Inequality and Competition in State Redistributive Systems: Evidence From Welfare and Health

• Author: NakHyeok Choi,Milena I. Neshkova
• Published date: 01 July 2019
• Date: 01 July 2019
• DOI: 10.1177/0275074018760305
• Subject Matter: Articles

https://doi.org/10.1177/0275074018760305

American Review of Public Administration

2019, Vol. 49(5) 554 –571

© The Author(s) 2018

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DOI: 10.1177/0275074018760305

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Article

Introduction

When determining their redistributive budgets, state politi-

cians face competing incentives. On one hand, they are

responsible for addressing the social needs of their states by

providing public assistance to people in need. Ultimately,

redistributive policies aim to decrease economic inequality

by taking from the haves and giving to the have-nots. On the

other hand, states seek to meet the needs of low-income pop-

ulations without becoming a “welfare magnet” (Peterson,

1995) that attracts poor people from neighboring states. This

article investigates these competing incentives and how they

affect redistributive programs’ accessibility and spending

patterns across U.S. states.

Prior research has examined whether state redistributive

systems compete in a “race to the bottom” fashion but pro-

duced mixed results. Some studies have reported strong evi-

dence of negative interstate competition (e.g., Bailey &

Rom, 2004; Peterson, 1995; Rom, Peterson, & Scheve,

1998). Others (e.g., Berry, Fording, & Hanson, 2003) have

registered a statistically significant but not substantial effect

of peers’ welfare policies. A third group of scholars (e.g.,

Volden, 2002) has argued that states actually intend to

increase benefits but hesitate to do so before their neighbors

do. Moreover, most studies have focused on the former cash

assistance program, the Aid to Families With Dependent

Children (AFDC), which was abolished in 1996. Our study

uses data on Temporary Assistance for Needy Families

(TANF) programs, which replaced AFDC. Following Bailey

and Rom (2004), we extend the analysis beyond welfare and

compare the effects with another redistributive program

under state control—Medicaid—which provides health care

services to low-income individuals.

Specifically, our study seeks to address two interrelated

research questions. First, it examines if a state’s redistribu-

tive policies reflect social conditions in this state. In other

words, when inequality in a state widens, do redistributive

expenditures grow as well? Are state politicians responsive

to changes in the income level of the median voter, as pre-

dicted by the median voter theorem? The extant literature

reports inconclusive findings on the relationship between

economic inequality and redistributive spending (Chernick

& Reschovsky, 2003; de Mello & Tiongson, 2006; Freitas,

2012; Karabarbounis, 2011; Mohl & Pamp, 2009; Persson &

Tabellini, 1994; Rodrigìuez, 1999). One group of scholars

finds support for the classic model proposed by Meltzer and

760305ARPXXX10.1177/0275074018760305The American Review of Public AdministrationChoi and Neshkova

research-article2018

1Seoul National University, South Korea

2Florida International University, Miami, USA

Corresponding Author:

Milena I. Neshkova, Steven J. Green School of International and Public

Affairs, Florida International University, 11200 8th Street, Campus Park,

PCA 350B, Miami, FL 33199, USA.

Email: mneshkov@fiu.edu

Inequality and Competition in State

Redistributive Systems: Evidence From

Welfare and Health

NakHyeok Choi1 and Milena I. Neshkova2

Abstract

When determining their redistributive budgets, states must strike a subtle balance—to provide for their needy residents

without becoming a “welfare magnet” and attracting poor individuals from neighboring states. We examine the competing

incentives that state politicians face in federal systems and their effects on program accessibility and redistributive spending

across U.S. states between 2005 and 2011. Comparing two redistributive programs under state control—Medicaid and

Temporary Assistance for Needy Families (TANF)—we find strong evidence of interstate competition in the case of cash

assistance programs, but less evidence in the case of health care. Yet our data show that states do not alter their policies

in response to rising inequality, that is, when the median voter becomes poorer than the average voter. Moreover, the

Great Recession had a greater impact on TANF than Medicaid. We attribute these differential effects to different funding

mechanisms used by the federal government to finance the two state-administered programs.

Keywords

race to the bottom, median voter, TANF, medicaid, great recession

Choi and Neshkova 555

Richard (1981), which relates rising inequality to greater

redistribution. Another group of scholars provides strong

evidence for the opposite effect: widening inequality drives

government redistribution down. Second, we test Peterson’s

(1995) “race to the bottom” thesis and ask if a state’s redis-

tributive policies compete with the policies of neighboring

states in terms of eligibility requirements for recipients and

the proportion of state budget devoted to redistribution.

