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Posted November 23, 2008

Week in Review

The Nation

Will the Safety Net Catch Economy's Casualties?

ALEX NABAUM

By STEVEN GREENHOUSE

 ECONOMISTS rarely agree on anything, but a great many do agree on one unfortunate matter these days: the current economic downturn is likely to develop into the worst recession since the downturn of 1981-82.

The United States is a far different place. Government programs in place then to cushion and counter recessions have been scaled back sharply, raising questions about whether they are up to the task as the economic outlook darkens today.

Unemployment insurance is not as generous now. Yet the unemployment rate is at 6.5 percent and some forecasters say it could top 8 percent next year. It hit 10.8 percent in the early 1980s.

This is also the first severe economic slump since President Bill Clinton overhauled the welfare system and made it tougher to qualify for, and keep receiving, benefits. Many people who lose their jobs now and fall into poverty may not qualify for public assistance. Other programs designed in part to counter hard times — like job training and housing subsidies — have also been cut back.

“Some of the core elements of the social safety net have eroded,” said Jacob Hacker, author of “The Great Risk Shift” and a professor of political science at the University of California at Berkeley.

ALEX NABAUM

“Unemployment insurance has been weak for a long time, but right now it seems to be quite anemic relative to the need,” he said. “The social safety net in general has not been kept up to date with the changing nature of the work force and the increased economic risks that working families are facing.”

With a Democratic president and Congress set to be sworn in this January, many liberal groups are maneuvering to strengthen the nation’s safety net — the web of government programs, including food stamps, welfare, Social Security, Medicare and Medicaid, that are intended to cushion Americans from hardships like layoffs, disability and old age.

Two such groups — the Center for American Progress and the National Employment Law Project — issued a report on Friday making their case for expanding unemployment insurance.

According to the report, tighter rules mean that just 37 percent of unemployed Americans are receiving jobless benefits today, down from 42 percent during the 1981-82 recession and 50 percent during the 1974-75 downturn. Americans today receive a maximum of 39 weeks of unemployment benefits, down from 65 weeks in the 1970s. The average weekly benefit is $293. And low-income workers — a category that tends to include women and those in part-time employment — are one-third as likely to receive unemployment insurance as higher-income workers.

Another liberal group, the Center for Budget Policy and Priorities, said that as states have imposed tougher restrictions on welfare, just 40 percent of very poor families who qualify for public assistance today actually end up receiving it, compared with 80 percent in the recessions of 1981-82 and 1990-91.

Liberal economists say the deterioration of the safety net will not only mean more pain and poverty for millions of families, but a longer recession. They say spending on social programs helps to stabilize the economy and counter the downward tug of recession. But many conservative economists argue that the existing safety net is plenty large, and that in any event, it will be less effective in fighting a downturn characterized by an extraordinary credit crunch.

“Is it the case that automatic stabilizers that are in place will prevent the kind of downturn we’ve seen most recently — I think the answer is no,” said Douglas Holtz-Eakin, who was John McCain’s chief economic adviser during the presidential campaign. Mr. Holtz-Eakin said the current downturn is “an asset-bubble-driven recession,” fueled by declining housing and stock prices. The increased income that automatic stabilizers put into people’s pockets is not an antidote to an economy in which banks are scared to lend, he said.

During the Great Depression, Franklin Delano Roosevelt strived mightily to build a broad and strong safety net that included unemployment insurance and aid for families with dependent children. After Ronald Reagan took office in 1981, Washington started trimming and tightening many social programs. To boost the economy, Mr. Reagan called for smaller government, lower taxes and more self-reliance. The unemployment insurance and welfare programs were trimmed to reduce spending and discourage recipients from dawdling. But President Reagan also expanded the Earned Income Tax Credit, which gives a credit of several thousand dollars to low-income workers.

Bill Clinton presided over a further tightening of welfare, with the federal government limiting the amount of time most recipients can receive benefits and many states imposing strict work requirements. Federal housing subsidies have also been cut by nearly two-thirds since the 1980s, after inflation.

But Brian Riedl, senior federal budget analyst at the conservative Heritage Foundation, said the automatic stabilizing effects of these programs remained strong. “Antipoverty spending is at its highest level in American history,” he said. “It’s topped 3 percent of gross domestic product.”

Economists say that it is sometimes hard to determine whether certain social programs fuel recessions or fight them. As 1.2 million workers have lost their job this year, for instance, many have turned to Medicaid, causing some states to spend more on health care, boosting the economy in the process. At the same time, some cash-strapped states have cut Medicaid, losing federal matching funds and slowing down the economy.

Some see a similar effect with the Earned Income Tax Credit. “The E.I.T.C. is a fantastic wage subsidy program that’s been hugely effective in reducing poverty, but when jobs disappear, the E.I.T.C. doesn’t help you,” said Jared Bernstein of the Economic Policy Institute, a liberal research group. He was one of the economists invited to a meeting of President-elect Barack Obama’s top economic advisers on Nov. 7. “When people lose their jobs, they often stop receiving E.I.T.C., and I fear that the program becomes less countercyclical and more pro-cyclical, meaning it reinforces recessionary forces,” he said.

The president-elect is on record in support of an economic-stimulus package and extending unemployment benefits. But many advocacy groups are churning out reports and position papers urging him to take further steps to enhance jobless and welfare benefits.

Rebecca Blank, a senior fellow at the Brookings Institution, noted that the recession of 2001 hurt factory workers most but had little effect on the low-wage jobs that many women hold.

“But this recession is really hitting those jobs, and the question is what will happen to that group of women. Is there a safety net?” she asked. Ms. Blank complained that low-wage-earning women often failed to qualify for unemployment benefits because many states do not provide such assistance to part-time workers or those who fail to work six quarters in a row.

“The other safety net for this group of workers is the traditional welfare program,” Ms. Blank said. “On that front, the news is not promising at all.”

Copyright 2008 The New York Times Company. Reprinted from the New York Times, Week in Review, of Sunday, November 16, 2008.  

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