Holes In The Safety Net: Welfare During The Recession

Yesterday I wrote about the landmark 1996 welfare reform and its impact over the past 15 years. The reform instituted work requirements and time limits on welfare receipt and changed the way the program was administered. While the new model (TANF) led to some early successes, these have been wiped away by the economic downturn and, perhaps more troubling, the program has proven ill-equipped to buffer families from the harsh impact of the recession.

TANF has responded weakly to the increased need brought on by the recession. From the start of the recession in 2007 through 2010, the national unemployment rate increased by 88% but TANF caseloads grew only 14%. Food stamps (SNAP) caseloads, in comparison, increased 60% over roughly the same time period. Of course, not all unemployed people need the cash assistance TANF offers – they may have their own savings to draw on and/or be receiving unemployment benefits. But in one in four states, TANF caseloads have actually decreased since the recession began, a counterintuitive and harmful trend.

Why hasn’t TANF played a greater role in helping people weather the recession? The authors of a new report from the Urban Institute suggest that the ’96 reform may have a lot to do with it. Here’s how:

  1. Welfare reform made it much harder to get benefits. Meeting work requirements is difficult when there are no jobs to be had, and some families may have already exhausted their lifetime benefits eligibility of five years.
  2. Welfare reform changed the funding structure of the program to a fixed block grant whose real value (adjusted for inflation) has declined 28% in the past fifteen years. Because federal TANF funding does not change from year to year in response to need or economic conditions,** benefit levels are low and caseloads must be limited.
  3. Welfare reform gave states significant freedom in determining how to administer the program and set eligibility requirements, and individual states have exercised this discretion very differently. For example, the share of families living below the poverty line who receive TANF ranges from 8% in Texas to 80% in California. During the recession, some states have significantly increased TANF coverage while others have cut their caseloads.
  4. Welfare reform gave states greater flexibility to spend TANF money on items other than cash assistance, such as job development, childcare, and other poverty-reduction measures. While these measures can help create and support jobs, they do not offer immediate assistance to families in crisis. Currently only 39% of TANF funding is spent on direct cash assistance, compared to 73% in 1997.

While the intent of the ’96 welfare reform – to encourage employment and reduce dependence on government assistance – may have worked well during the strong economy of the late 90s, it reduced the ability of the program to provide a robust response in times of economic crisis. How might Congress make welfare a better tool for helping people weather future recessions?

  • Allow welfare recipients the flexibility to participate in job training and education instead of work when jobs aren’t available.
  • Expand TANF funding in times of need and increase funding each year to keep pace with inflation.
  • Provide increased oversight of state welfare policies to ensure states aren’t making harsh cuts when individuals need welfare the most.

What Role is Welfare Playing in this Period of High Unemployment?
Urban Institute // Sheila R. Zedlewski, Pamela J. Loprest, Erika Huber // August 17, 2011

“A safety net built around work – when there is no work”, The Hill
MDRC // Gordon Berlin // August 22, 2011

**While the stimulus created a $5 billion TANF emergency fund, it was exhausted within a year and has not been renewed.

A State’s Guide To Surviving The Recession

Why have some states, like Texas and North Dakota, weathered the recession much better than others, like Arizona and Florida? According to new report from Goldman Sachs (not available online but summarized here and here), three key factors protected certain states from the worst of the recession:

  • energy resources or industries, particularly oil and natural gas
  • technology and high-end professional industries
  • fewer subprime mortgages during the housing bubble

These three factors explain nearly three-fourths of the difference in job performance among states since the recession began.

What didn’t matter? States’ tax and spending policies. Goldman’s research found that the  size of a state’s spending and its income and property tax rates had no relationship with that state’s job picture. Whether other government activities, like regulatory structures or investment in job development programs matter wasn’t covered in any descriptions of the report I read.

These findings should give pause to those who argue that tax and spending policies, in and of themselves, are responsible for recent job trends at the state level. Two recent examples of this line of thinking: (1) the Rick Perry campaign’s claim that miracle job growth in Texas is due in part to tax cuts and spending reductions (2) the Heritage Foundation’s suggestion that poor job growth Illinois is due to its plan to increase tax rates. The Goldman report suggests that focusing on strengthening the housing and mortgage markets and cultivating key industries may be more valuable for states than tinkering with taxes and spending.

Welfare Reform At 15

Monday marked the fifteenth anniversary of the landmark 1996 welfare reform, passed with support from both the Republican “Contract with America” Congress and President Bill Clinton. Experts and journalists have been weighing in this week on the reform’s successes and failures, particularly during the current recession.

The basic political belief driving the ’96 reform was that giving low-income people money is counterproductive because it encourages dependence on the government and reduces recipients’ incentives to work. The solution? Require welfare recipients to work (or participate in job training/job development) and place limits on how long they can collect benefits. Just as important as the reform’s stricter requirements for welfare receipt were its changes to the structure of the program. While the previous program, AFDC, was an open-ended entitlement with no funding cap, its replacement, TANF, receives an annual block grant of $16.6 billion in federal funding, an amount that hasn’t changed in 15 years. The ’96 reform also gave states more flexibility in how they administer the program.