To answer these questions, we gather data on state

Medicaid and TANF programs between 2005 and 2011.

These data also allow us to explore the effect of the 2008

financial crisis on redistributive expenditures. The Great

Recession presents an intriguing case. In times of strained

public budgets, redistributive spending seems most vulnera-

ble. Conversely, these are conditions in which poverty and

inequality are likely to rise along with demand for public

assistance. And indeed, in response to the economic reces-

sion of 2008, the federal government implemented various

policy initiatives, chief among which were the American

Recovery and Reinvestment Act (ARRA) of 2009 and the

Patient Protection and Affordable Care Act (ACA) of 2010.

Under ARRA, the federal and state governments increased

the funding for vulnerable social groups; respectively, the

ACA considerably expanded the coverage of Medicaid. Yet,

did the states respond in a similar manner by increasing the

amount of funding, given that they are subject of stringent

balanced budget requirements and greater competitive pres-

sures compared with the national government?

Our results show that states do compete, albeit some more

than others, and generally attempt to maintain redistributive

programs that are less generous than those in neighboring

states. When states set eligibility rules, redistributive pro-

grams can be designed to ease or to limit access to benefits.

To understand if interstate competition applies to program

access, we analyze the eligibility rules for welfare across

states and find that states behave in a manner consistent with

the “race to the bottom” hypothesis (Peterson, 1995) for both

TANF and Medicaid. The results of our regression analysis

also provide support for the existence of interstate competi-

tion between states’ redistributive systems, yet the competi-

tion is more pronounced in welfare programs than in health

programs. In regard to state responsiveness to social condi-

tions, we find that policy makers do not alter redistributive

policies when the median voter becomes poorer than the

average voter (indicating rising inequality). Our analysis

shows that the coefficient of inequality has a negative sign,

suggesting an inverse relationship with redistributive spend-

ing, but the effect fails to achieve statistical significance.

The article contributes to the literature by examining and

comparing two popular theories—the median voter and the

race to the bottom—and testing whether they can explain

why some states opt for more generous redistributive poli-

cies than others. Prior studies have only examined these two

hypotheses separately. This approach allows us to test the

two theories of federalism, advanced by Peterson (1995):

functional federalism versus legislative federalism. We study

in detail the eligibility rules of Medicaid and TANF, and

assess how they relate to the amount of spending devoted to

each program. Furthermore, we analyze the link between

inequality and redistributive spending in a period of eco-

nomic downturn—when redistributive expenditures are

highly vulnerable. We also compare the effects of devolution

across two redistributive programs, Medicaid and TANF,

which allows us to gauge the respective effects of different

funding systems: entitlements versus block grants.

This article proceeds as follows. The next section pro-

vides the theoretical framework and reviews prior research

used to devise the hypotheses. We then describe our data and

the results of both the eligibility rules analysis and regression

analysis. The last section discusses the implications of our

findings and outlines directions for future research.

Redistribution and American

Federalism

Functional and Legislative Theories of Federalism

Federalism refers to the division of power between the fed-

eral government and the states. Some of these powers are

specified in the U.S. Constitution, particularly in the Tenth

Amendment, but many are not. Although the Supremacy

Clause implies a hierarchical relationship between the levels

of government, in one popular metaphor, federalism in the

United States is characterized as a “marble cake” rather than

a “layered cake” (Grodzins, 1966). Indeed, state and federal

policy-making responsibilities are not neatly distinguished;

rather, they are intertwined, subject to judicial interpretation,

and constantly evolving. In many policy areas, the provision

of goods and services involves various levels of government

that can, in turn, work in a cooperative or competitive way.

In this sense, policies at the state level must strike a fine bal-

ance between multiple factors, including the needs of state

residents for particular goods and services, the level of fed-

eral supply/funding for these goods and services, the policies

of neighboring states, and the needs of politicians making

those policies.

Peterson (1995) advances two theories to explain the divi-

sion of power between the federal government and the state

governments: functional theory and legislative theory.

According to functional theory of federalism, each level of

government focuses on the areas in which it is most compe-

tent and can handle more efficiently. Peterson distinguishes

between two broad types of programs: developmental and

redistributive.

Developmental programs provide the physical and social

infrastructure necessary to facilitate a country’s economic

growth. The physical infrastructure includes roads, mass transit

systems, sanitation systems, public parks, and a vast array of

other basic utilities. The social infrastructure includes institutions