Solar Panel alternative energy technology with sky

Corporate Welfare: It’s Not Just a Drain on the Federal Budget; It’s a Drain on Innovation

by Chris Edwards and Tad DeHaven

RISING GOVERNMENT SPENDING and huge deficits are pushing the nation toward an economic crisis. There is general agreement that policymakers need to find wasteful and damaging programs in the federal budget to terminate. One good place to find savings is spending on corporate welfare.

A recent Cato Institute study finds that federal business subsidies total almost $100 billion annually. That is a fairly broad measure of subsidies to small businesses, large corporations, and industry organizations. The subsidies are handed out from programs in many federal departments including Agriculture, Commerce, Energy, and Housing and Urban Development.

However, there is no precise measure of corporate welfare. As part of the national income accounts, the Bureau of Economic Analysis calculates that the federal government handed out $57 billion in business subsidies in 2010.

There are several obvious upsides to ending federal subsidies to businesses: It would help reduce the federal deficit; it would reduce the amount of money taken from taxpayers and given to big corporations; and it would reduce the incentives for political corruption. A less obvious, but no less important, reason to end corporate welfare is that an economy that doesn’t depend on subsidies from government is a more entrepreneurial economy that will grow faster.

Government Is Not a Good Investor

Some people think that subsidies are needed to help U.S. businesses compete in the world economy. But the more we subsidize businesses, the more we weaken the market’s profit-and-loss signals, and the more we undermine America’s traditions of entrepreneurship and gutsy risk-taking by the private sector.

People argue that business subsidies are needed to fix market imperfections. But subsidies usually don’t work as intended, and they often distort markets rather than fixing them. Journalist Robert Novak once said that “the mind-set underlying corporate welfare is that of the central planner,” and yet we know that central planning does not work.

Consider the energy industry, which Republicans and Democrats have been manipulating with subsidies for decades. An early subsidy effort was the Clinch River Breeder Reactor, which was an experimental nuclear fission power plant in Oak Ridge, Tennessee in the 1970s. This Republican-backed boondoggle cost taxpayers $1.7 billion and produced absolutely nothing in return.

Then we had the Synthetic Fuels Corporation (SFC) approved by President Jimmy Carter in 1980, who called it a “keystone” of U.S. energy policy. The government sank $2 billion of taxpayer money into this scheme that funded coal gasification and other technologies before it was closed down as a failure. The SFC suffered from appalling mismanagement, huge cost overruns on its projects, political cronyism, and pork-barrel politics in dishing out funding.

Both parties have backed dubious “clean coal” projects for decades. The Government Accountability Office found that many of these projects have “experienced delays, cost overruns, bankruptcies, and performance problems.” In a review of federal fossil fuel research, the Congressional Budget Office concluded: “Federal programs have had a long history of funding fossil-fuel technologies that, although interesting technically, had little chance of commercial implementation. As a result, much of the federal spending has not been productive.”

With the poor record of energy subsidies over the decades, it is no surprise that the Obama administration is having trouble with its green energy activities. The administration’s failures keep piling up—Solyndra, Raser Technologies, Ecotality, Nevada Geothermal, Beacon Power, First Solar, and Abound Solar. These subsidy recipients have either gone bankrupt or appear to be headed in that direction.

Why don’t business subsidies work very well? One reason is that political pressures undermine sound economic choices. The Washington Post found that “Obama’s green-technology program was infused with politics at every level.” The decision to approve the Solyndra loan, for example, appears to have been rushed along by high-level politics.

Perhaps more importantly, subsidies change the behavior of businesses. An economist once quipped: “I don’t know whether the government is better at picking winners rather than losers, but I do know that losers are good at picking governments.” When the government starts handing out money, businesses with weak ideas get in line because the businesses with the good ideas can get private funding. Enron, for example, was able to grab huge federal support for its disastrous foreign investment schemes.

At recent House of Representatives hearings on green energy subsidies, most witnesses lined up in favor of Department of Energy loan programs, except for one witness who heads a solar power firm that does not receive federal subsidies. James Nelson of Solar3D said subsidizing green energy commercialization “is a wasteful mistake because it doesn’t work.” Here are some of the problems he pointed to:

Firms that receive subsidies become spendthrift. Nelson contrasted his firm’s lean operations with Solyndra’s wasteful ways, which included building a fancy factory in a high-cost location. Nelson noted that the “most powerful driver in our industry is the relentless reduction in cost.” Yet government intervention rarely works to drive down costs in any activity.

Subsidies aren’t driven by actual market demands. Nelson noted that U.S. adoption of solar energy lags behind several other nations. But he said, “this should not bother us if it means that the other countries are investing in technology that is not economically viable.” In other words, if other countries are misallocating resources, that won’t hurt us. The good news, he said, is that America is the leader in market-driven private venture capital for “clean tech.”

