Now that it's Fall, I am reminded that wintertime is not that far off. I live in a place where winters are nowhere near as bad when I was living in Wisconsin. I remember that one winter in Wisconsin, it reached -30ºF, and that was without wind chill. Without having an adequate enough of a heating system, my guess is that I would not have made it through that winter or any other winter. I would hardly consider myself rich, but at the same time, I have always had access to heating, ventilation, and air conditioning (HVAC) when I needed it. There are some who do not have such access or have a harder time paying for energy during the winter or summer. This is where LIHEAP comes in.
In 1981 under the Reagan Administration, the United States Congress created LIHEAP, the Low-Income Energy Assistance Program. The purpose of LIHEAP is to provide assistance to households that pay a disproportionately high amount in meeting their immediate home energy needs. LIHEAP is currently managed by the Health and Human Services' (HHS) Administration for Children and Families (ACF). In its most recent LIHEAP report to Congress, the ACF pointed out that in 2014, LIHEAP helped 5.7 million families with heating and 673,000 with cooling. There is also the case to be made that LIHEAP helps the most vulnerable. 90 percent of LIHEAP households either have children, disabled individuals, or senior citizens. This suggests not only this directly helps many low-income households, but that it helps those who are disadvantaged.
The economic theory that would support having LIHEAP in the first place is the market failure of a negative externality. The idea here is that on its own, the market fails to provide an adequate output level of affordable energy for people to make it through arduous seasons. The LIHEAP subsidy is supposed to push private demand up to social demand, thereby creating greater social benefit. Given where I lie on the political spectrum, I used to take the opinion of "there isn't a subsidy out there I like." The reason is that the government's attempt to subsidize comes with unintended consequences, and usually makes things worse. In 2014, I came across the first subsidy I did like: the birth control subsidy. At that moment, I realized that it is more prudent to look at subsidies on the individual level instead of assuming a generalization (even if it is true) because an exception might come along. The question here is whether the LIHEAP subsidy falls under the exception of being a helpful subsidy or not.
I started to ask myself this question when I read this policy brief from the Urban Institute entitled "Eliminating LIHEAP would leave poor families in the cold." What makes it difficult to ascertain the impacts is that the ACF has not conducted an evaluation of any kind since 2005. And even that 2005 evaluation was a case study, and not a nation-level evaluation. We do, however, have a study showing that cutting LIHEAP would decrease energy security amongst low-income households by 17 percent (Murray and Mills, 2014), which would indicate that LIHEAP actually helps out those in need. Plus, the Center of Poverty and Social Policy at Columbia University estimates that 200,000 would transition into poverty as a result of eliminating LIHEAP.
There is a concern over fraud rates. A 2010 Government Accountability Office (GAO) report found that the fraud rate for LIHEAP was 9 percent. With a program that cost nearly $3.4 billion for FY2017 (see LIHEAP funding history), that comes out to about $305 million. Urban Institute questions whether the fraud rate is still that high because it asserts that improvements on verification and monitoring have been made in the past seven years (e.g., improved program monitoring data in May 2017). Assuming that these initiatives have decreased fraud, that means fraud is less prevalent of an issue.
So here we have a program that is relatively well-targeted and actually provides the service it promises to provide. Sure it could use some tweaks, but generally, LIHEAP is doing pretty well for itself. Since successfully providing a service is a rarity in the world of public policy, I would consider that enough for government to play a role in subsidizing heating. However, my main issue with LIHEAP is that it does not address why energy costs are growing at a faster rate than wage growth (also see here). The subsidy simply provides a cash transfer to help low-income households with their utility bills. My contention is that such a subsidy could be contributing to higher energy costs. The reason for this concern is looking at how the U.S. government subsidizes college tuition. Federal subsidies are the primary culprit for rising college tuition costs because it's a demand-side subsidy, and that contributes to rising costs. Granted, LIHEAP is nowhere near as large or prevalent as federally subsidized student loans, but it should make one pause.
Even so, we need to ask why energy costs growing this quickly in the first place. This certainly is a discussion for another time and another blog entry, but we need a better focus on bringing energy efficiency to low-income housing so their energy bills can go down. If we cannot address this issue, LIHEAP is at best a temporary bandage over an increasingly large problem. By finding ways to provide energy at a lower cost can we solve the main issue LIHEAP is trying to mitigate.
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