Spending on Social Welfare Programs in Rich and Poor States. Final Report.. Chapter IV: A Closer Look at Poor States

07/01/2004

The econometric models support the claim that state fiscal capacity exerts positive effects on total spending for social programs as well as spending for major components of social welfare budgets, such as cash assistance, medical assistance, and other public welfare programs. However, the models raise two sets of new questions:

  • Why do the significance and weights of the variables vary across different types of social welfare spending? Fiscal capacity is most strongly related to spending on non-health social services, while its relationship to spending on public hospitals is insignificant. Population density is negatively related to spending on health-related functions but directly related to spending on cash assistance. Unemployment pushes up cash assistance and Medicaid spending but not non-health social services. These differences do not undermine the basic model, but the underlying general theory of state spending does not account for them.
  • Why do the models find large, unexplained differences among states in their propensities to spend on different social welfare functions? Although the linear effects of fiscal capacity, unemployment, federal grants, and population density account for a major part of state variation in spending on social programs, another large part of the variance is "explained" by state effects. These state effects are average spending levels for individual states after controlling for the effects of variables in the model. These estimated state effects vary greatly among states. Thus, they represent long-run differences in state spending levels that might be attributable to factors not included in the model, such as differences in political systems, other indicators of social needs, or even nonlinear effects of included variables such as fiscal capacity.

The econometric models, therefore, fail to fully explain important differences across program areas and states, though the models narrow and focus the explanatory problems.

The remainder of this analysis explores these unexplained differences among states and program areas in three ways. First, we examine the estimated state effects from the econometric models among the six case study states, all of which have high social needs and low fiscal-capacity. How do these state effects relate to each other? Do we find clusters of states with similar spending patterns?

Second, after we identify state differences in spending patterns based on the econometric models, we determine whether those findings are consistent with changes in state spending after 2000, the last year in the Census data, in our six case study states. These states, along with nearly all states in the U.S., experienced fiscal difficulties after the economic downturn of 2001 and 2002. And we consider whether our statistical findings are consistent with or depart from the spending decisions these poor states made in the years after 2000, including the fiscal crises. Although we have no comparable Census data for these years, we can examine changes in roughly comparable spending based on administrative data on program expenditures and on reports of decisions from interviews and documents obtained during site visits in middle and late 2003.

Third, we use the site visits and especially the discussions with state officials to understand how spending choices are made in different program areas and what factors influence those choices. We want to understand what decision-making processes might generate the statistical relationships found in the econometric models, how and whether these processes vary across program areas, and what state characteristics affect those processes. Succinctly stated, we found that spending decisions in different program areas are made in different ways; that these different modes of decision-making respond to different state characteristics; and that these differences in processes and influences might help explain why certain variables are important, or unimportant, in the econometric analyses and why poor states vary in their spending patterns. These findings might also help us understand some of the trends in state spending on social programs noted in subsection IIIA. And, they hold important implications for the broader questions posed in this study about federal influence over state spending, packages of social programs, and effects of economic cycles.

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