Impact of the Reform

TANF has indisputably succeeded at one of its goals: cutting the welfare rolls. Welfare caseloads have declined 60% since 1996, even though the number of families in poverty has been increasing since 2000. While conservatives may laud the reduction in welfare cases, it doesn’t mean that fewer people are poor, just that fewer of them are accessing benefits. In 1996, 68% of families living in poverty were receiving welfare, while in 2009, the figure was just 27%.

Expert opinion on the success of welfare reform in actually reducing poverty is mixed: most agree there was a significant impact in the first few years but many argue that these early gains were almost entirely undone in the past decade.

Ron Haskins, an architect of the legislation now at the Brookings Institution claims it has “been quite successful.” He points to increased employment among women with low-education levels and reductions in child poverty in the first five years after the reform. But many claim these early gains were a product of the booming economy of the late ‘90s more than welfare reform. As LaDonna Pavetti at the Center for Budget and Policy Priorities shows in the graph below, the employment gains among women have steadily disappeared since 2000.

On the poverty front, the percentages of children (20.7%) and families (12.5%) living in poverty in 2009 were almost exactly the same as in 1996 (20.5% and 12.2% respectively). The rates were, however, lower before the current recession began. In 2007 they were 18.0% for children and 10.8% for families, better than in 1996 but not as good as 2000.

The Heritage Foundation, who played a significant ideological role in shaping the ’96 legislation, offers an interesting take on the reform’s success. They claim the spirit of the reform – discouraging dependency and encouraging work – is no longer being implemented and that’s why it hasn’t worked, though they don’t offer much concrete proof of this perspective.

To me, the evidence suggests that during the strong economy of the late 1990s, stricter eligibility requirements and more flexibility in program administration helped encourage some poor people to work and lifted some families out of poverty. But a good part of these gains were undone when the economy slowed and jobs became scarcer in the 2000s. And when the economy collapsed in late 2007, not only were previous gains lost, but the new welfare model was ill-equipped to help families who were struggling in the recession.

I’ll have a post tomorrow on this last point, exploring how welfare has (or hasn’t) worked during the current recession.

TANF at 15: A Weak Safety Net Getting Weaker
TANF at 15, Part I: How Well Does It Provide Income Support for Poor Families?
TANF at 15, Part II:  How Have States Spent Their TANF Dollars?
Center on Budget and Policy Priorities // LaDonna Pavetti // August 19 – 24, 2011

The 15-Year Anniversary of Welfare Reform (video)
Brookings Institution // Ron Haskins // August 22, 2011

The Economic Misery Continues in 2011

Economic think tank the Peterson Institute tracks a measure they call the “augmented misery index” that combines inflation, unemployment, and housing prices to provide a sense of just how awful our economy is doing. A higher score on the index indicates high inflation, high unemployment, and low housing prices.

Source: Peterson Institute, 2011.

Last week they released a revised score for the first six months of this year and it wasn’t pretty. The economy in the first half of 2011 wasn’t quite as bad as during the worst of the recession in 2008 and 2009, but it was worse than it’s been since the mid-2009. And things have only declined since the end of June – the debt downgrade, stock market turmoil, and little good news on jobs.

The authors offer predictions for the rest of 2011: lower inflation, but continued slow economic growth and thus little reduction in the unemployment rate. The augmented misery index will drop but nowhere near pre-Recession levels. All of this does not, they conclude, look good for President Obama’s reelection prospects. No president since FDR has been reelected when unemployment was over 7.2% (it averaged 9.0% in the first half of 2011).

What Does the Augmented Misery Index Say about President Obama’s Election Prospects?
Peterson Institute // Gary Clyde Hufbauer & Julia Muir // August 16th, 2011

Infographics: Visualizing The Deficit & Proposed Solutions

Two cool debt ceiling/deficit-related infographics caught my eye today.

The first, by the Center for American Progress, shows the percentage of savings that would come from tax increases under various proposals to address the deficit, including those offered by Obama, the Gang of Six, and the Simpson-Bowles Commission. It backs up the assertion of Paul Krugman and other commentators that Obama has already given a lot to anti-tax Republicans and what he is now offering is actually right-of-center.

The second infographic, from this weekend’s NY Times, shows how our two most recent presidents contributed to the deficit. Policy changes under Bush cost $5.07 trillion while those during Obama’s tenure added $1.44 trillion (projected over ten years). To be fair, Obama’s term isn’t over yet and so far he has increased spending at roughly the same rate as Bush: on average he has added $580 billion in spending for each year of his term, compared to $630 billion a year under Bush. Much of Obama’s new spending, however, was in response to the economic crisis and I think it’s clear that he doesn’t plan to continue increasing spending at the rate we saw during his first two years in office.

