Block Grants

When I read The Coming Crisis of Big Government I gained a measure of hope that there might be some possibility left for averting the crisis of our soon-to-balloon costs for social security and Medicare. One of the central examples in the article relate to the use of block grants to restructure some of the programs.

Ferrara emphasizes the shocking success of the 1996 reforms of the old Aid to Families with Dependent Children (AFDC) welfare program. Based on concepts developed by my long-time friend and Reagan welfare guru, the late Robert Carleson, AFDC was “block granted” back to the states. This means the share of Federal spending on the program was sent back to each state to be used for a new welfare program designed by each state based upon required work for the able bodied.

The key is that the Federal block grant for each state is finite and does not vary depending on how much the state spends. If the state welfare program costs more the state must pay for the extra expense. If the state welfare program costs less then the state keeps the savings.

The required work for the able bodied has been powerful in moving people off the welfare rolls. But even more powerful have been the new incentives for state bureaucrats resulting from the finite block grants. Under the old system, where Federal funds were increased to match whatever the state spent, signing up new welfare recipients at the state level meant bringing more Federal funds to the state. But with the state itself paying for any extra expenses, or keeping any savings, state bureaucrats moved aggressively to get welfare recipients into jobs.

I agree that matching funds methods of financing federal programs only encourages program growth – the states have great incentive to stretch their budgets by putting everything they can think of toward 2 for 1 programs (for every state dollar they spend they have two dollars to spend because of federal matching – at least for 1 to 1 matching programs). The block grant method was apparently useful for welfare, but states are naturally going to balk at the idea of having their budgets limited when their needs feel unlimited.

I also wonder how well block grants will work with other programs such as transportation funding? Here in the Wasatch front we are keenly aware of the need for more funding for roads and transit. Would block grants encourage the state to spend their money on the best solutions, or would they simply shortchange our burgeoning needs?

So here’s the question – do you think that block grants are a widely applicable tool to control the growth of government spending, or do we need to come up with more tools in order to close the lid again on this Pandora’s box?