ChiefExecutive.net

Welfare Checks to Paychecks

October 1 1999 by Sally C.Pipes

Welfare reform,” President Clinton announced in January 1997, just before meeting with a group of CEOs, “if it is going to work, will need the leadership of the private sector in turning welfare checks into paychecks.” Well, it worked. Three years later, nearly two million people have left welfare. “We’ve changed the culture of non-work,” says Fred Grandy, CEO of Goodwill Industries. “People who were on welfare before have moved into jobs and will probably stay there.”

Thus far, they’re staying power is holding strong. The retail giant The TJX Cos. made a commitment to employ 5,000 former welfare recipients by 2000. Six months ahead of schedule, it has hired more than 10,000 former welfare recipients. Says CEO Bernard Cammarata, “TJX is a stronger company for its participation in the program.” The Welfare to Work Partnership, founded by such companies as Sprint and Burger King, estimates that its 4,500 member companies hired more than 135,000 people off welfare rolls last year. Three out of four executives report that welfare recipients are “good, productive employees.”

Despite these triumphs, there is a recognition that more needs to be done. President Clinton, announcing his New Markets Initiative, again called on the private sector to help turn poverty into prosperity during his July poverty tour. Yet the very success of the Welfare to Work program may point to where the New Market Initiative will come up short.

Clinton‘s New Market Initiative has three legislative prongs. The New Market Venture Capital Proposal would have the government guarantee loans for twice the amount of private money invested in designated areas for small- and medium-sized businesses. For larger projects, the President wants Congress to create an America‘s Private Investment Companies (APIC) for projects requiring up to $300 million in investment. The third prong is a 25 percent tax break for investments into community development banks and other favored investment projects. Unlike welfare-to-work programs that invested in individuals, the New Market Initiative is a return to place-based subsidy.

A strange mix of ideas seems to animate Clinton‘s latest domestic policy push: that capital markets fail to allocate capital efficiently; that America was slow to use government funds to jump-start the stalled economies of many urban and rural areas; and that investment in poor areas in the U.S. is tantamount to investing in Third World countries. “Basically what I’ve asked the Congress to do,” the President said in Los Angeles, “is to give businesspeople the same incentive to invest in America they get to invest today in poor communities in Latin America, Asia, Africa, or the Caribbean.”

Each of these premises is false. But let’s dwell on the second. The federal government has dumped plenty of money into distressed areas. The problem, as Harvard Economist Edward L. Glaeser recently pointed out in The Wall Street Journal, is that place-based programs, as opposed to person-based programs, mostly fail. The reason is simple: They give people an incentive to actually stay in poor areas. Far from correcting market failure, public subsidy distorts investment, by substituting bureaucratic and political decision-making for economic decision making.

To their credit, it’s not clear the private sector has climbed aboard Clinton‘s investment bandwagon. While he was sure to have CEOs at each stop, most CEOs still favor old-style education, people-based initiatives.

Consider Cisco System’s Networking Academies. Started in 1997, Cisco now has more than 2,500 academies. They are set up in high schools and junior colleges to train students to design, build, and maintain computer networks. Says Chairman John Morgridge, “The Cisco Networking Academies program is helping not only to increase the size of the available IT workforce, which is a major concern today to industries in all communities, but also to empower students especially economically disadvantaged students.” Yet these are job training-as relevant in suburbia as in the inner city-not poverty programs.

Bell South CEO Duane Ackerman traveled with the President to Hazard, KY, and made a commitment to assist community colleges in developing a skills-based curriculum and placing 100 of the program’s graduates. Said Ackerman, “The Partnership lines up with our efforts of assuring that we have a highly trained workforce.”

This people focus is appropriate. An individual’s best cure for poverty is to acquire skills and then move to a place where the skills are in demand. This was an established sociological pattern before government programs paid people to stay put in places businesses had long since fled. That’s what turned boomtowns into ghost towns. And that’s why Clinton‘s international comparison is so wrongheaded: There are no border guards keeping anybody on an Indian reservation, in an inner city, or in a rural town whose extraction-based industry has either been mined out or regulated out of existence.