Subsidies distort business decisions. Nelson noted that “giving companies money to set up manufacturing in the United States may doom them to failure by financing them into a strategically uncompetitive position.” In other words, if subsidies induce U.S. firms to put more production in the United States than is efficient, it will disadvantage them in the marketplace.

Venture capitalists have already funded the best projects, leaving the dogs for the government. If venture capitalists “reject a project, it is difficult to believe that the government could do a better job of picking a winner,” argues Nelson.

The House hearing included testimony from green energy firms that had received subsidies. Their comments reveal how subsidies erode the focus on the bottom line. The firms stressed how many jobs they were creating and how their supplier chains covered many states—and thus many congressional districts. One solar firm bragged that it is “creating and maintaining jobs locally and across the nation,” while it is “procur(ing) from a supply chain that stretches across 17 states.” Another solar firm bragged that it “spent more than $1 billion with U.S. suppliers in 35 states.”

Another problem with business subsidies is that they can encourage investing in very dubious projects. That is the story of Enron’s international investments, which played an important role in the implosion of the firm. According to a Washington Post investigation, Enron received $2.4 billion in federal aid through the Export-Import Bank and the Overseas Private Investment Company between 1992 and 2000. A study by the Institute for Policy Studies puts total federal government subsidies to Enron for its foreign schemes at $3.7 billion. Enron also received subsidies from international agencies such as the World Bank. All of these subsidies made possible Enron’s excessively risky foreign investments, which came crashing down at the same time that the firm’s accounting frauds were being revealed.

Suppose that the government was capable of channeling subsidies only to well-managed companies with sensible ideas. Then the subsidies wouldn’t be needed because they would simply crowd out private investment. That seems to be the case with much of the $7 billion in subsidies for rural broadband in the 2009 stimulus bill, as one detailed study by Jeffrey Eisenach and Kevin W. Caves found.

Or consider the Department of Energy’s Advanced Technology Vehicles Manufacturing Loan Program, which provides subsidies to companies to develop green cars. A former executive with Tesla Motors, which received subsidies, concluded that “private fundraising is complicated by investor expectations of government support.” Subsidies distort the venture capital market, having “a stifling effect on innovation, as private capital chases fewer deals and companies that do not have government backing have a harder time attracting private capital.”

Most of our long-term economic growth has come not from existing large corporations or governments, but from entrepreneurs creating new businesses and pioneering new industries.

A final problem with corporate welfare is that it can create broader distortions in the economy. For more than a century, the federal Bureau of Reclamation has subsidized irrigation in 17 western states. About four-fifths of the water supplied by the Bureau goes to farm businesses, and this water is greatly underpriced. Because farmers receive water at a fraction of the market price, they overconsume it, which threatens to create water shortages in many areas in the West. Subsidized irrigation also causes environmental damage.

Long-Term Growth Depends on Entrepreneurs

Most of America’s technological and industrial advances have come from innovative private businesses in competitive markets. Indeed, it is probably true that most of our long-term economic growth has come not from existing large corporations or governments, but from entrepreneurs creating new businesses and pioneering new industries. Such entrepreneurs have often had to overcome barriers put in place by dominant businesses and governments.

Economic historians Nathan Rosenberg and L.E. Birdzell found that “new enterprises, specializing in new technologies, were instrumental in the introduction of electricity, the internal-combustion engine, automobiles, aircraft, electronics, aluminum, petroleum, plastic materials, and many other advances.” We can update that list to include cell phones, personal computers, biotechnology, and all kinds of Internet businesses.

If policymakers want to get U.S. economic growth back on track, they should put entrepreneurs frontand- center in their thinking about policy. Here are some of the ways that entrepreneurs generate growth:

Entrepreneurs are radical innovators. Their advances are usually unexpected and disruptive to existing businesses. Personal computers were pioneered in the 1970s by new companies such as Apple. The opportunity was missed both by leading computer firms and by government planning agencies such as Japan’s MITI. Big corporations were focused on mini- and mainframe computers, while the U.S. government was subsidizing supercomputers. Governments and big companies often overlook niche products that later become revolutionary. In the 1970s, microcomputers were an obscure hobbyist activity, and software for microcomputers— which Bill Gates helped pioneer—was a niche within a niche. The small-scale innovations of entrepreneurs in niches often create huge, unforeseen changes.

Entrepreneurs generate competition. Another crucial role of entrepreneurs is that they challenge dominant firms and governments. One great story is the rise of MCI Corporation in the 1970s and 1980s. MCI helped destroy the AT&T monopoly, which paved the way for the modern telecommunications revolution. Another innovator was Fred Smith of Federal Express. Today we take overnight letter delivery for granted, but it was Smith who battled federal regulatory roadblocks in the 1970s and provided new competition for the U.S. Postal Service by proving that there was an untapped demand for rapid delivery.

