Medicare, the Bush scheme relied on private insurers to off er plans that fi t the program’s guidelines. Th e legislation forbade Medi- care to negotiate directly with drug companies for lower prices, as the Vet- erans Administration did. It exempted low-income seniors from premiums, moving those eligible for Medicaid into the new drug program and reducing premiums for others with near-poverty incomes, but it handed extra dollars to insurance companies for seniors—many of them Medicaid recipients with little choice—enrolled in Medicare Advantage Plans (managed-care plans that combined medical and prescription benefi ts). Medicare paid these private health plans about 12 percent more than it would cost to care for the same patients in the traditional Medicare program. In its fi rst year in offi ce, the Democratic congressional majority proved unable to lift the prohibition on negotiating drug prices or to scale back the advantages granted private insurers. It did not even attempt to alter the complicated prescription drug plan, which left many seniors still paying thousands of dollars each year for their medications. Th e escalation of health-care costs combined with growing numbers of uninsured and underinsured Americans pushed health care to the top of the national domestic agenda, making it a key issue in the 2008 presidential election. President Barack Obama promised to bring national health insurance to Americans, an accomplishment that had eluded every American president with the same goal, starting with Harry Truman. In April MICHAEL b. KATZ | 517 2010, with passage of the Patient Protection and Aff ordable Care Act, he suc- ceeded. (Among its many provisions, the act will close the infamous “dough- nut” hole in the Medicare prescription drug plan and scale back the privileges of Medicare Advantage Plans.) Health care, nonetheless, remained fi rmly in the market, its expanded benefi ts to be delivered through private insurance companies, albeit with their freedom to reject applicants with preexisting conditions, drop clients, and raise premiums at will curtailed. Its history left the American welfare state with a set of distinctive characteristics. Th ese were a mixed public/private economy; benefi ts shaped and constrained by constitutionally based federalism; a sharp division between public assistance and social insurance, with the most generous benefi ts reserved for the latter; a preference for delivering benefi ts through the tax code; and a link between benefi ts and work in the regular labor market. To- gether, these features worked to equate full citizenship and membership in the social contract with market work and, thereby, to stratify Americans into fi rst- and second-class citizens, leaving those in the second class particularly vulnerable to hard times. welfare in hard times Th e features of America’s rickety, uncoordinated welfare state originated from so many diff erent points in the nation’s past and developed along such inde- pendent routes that it would be unreasonable to expect a singular interpreta- tion of its response to hard times. None of the theories of welfare state development advocated by political scientists or sociologists explains the messy, complicated whole. By picking selectively, one could argue that welfare benefi ts expanded and contracted in keeping with economic cycles. 18 Or, one could root welfare state development in a “path dependent” process linked to the development of governmental institutions. 19 A third approach would capture welfare state history within a typology of national political regimes. 20 Another would see gender as the key to the story, another America’s diversity and the reluctance to extend kindness to strangers.2 1 All these interpretations are useful and heuristic, but partial. Exceptions render them less than universal. A more promising approach to unraveling the connections between the welfare state and hard times begins on the ground, looking closely at historical cases. Th is approach unearths a series of conditions whose confi gurations shape the links between welfare and economics at diff erent points. Th ese are the social structure of poverty and risk, political coalitions and alignments, preexisting policies and institutional structures, and ideas