Spending on Social Welfare Programs in Rich and Poor States. Final Report.. 5. Conclusions from Econometric Analysis

07/01/2004

i) Effects of Fiscal Capacity

Although per capita income generally had the expected positive effect on spending, notable differences occurred between rich and poor states. When we analyzed the sample separately by quartile, we found the income effects on cash assistance, non-health social services, and public hospitals much more consistently larger and statistically significant for the rich states than for the poorer states. On the other hand, the income effects on Medicaid were larger and more positive for the poorer states than for the richer states. This finding suggests that when personal income rises in the richer states, the states are more likely to increase social welfare spending across the board, and when income rises in the poorer states, spending is likely to occur largely on Medicaid.

ii) Effects of Federal Grants

Although federal grants largely increased state and local spending on social welfare, the effects on federal grants were hardly noticeable for the poorest states (Quartile 4), except for a positive effect on Medicaid. The grant effects were most apparent on payments to Medicaid, suggesting the importance of the Medicaid matching funds.

iii) Effects of Need Variables, Including Unemployment

Estimating a stable needs function that would predict well state and local spending proved impossible. That poverty seemed negatively correlated with spending in a number of spending categories was puzzling, particularly for the richest states. Although the sign on the per capita unemployment was much more likely to be positive than the sign on the poverty variable, the statistically significant positive unemployment effects on spending seemed generally confined to the richer states. The strongest positive effects of unemployment occurred on cash assistance spending. This result might constitute a kind of caseload effect, but it fails to occur in Quartile 4 for the poorest states. The effects of population density on social welfare spending were generally mixed, but we estimated a number of coefficients to be statistically significant.

The poorer states seem to have less protection against adverse unemployment effects, and their needs are more likely to go unmet in a downturn. When we more closely evaluated the effect of state unemployment on spending using the state unemployment rate, we found that cash assistance and Medicaid spending were positively related to the unemployment rate with no income control, particularly for the richer states. However, for non-health social services, the coefficient on unemployment was consistently negative and statistically significant across quartiles and largely statistically insignificant for public hospital spending. We conclude that the total effect of a rise in unemployment is likely to be a cutback in spending for non-health social services across all states with increases in spending for cash assistance and Medicaid in richer states.

iv) State Effects

Stable differences among states in their spending patterns persisted even after controlling for the linear effects of fiscal capacity, need, federal grant, and other independent variables. These propensities to spend (i.e., estimated state effects) suggested that state fiscal capacity was more strongly related to non-health expenditures than to health-related expenditures. They also suggested that the basic structure of expenditures was different in rich and poor states. In wealthier states, spending on each social welfare function was more likely to be positively related or largely independent of spending on other social welfare functions. In the poorest states, however, spending on each social welfare function, such as Medicaid, was more likely to be negatively related to spending on other functions, such as cash assistance. These negative relationships between expenditures by poor states result in some interesting differences among the states with respect to their spending patterns, one difference being the regional split between western and southern states in their relative emphasis on cash assistance and Medicaid. This is discussed further in the next section.

In sum, the multivariate econometric analyses suggested the following:

  • Unemployment pushed up spending on cash assistance and Medicaid but not on non-health service spending.
  • Growth in state per capita incomes enhanced spending on Medicaid and non-health social services but not necessarily on cash assistance.
  • Rural states spent less of their money on cash assistance programs and more on health and non-health social services.
  • States were especially responsive to federal grants for Medicaid.

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