Entrepreneurs turn inventions into innovations. America’s long-run growth is often portrayed as a steady process of accumulating new inventions. Many people seem to think that the government can simply pump money into research and the economy will grow. But that “science push” theory of growth is incorrect. Economies grow because of innovations, which are inventions that are packaged and tested in the marketplace by entrepreneurs.

Entrepreneurs are the economy’s guinea pigs. They have the guts to act in the face of uncertainty, and they learn from their mistakes and keep trying until they find ideas that work and generate profits.

The modern economy is steeped in uncertainty. No one can predict the future, not even the best scientists, engineers, and economists in big companies and the government. Many experts have made hugely off-base prognostications about the economy. Two decades ago, many pundits and policymakers were convinced that Japan was taking over the global economy. Professor and pundit Robert Reich thought that “chronic entrepreneurialism” was undermining the U.S. economy. And past predictions about the computer industry have been laughable, such as this comment in 1977 by the founder of Digital Equipment Corporation: “There is no reason for any individual to have a computer in his home.”

Luckily, expert predictions don’t drive the economy. Rather, successful market economies work by having swarms of entrepreneurs freely testing new ideas. Entrepreneurs are the economy’s guinea pigs. They have the guts to act in the face of uncertainty, and they learn from their mistakes and keep trying until they find ideas that work and generate profits.

By contrast, government plans to stimulate the economy are often based on ideologies and rigid ideas. Some policymakers believe that particular energy technologies are the solution to America’s problems, and they support subsidies year after year regardless of marketplace realities. By contrast, in competitive and unsubsidized markets, mistakes usually are quickly exposed and businesses cut their losses short and change direction.

The government tends to work at a turtle’s pace, which doesn’t sync well with the fast-paced modern economy. We saw a comparison of the government turtle with the private-sector gazelle during the first sequencing of the human genome in the late 1990s. The government’s lavishly funded Human Genome Project was a lengthy multi-year research project, but it was upstaged when entrepreneur Craig Venter launched Celera Genomics to complete the job at a fraction of the time and cost.

What are the policy lessons from America’s great entrepreneurial history? One lesson is that because markets have high levels of uncertainty, government agencies and dominant companies cannot be relied upon to secure our economic future. Instead, we should remove hurdles to entrepreneurship every way we can—by tax reforms, by repealing barriers to entry into industries, and by reducing financial industry barriers to private risk financing.

While it has become fashionable to criticize Wall Street, the financial industry has been crucial to funding waves of innovation in the U.S. economy. Risk capital was integral to the railroad and telegraph booms of the 1800s, and the radio, electricity, and automobile booms of the early 20th century. J.P. Morgan Chase garnered negative headlines for a $2 billion quarterly loss earlier this year, but J.P. Morgan was the company that provided seed capital for Thomas Edison’s Edison Electric Illuminating Company, which became General Electric.

In recent decades, high-yield bonds, venture capital, and angel investment have played key roles in growing new industries. Today, U.S. venture capital and angel investors pump more than $50 billion annually into young companies. Tax policy influences investment flows, and funding for high-growth ventures is affected by the tax treatment of capital gains in particular. Extending the 15 percent federal capital gains tax rate would make it easier for firms and investors to plan for the future. Also, the corporate tax rate should be cut to spur greater capital investment—new capital equipment usually embodies technological advances.

Policymakers should put aside the idea that some sort of big intervention can permanently “win the race” for some particular goal, such as energy independence, solar power dominance, or beating China. In recent testimony before the House of Representatives, an energy consultant said: “[C]lean energy has been targeted by our major international competitors (including China and Germany) as a critical, and perhaps the critical, future growth and export industry … whether the U.S. wins or loses in this race matters because the outcome will have a large impact on future U.S. employment and economic strength.” At the same hearing, a solar company executive said that America could “win in the long run” with a particular solar technology.

New Zealand ended virtually all its farm subsidies in 1984. Farm productivity, profitability, and output have soared since the reforms. The farmers cuts costs, diversified land use, sought nonfarm income, and developed new markets.

However, those sorts of prognostications are refuted by U.S. economic history. There is never any final “win” in the marketplace. Look at how leadership in cell phones and smart phones has shifted from firm to firm and country to country, from Nokia, to RIM Blackberry, to Apple, and to others. Technologies and markets are always changing, so the only way for America to permanently “win” in the struggle for economic growth is to have the best climate for investing, innovating, and building entrepreneurial companies.

Subsidies to new industries like green energy aren’t the only ones that distort the economy. Withdrawing corporate welfare from older, established industries could spur innovation as well. Consider farm subsidies. New Zealand ended virtually all its farm subsidies in 1984, which was a bold stroke because that country is much more dependent on farming than is the United States. The changes were initially resisted, but New Zealand farm productivity, profitability, and output have soared since the reforms. Faced with new financial realities, New Zealand’s farmers innovated—they cut costs, diversified their land use, sought nonfarm income, and developed new markets.

