Editors' Summary

The brookings panel on Economic Activity held its seventy-seventh conference in Washington, D.C., on March 25 and 26, 2004. This issue of Brookings Papers on Economic Activity includes the papers and discussions presented at the conference. The first paper analyzes the experience of single mothers since the welfare reforms of the mid-1990s. The second paper offers a diagnosis of the persistence of poverty in sub-Saharan Africa and outlines a long-run program of assistance to promote sustained development. The third paper models the relationship between long-run demographic swings and long-run returns to equities. The fourth paper reports on a survey of Americans' opinions on, and knowledge about, economic policy issues and assesses how self-interest, political ideology, and other factors relate to those opinions.

The change in the political climate in the United States during the 1980s placed the nation's welfare system under increasing attack, and after caseloads began to grow rapidly in the early 1990s, recalling an earlier surge in the late 1960s and early 1970s, Democrats as well as Republicans supported reform. In 1996, with the support of President Bill Clinton, Congress passed the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. This legislation replaced the Aid to Families with Dependent Children (AFDC) program with a new program called Temporary Assistance for Needy Families (TANF). Since its inception as part of the Social Security Act in 1935, AFDC had been the federal government's main welfare program, providing assistance to low-income single mothers. TANF continued this assistance but mandated nationwide time limits on welfare receipt and work requirements for recipients—popular features that some states had introduced earlier under federal waivers. At the same time, the new law reduced federal control over welfare policy. Federal matching of state expenditures on AFDC was replaced with fixed block grants, and states were given considerable leeway in how the block grants were used.

The 1996 reform is widely regarded as successful. Welfare participation among single mothers has dropped from 25 percent in 1996 to 9 percent in 2002, and the fraction working has increased from 74 percent to 79 percent. But there is as yet no agreement on what features of the reform deserve the most credit, or on the extent to which its success reflects the extraordinary growth in output and employment that the economy enjoyed for several years after the reforms were passed. In the first article of this issue, Hanming Fang and Michael Keane address these issues, using detailed information on the behavior of a large sample of single mothers and exploiting the significant differences among states and over time in the salient features of welfare policies.

A significant literature on these issues has developed in the eight years since welfare reform was enacted. The authors provide an extensive critical review of this literature, highlighting differences between their own approach and those of previous studies. The aspect of the 1996 reform that has received the greatest attention is the elimination of the entitlement status of welfare, in particular the imposition of time limits on welfare receipt. But a broad range of other factors may also have influenced the welfare and work decisions of single mothers, including other features of the reform itself (such as work requirements), other policy changes (such as the expansion of Medicaid eligibility and the earned income tax credit, or EITC), and the strong macroeconomic environment. Most studies have focused on one or a few of these policy and economic variables and thus might have misattributed the observed improvement in outcomes to the feature or features being examined, when the change was really due to other, omitted factors. The authors discuss at length the pitfalls in the widely used difference-in-differences methodology, which compares behavioral changes in a group subject to a policy change with behavioral changes in other groups not subject to the change. They also note several anomalous or disconcerting results in studies that have used other approaches. Many studies, moreover, do not explain the rise in caseloads before reform, leaving open whether a reversal of unidentified factors responsible for the rise may have contributed to the later...