Analyses of the U.S. welfare system in the tradition of political economy have tended to focus on the maintenance of a pool of low-wage labor. This paper adds another dimension, as it incorporates government work programs into a theory of the functions and nature of the U.S. welfare system. Three dimensions of the welfare system are posited: (a) maintaining a stigma attached to welfare so that people are encouraged to hold low-wage jobs: (b) maintaining welfare payments at levels that do not interfere with the functioning of labor markets; and (c) basing government work programs on principles that are congruent with the logic of the market, i.e., profit criteria. Examples drawn primarily from the 1930s to the 1980s are used to illustrate the theory.