Thus rather than looking for new ways to subsidize businesses, policymakers should be looking for places to withdraw subsidies and deregulate in order to spur innovation. For example, just as the break-up of the AT&T monopoly in the 1980s helped to generate growth in the telecommunications industry, ending the U.S. Postal Service monopoly today would spur innovation in that industry. Europe is moving in that direction, with Germany and the Netherlands already privatizing their postal systems.

The transportation sector is another area where innovation could be spurred by the reduction of federal subsidies. For example, Amtrak is doomed to inefficiency as a government-run business pumped full of subsidies and shackled with regulations. It should be privatized. Other countries are ahead of the United States in privatizing transportation infrastructure, or at least in bringing private investment into infrastructure.

The United States subsidizes its air traffic control system, but it doesn’t need to. Canada privatized its air traffic control system in 1996, and it operates as a self-funded nonprofit corporation. It has been a big success. Space flight is another area that could benefit from cutting subsidies and letting the private sector operate. The recent success of the SpaceX flight and the 2004 success of SpaceShipOne indicate that the private sector is entirely capable of bold and risky technological ventures.

To sum up, the way to spur economic growth is not through business subsidies, but through breaking down barriers to entrepreneurs. Let’s give entrepreneurs a crack at postal services, air traffic control, passenger trains, and other monopoly industries. Let’s pursue tax and regulatory reforms to maximize the flow of financing to new and growing businesses. And let’s stop demonizing entrepreneurs who succeed and the financial system that allows them to grow. If we want to exorcize some demons, we should end the corporate welfare system that is corrupting our government and the American economy.

Mr. Edwards is Director of Tax Policy Studies at the Cato Institute. Mr. DeHaven is a budget analyst at the Cato Institute. This article is adapted from their testimony before the Committee on the Budget of the U.S. House of Representatives, June 1, 2012.


Fixing Health Care Requires Freeing the Patient and Freeing the Doctor: An Interview with John Goodman

TWO DECADES AGO, IN THEIR BOOK Patient Power: Solving America’s Health Care Crisis, John Goodman and Gerald Musgrave argued that the problem with American health care was that somebody other than the patient was making most of the decisions— because somebody other than the patient was picking up the bill. The authors introduced the world to the idea of medical savings accounts, which gave patients control of the money and allowed them to decide what health care was worth buying and what wasn’t. Today, medical savings accounts are called health savings accounts and they are the fastest growing type of health plan in the country. Now Goodman, President of the National Center for Policy Analysis, has written a new book called Priceless: Curing the Health Care Crisis, in which he takes the argument even further. The system of third-party payment not only constrains patients, he says, it also prevents doctors and hospitals from finding new and better ways of serving patients. We talked recently with Goodman about how a real free market in health care can deliver better medicine.

The Insider: In your book, you argue that the suppression of market forces creates problems in health care. Isn’t health care different, though, in a number of ways that make it hard for markets to operate?

John Goodman: Wherever we don’t have third-party payers paying most of the bills, health care markets work very well. We see that in cosmetic surgery, in Lasik surgery. We see it in the international market for medical tourism, which covers just about every type of elective surgery, and increasingly in the United States we’re developing a domestic market for medical tourism. So there’s lots of evidence that markets can work in health care. We’ve seen a growth of specialty products in areas where patients pay mainly with their own money. There are more than a thousand walk-in clinics now. They post prices. They provide high-quality inexpensive care. was the first online mail-order pharmacy, which came into existence to compete with local pharmacies, mainly appealing to people who were spending their own money. You get price competition, and so you get lower prices and higher quality as well.

TI: So is ObamaCare just a continuation of the suppression of market forces?

JG: The philosophy behind ObamaCare is that health care really should be free at the point of delivery. They’ve certainly gone to great lengths to make preventive care free without deductible or copayment. There are a lot of people on the Left who would like to make all health care free at the point of delivery.

Right now, our third-party payment system gives both the patient and the doctor perverse incentives. The perverse incentive of the patient is to over-consume because he’s not paying the full price. And the perverse incentive on the doctor’s side is to over-produce because instead of trying to satisfy a patient, he is really maximizing against a payment formula.

TI: What about the argument that consumers can’t really make informed decisions on their own about health care; that information asymmetries force us to rely on doctors’ judgments, and so therefore we need something other than markets to keep crass profit maximization in check?

JG: There’s information asymmetry in the cell phone market. The guys repairing my cell phone know a lot more than I know, but cell phone repair is a market that works very well. There’s even a chain called iHospital, and their employees are called iDoctors. Some firms make house calls to repair your cell phone. So asymmetry of information doesn’t mean that markets can’t work, and work well.

TI: If patients had to pay for their care out of their own pockets, wouldn’t they forgo care that they really need?

JG: You want people to choose between health care and other uses of money. Certainly society as a whole has to do it, and, therefore, it’s appropriate for individuals to do it. If somebody wakes up in the middle of the night and they have something wrong with them, should they go to the emergency room, and spend the money for care? Or should they forgo that care and see if they get better on their own? Who is in a better position to make that choice than the patient? One of the reasons why we promote health savings accounts is we want the patient to actually have money. So, if he decides he needs the care and it’s worth the price, he can pay it first. We think that the patient is the ideal person to make a lot of those decisions.

TI: So because of third-party payment we over-consume health care in aggregate. But are there specific medical services that are under-consumed?

JG: I would say for the chronically ill we are way under-consuming drugs. If we treated most chronic illnesses optimally, we would, maybe, double or triple the drugs that chronic patients take. Let’s say the diabetics, the asthmatics, and so forth had a budget that they could manage. Then the providers would try to think of ways to meet the needs of the patients that would include prescribing the right drugs and encouraging the patient to be compliant with drug regimes as part of an overall care plan.

TI: So if we had real prices and consumers making decisions based on those prices, health care providers would behave differently too, right?

JG: Yes. For example, we would have competition to treat the diabetics. You would have clinics and facilities that are set up to meet their special needs.

TI: And the fee schedules that both government programs and insurance companies use are not real prices either, right?

JG: That’s right. That’s a crazy way to pay doctors. If you don’t have a task on your list, they’re not going to do it. They’ll only do what they get paid to do.

TI: Another theme of your book is that we have confused health care and health insurance. How did that happen and why does it matter?

JG: The surprising thing is that otherwise sophisticated people make this mistake. They talk about how Massachusetts health reform, cut the number of uninsured in half. To a lot of even sophisticated people, that means that somehow people are getting more health care, but there really isn’t any evidence that more health care is being delivered in Massachusetts. So there is a very definite confusion over something very important. If the people who were going to community health centers and emergency rooms before are still going to those places for the same care, then we really haven’t changed anything. We’re just moving money around.

The number of people who say they can’t find a doctor or are not getting care is about the same as it was before the reform. Remember, in Massachusetts they didn’t create any more doctors; they didn’t create new doctors, new nurses, or new clinics. They just expanded demand and left supply where it was before. So now in Boston, a new patient has to wait two months to see a doctor. The average for the country as a whole is one week.

TI: And the time we spend waiting for care can be a bigger barrier to access than money. That’s what you refer to in your book as the time-price of health care. Is that right?

JG: Just as people do in Canada, in Britain, and in most European countries, we pay for care in the United States primarily with time and not with money. What does that mean? How long does it take you to get the doctor’s office on a telephone to make an appointment? How many days do you have to wait before you can see the doctor? How long does it take you to get from your home to the doctor’s office? How long do you have to wait in the doctor’s office once you get there? Those are all non-price barriers to care. And those barriers to care, by the way, are more important than the fee the doctor charges.

TI: So is it correct to say that as a society we’re paying twice for health care? Patients pay with time, and then society as a whole still pays the doctor his fee.

Nothing in the Affordable Care Act increases access. I believe that access to care for our most vulnerable populations is going to go down, not up. We’re going to have a huge rationing problem. We’re going to expand the demand, but there’s no change in supply.

JG: Yes, that’s right. But some of that time is just delay. So I use “time” in several different senses in those examples I gave you. Having to wait so many days to see the doctor is just delay. But waiting in a doctor’s office, waiting in an emergency room is a real waste of resources. That’s another sense of time. If the emergency room is basically giving away care for free then the time-price is the market-clearing price. People who get care will be the people willing to wait in the emergency room the longest. One out of every five patients who goes to an emergency room leaves without ever seeing a doctor because they get tired of waiting.

TI: But even if the time-price goes up, won’t lowering the money-price of care increase access for low-income and vulnerable populations?

JG: Nothing in the Affordable Care Act increases access. I believe that access to care for our most vulnerable populations is going to go down, not up. We’re going to have a huge rationing problem. We’re going to expand the demand, but there’s no change in supply. So if you’re in a plan that pays providers less than what Blue Cross pays or what the other private payers are paying, you’ll be less preferred than other patients. And who are those people? They’re the elderly and the disabled on Medicare, low-income people on Medicaid, and if we follow the Massachusetts precedent, they will be low-income people in the newly subsidized plans sold in the health insurance exchanges. Those are the most vulnerable people and they will have the greatest difficulty finding doctors who will see them.

TI: What are the main things that we need to do in order to get a real free market in health care?

JG: Most fundamentally, we need to free the patient and free the doctor. You free the patient by giving him control over the marginal dollars. You free the doctor by allowing him to compete on price and on quality.

TI: Does that mean more health savings accounts, changing the tax code?

JG: It means having more flexible heath savings accounts, so that the market can decide what activities we will self-insure for and what activities will be insured by third parties. Right now, HSA’s have across-the-board deductibles because Congress has designed your health plan. Congress is basically telling you what you’re going to self-insure for and what you’re going to use a third party for, instead of letting individuals and markets make that choice.

TI: You devote a chapter of your book to describing the intellectual state of mind that makes people resist the economic way of thinking about public policy problems. How do you change people’s thinking about that? How do you get them to see that ideas like “There’s no such thing as a free lunch” really matter— even in health care?

JG: It’s very hard. If you’re used to the economic way of thinking, which is the way my book approaches health care, it’s hard to talk to people who resist that way of thinking. There’s a recent report by a liberal group on how to contain costs. Well, none of it has anything to do with giving anybody the right incentives, because they don’t believe in incentives.

TI: But you’ve had some success in getting people to rethink health care issues, right?

JG: When I started out with the idea of a health savings account in the early 1990s, everybody was against the idea. And by everybody, I mean the Chamber of Commerce, the business groups, the health insurance companies, the American Medical Association. They were all against it. And in 10 years we’ve turned just about everybody around. So now, all those organizations are very supportive. All the health insurance companies offer the product. That was a dramatic example of changing minds.


Turning Back the Clock on Human Dignity

by Jennifer A. Marshall

WHAT IF WE KNEW HOW to reduce by half the number of Americans dependent on welfare? What if we could—at the same time—significantly reduce poverty among children and single mothers?

If we had such an effective poverty-fighting formula in place, surely we’d try to expand it, not toss it aside. Yet that’s what the Obama administration has just done with the successful welfare reform of 1996.

On July 12, the Department of Health and Human Services issued a new policy gutting welfare reform by claiming the authority to waive work requirements— the central element in the law’s success.

The move is bad policy, bad governance, and bad politics. Most of all, it’s bad for those that public assistance is supposed to help.

Signed by President Clinton, welfare reform transformed the old Aid to Families with Dependent Children (AFDC) into a program called Temporary Assistance to Needy Families (TANF).

For four decades prior to reform, welfare rolls saw no significant decline and child poverty remained persistently high. Following the historic reforms of 1996, the welfare caseload fell by half. Nearly 3 million Americans achieved independence from government. Poverty among children and single mothers decreased significantly; poverty among black children reached its lowest level in U.S. history, as did the poverty rate for single mothers.

A Bogus Measure of Success

By Robert Rector

ACCORDING TO THE DEPARTMENT of Health and Human Service’s new policy, work requirements in the 1996 welfare reform law will be waived for states that “commit that their proposals will move at least 20 percent more people from welfare to work compared [with] the state’s prior performance.”

That metric, however, is likely to reward states for increasing rather than decreasing welfare dependence. One way of increasing the number of people exiting the program through gaining employment (employment exits) is simply to increase the number of people entering the program. In fact, an increase in employment exits is almost always an indicator of increasing welfare dependence. Before the 1996 welfare reform, a modest number of households would regularly exit the welfare rolls each month while a similar number would enter the rolls. Because of routine turnover, increased caseloads were generally accompanied by higher numbers of employment exits.

Thus, according to the Obama administration’s preferred measure of welfare performance, the pre-reform Aid to Families with Dependent Children was a stunning success; employment exits nearly doubled. By contrast, the post-reform Temporary Assistance for Needy Families program was a failure because employment exits declined.

Mr. Rector is Senior Research Fellow at The Heritage Foundation. This sidebar is adapted from his paper, “Ending Welfare for Work: Bogus Measures of Success,” published by The Heritage Foundation, August 2012.

The main reason for these impressive results was establishing work requirements, which called for able-bodied adults to work or prepare for work.

Congress wrote the law specifically not to allow these tough work requirements to be waived. The fact that HHS Secretary Kathleen Sebelius has claimed that power tramples not only on successful policy, but also on the authority of Congress.

Waiving work requirements also tramples on popular opinion, which long has favored welfare reform. Today, polls continue to show that more than 80 percent of Americans support work requirements for able-bodied adults receiving public assistance. Americans are generous toward neighbors in genuine need, but they want to know that each one is doing what he can to exercise personal responsibility and improve his situation.

Even Barack Obama, as a candidate for president, acknowledged the success of the policy his administration has just undermined. During the 2008 candidates forum at Saddleback Church hosted by Rick Warren, the U.S. senator from Illinois explained that he initially opposed welfare reform but changed his opinion when “it worked better than, I think, a lot of people anticipated.”

“And, you know,” Obama added, “one of the things that I am absolutely convinced of is that we have to work as a centerpiece of any social policy.”

Since the 1960s, government has spent nearly $20 trillion on the War on Poverty. The federal government now runs approximately 80 programs providing aid to the poor. Only three had functioning work requirements, and now that count is down to two. Real reform means not only restoring TANF work requirements but expanding the policy to programs such as food stamps and public housing.

While serving as secretary of Housing and Urban Development, the late Jack Kemp criticized the welfare state for exacerbating poverty by weakening the connection between effort and reward. In a 1990 speech at The Heritage Foundation, Kemp explained that the fundamental problem with welfare policy at the time was that it got human nature wrong—especially about the importance of work to human dignity.

“The poor don’t want paternalism, they want opportunity,” Kemp said. “They don’t want the servitude of welfare, they want to get jobs and private property. They don’t want dependency, they want a new declaration of independence.”

Welfare reform succeeded in helping millions of Americans achieve that goal. This is no time for the Obama administration to point the way back to government dependency.

Ms. Marshall is Director of the DeVos Center for Religion and Civil Society at The Heritage Foundation. This article was first published by McClatchy-Tribune news service.


Getting Government Records: How to File a Successful Freedom of Information Act Request

by Lisette Garcia

THE FREEDOM OF INFORMATION ACT (FOIA) (5 U.S.C. § 552) permits anyone, anywhere to obtain, upon request, an existing federal record used in executive branch business that is not already publicly available on a government website. Agencies must notify requesters within 20 days (excluding weekends and federal holidays) whether they intend to fulfill requests and, if not, why not. Requests can be denied based on several exceptions to compulsory disclosure, discussed below, or because a request lacked information.

Elements of the Request. The rate of success in having FOIA requests promptly fulfilled dramatically increases with the inclusion of several key items:

Who: Identify the department, agency, component, division, bureau, or office most likely to possess the record you seek. If you are unsure, call a FOIA Liaison whose job it is to help you. You can find a directory of FOIA Liaisons at: xls. Addressing a request to a named FOIA staffer helps avoid later claims of lost mail by building accountability should your case reach litigation.

What: If the information is recorded on a preprinted form, cite that nomenclature in your FOIA request. (E.g., a green “return receipt requested” card is officially known as Postal Service Form 3811 or PS 3811.) Also, if what you seek is associated with buzzwords, supply them to the agency so that it can craft an effective search. However, steer clear of terms contained in any of FOIA’s nine exemptions, discussed below, as these can trigger unwarranted denials by inexperienced agency personnel. (See: 5 U.S.C. § 552 (b)(1)-(9).) Also, be sure to specify your format and delivery preferences. To the extent an agency is set up to do so, and doing so is efficient, the agency is required to meet your express wish to receive records electronically or to receive raw data in their native tables.

When: An agency may speed up—or, expedite— disclosure where a “compelling need” is shown. Under FOIA, “compelling need” generally means that, without the requested records, someone risks losing life or limb. Among news gatherers, though, it means an urgency to inform the public about actual or alleged federal government activity. An agency has 10 days to decide whether to expedite a FOIA request and must decide appeals equally expeditiously.

Where: In addition to addressing the correct FOIA contact, be sure to direct your request to as many offices as may hold a copy of the same record. Addressing various agencies simultaneously improves accountability as well as one’s rate of return. Where possible, indicate, too, the particular records systems to be searched. If you are unsure, consult a FOIA Liaison as well as an index of the agency’s files, also available upon request. While bureaucrats cannot purposely ignore what they know about where your document is kept, they are not held liable for ignorance or honest mistakes.

When: A FOIA request must be filled without regard to a requester’s purpose except as that purpose justifies expedited processing, discussed above, or the waiver of associated fees, discussed in the next section. Hence, if an agency ever calls you to ask “What you are truly after?” for the purported objective of helping you reach your target faster, ask the caller to put his or her question to writing. Asking the agency to put a question in writing will scare off most improper attempts to alter a request while preserving evidence of those that persist in the event your dispute reaches litigation.

If you articulate a substantial public interest in the material requested and can show that you are in a position to disseminate the information widely, then you may be able to get search, review, and duplication fees waived.

Finally, beware of substitutes! FOIA does not require creation of a record. So, if an agency offers to produce a substitute in place of delivering what you asked for by name, suspicion is warranted.

Cost. Standard rates for processing a request are set by individual agencies subject to guidelines published by the Office of Management and Budget. Requesters seeking records for commercial purposes must pay for search, review, and duplication. Such fees must be waived or reduced, however, where other conditions are met. For instance, if you articulate a substantial public interest in the material requested and can show that you are in a position to disseminate the information widely, then you may fall into the educational/media requester category. The fact that your school or newspaper turns a profit is not fatal to a request, so long as making money is not the primary aim of the report. When requesting a waiver or reduction of fees, focus on the public interest at stake: Identify how the average citizen needs the requested information in order to take action or otherwise adjust his affairs. The request must also contain a promise to pay in the event the agency declines your fee request. Expressing a threshold amount, e.g. $250, is a sensible way to satisfy the obligatory pledge to pay while avoiding incurring an exorbitant obligation, the nonpayment of which will block all future requests from you to that agency.

Response Time. FOIA contains several safe harbor provisions excusing agency delay. For instance, the clock can stop for up to 10 days while an agency obtains further clarification from you on the scope or cost of your request. An agency may also take up to 10 days to forward requests internally. Prompt resolution of any agency confusion underscores the importance of making direct contact with named FOIA staff early and often. Also, because all agency contact is legally significant, follow each phone call with an e-mail which includes details of what was discussed and agreed to.

Beyond administrative delays, agencies may also face unusual or exceptional circumstances. An unusual circumstance warrants, at most, a 10-day extension and entails distant, voluminous, or shared records. Due process entitles a requester to a written notice of the expected delay that describes the unusual circumstance and sets an estimated date of dispatch. An exceptional circumstance involves extensions longer than 10 days but cannot be based on predictable agency workload unless substantial progress in reducing its FOIA backlog is shown. A requester’s unwillingness to narrow a burdensome request can be treated as an exceptional circumstance for purposes of justifying an agency’s failure to fulfill on time.

Freedom of Information and State Governments

State governments are not subject to the Freedom of Information Act, which is a federal law. However, all 50 states have their own versions of open records laws. For information about the open records laws of particular states, check the website,, maintained by the National Freedom of Information Coalition.

Exemptions. In drafting your request or appealing a deficient production, bear in mind the Freedom of Information Act’s exemptions (5 U.S.C. § 552 (b)) in order to avoid employing pitfall language that can prompt an automatic denial.

An agency has no discretion to disclose and must withhold all documents that are either classified by Executive Order or made confidential by other legislation. An agency has total discretion to withhold information on personnel rules and agency practice; trade secrets or financial information obtained on the promise of confidentiality; legal advice within the agency or internal discussions of policy alternatives not adopted; personnel files not about the requester with marginal impact on the public interest; law enforcement records about a specific proceeding which disclosing would circumvent; records collected in the supervision of financial institutions (but only analysis, not facts); and geological and geophysical information and data, including maps, concerning wells.

Appealing a Withholding. You should review the material produced in response to your FOIA request in order to evaluate whether any withholdings were proper. The agency’s cover letter is called a determination and it must say where to file a challenge and how soon. The determination must also contain the agency’s rationale for refusing your request, even in part. Your challenge is called an administrative appeal and amounts to a letter to the head of the agency complaining about any defects described above. The letter should close with a request that the agency compel appropriate personnel to undertake a new search and issue all responsive documents in a more compliant manner.

Your appeal should be brief, but must contain sufficient evidence to persuade the agency to reverse its initial decision. The ideal appeal contains at least: a copy of the agency’s determination, a copy of your original request, and sample pages from the production representing its most egregious FOIA violations. An agency has 20 days to decide an administrative appeal and may take many more days than that to issue an amended production.

Should You Sue? If on appeal an agency affirms any of its initial withholdings, you can file a lawsuit in the federal court where you live or in Washington, D.C., asking a judge to force the agency to comply with FOIA as regards your request. The complaint can be filed without an attorney but in accordance with court rules, including those respecting format and filing fee. The court decides the dispute anew, without reference to your administrative appeal. If the agency discloses documents in response to the lawsuit, you may be entitled to attorney’s fees, but only if you are an attorney or are represented by one. Additionally, if your record of contact with FOIA staff proves that the agency abused its authority in processing your request, the court may refer the matter to Special Counsel for investigation.

Judicial Watch Can Help You

If your conservative nonprofit public policy group has a worthy Freedom of Information Act request to make, Judicial Watch may be able to help. Through its Open Records Project, Judicial Watch shares its expertise in open records research and litigation. Judicial Watch can provide technical, research, and litigation assistance to groups seeking critical information about government activity. Judicial Watch can help in any step of the process: determining what agencies have the information needed; defining requirements and composing document request strategy; making the request; reviewing information and providing analysis of document production; handling denials, exemptions and the appeal process; managing the court process; getting the information into the hands of the general public and raising media awareness.

For more information, please call (202) 646-5172, or send an e-mail to

Ms. Garcia is a Senior Investigator at Judicial Watch, a nonpartisan, nonprofit watchdog organization that specializes in using open records laws to promote transparency, accountability, and integrity in government. For more information on how to file a Freedom of Information Act request, see Judicial Watch’s Freedom of Information Act and Open Records Handbook available at