Source: The New York Times, July 24, 2011

African Americans Face Higher Unemployment, But It’s Not Unique To The Recession

The current unemployment rate among African Americans, 16.1%, is twice that of whites, 7.9%. Even when you control for differences in educational attainment, gender, and age between the two groups, rates are significantly higher among blacks. Unemployment among African Americans with a college degree? 1.8 times the rate among whites with the same level of education. Among African American women? 1.9 times that of white women. You get the (depressing) picture…

This troubling 2:1 ratio isn’t unique to the Recession. According to a new report from the Center for American Progress (CAP), “The black unemployment rate tends to be about double that of whites, regardless of the economic climate.” The unemployment rate when the Recession was just beginning at the end of 2007, for example, was 8.4% among African Americans, 2.1 times the rate among whites (4.1%).

Source: Center for American Progress, "The Black and White Labor Gap in America," 2011.

While the Recession has forced a greater share of African Americans into unemployment (an increase of 8 percentage points versus 4 for whites), the size of the overall disparity has remained the same. Black and white unemployment rates are both about double what they were when the Recession started: the current rate among African Americans is 1.92 times what it was at the end of 2007; for whites the ratio is 1.98.

The CAP report provides some evidence that African Americans may be experiencing the phenomenon known as “first fired, last hired” that has been seen in other recessions. White unemployment rates have dropped slightly (by 0.4 percentage points) since the recovery officially began in mid-2009, while black unemployment has continued to grow (up 1.3 percentage points).

While all of this data is disturbing, one figure in particular caught my eye. The latest national unemployment number – 9.2%  that has people freaking out? That was the exact unemployment rate among African American men in 2007, before the Recession began.

The Black and White Labor Gap in America: Why African Americans Struggle to Find Jobs and Remain Employed Compared to Whites
Center for American Progress // Christian E. Weller, Jaryn Fields // July 25, 2011

(Note: I didn’t discuss the unemployment rates for other racial or ethnic groups because the CAP report focuses on blacks and whites. In case you’re curious, the current rate among Asians is 6.8% and among Hispanics of all racial backgrounds is 11.5% (these are the only two other racial/ethnic groups BLS reports separate statistics for).)

What Does Poverty in America Really Look Like?

What does it mean to be poor in America? Living on the street and eating meals at a soup kitchen? Or in a run-down house or apartment with little furniture inside? The poverty line for 2011 – $22,000 for a family of four or $11,000 for a single person – doesn’t sound like much. But a new Heritage Foundation report on what conditions in low-income households actually look like might surprise you:

  • 43% of low-income households own their own home
  • 73% own a car
  • 98-100% have a fridge, television, stove and oven
  • 78% have air conditioning

In addition, low-income families aren’t that far behind the rest of America in terms of owning non-essential electronics like stereos, computers, DVD players, and even video game systems. Looking at this graph and knowing that one-fourth of Americans have no emergency savings sort of makes you question where everyone’s priorities lie.

But quality of life is about a lot more than whether you have a coffeemaker or dishwasher in your house. Heritage’s purpose with all of this is to call into question our definition of poverty by demonstrating that low-income families in the U.S. are living much better lives, in some ways, than most people in the rest of the world and throughout U.S. history. Extreme material deprivation is no longer very common in the U.S., which is something to celebrate. Instead of taking this to mean that poverty isn’t a problem anymore, we should recognize that our current challenges are less visible and harder to fix, but no less important. What poverty in America really looks like is poor health outcomes, lower life expectancy, reduced educational opportunities, higher rates of crime victimization, and a host of other challenges. In other words, there’s still plenty to be concerned about.

Furthermore, even though the vast majority of low-income families in America aren’t homeless or starving, the number that are is not insignificant. The data Heritage cites in its report show 1 in 68 poor people are homeless on any given night and 6% report instances in the previous 4 months when there wasn’t enough food to eat in their household (more recent USDA statistics show slightly higher rates). In a country with a GDP of $47,000 per capita, which puts us on the worldwide top ten list, the fact that this kind of stuff still exists at all, no matter how rare, is depressing.

Air Conditioning, Cable TV, and an Xbox: What is Poverty in the United States Today?
Heritage Foundation // Robert Rector and Rachel Sheffield // July 18, 2011

How Poor Are America’s Poor? Examining the “Plague” of Poverty in America
Heritage Foundation // Robert Rector // August 27, 2007

Clean Economy Employs 2.7 Million Workers, More Than Fossil Fuels or Biotech

Today, the Brookings Institution released a major report on the clean economy, which now provides 2% of all American jobs, more than either the fossil fuel or biotech industries. The clean sector, as the authors define it, spans numerous industries including manufacturing, agriculture, energy, and transportation, and includes all activities, “that produce goods and services with an environmental benefit.”

The Brookings project is one of the first to provide comprehensive, detailed data on the number, location, and type of green jobs available nationwide and to allow for comparisons across regions and localities. I’ll have a post later on where green jobs are located, but for now I want to focus on some highlights from the report about the size and scope of the clean economy.

(1) While clean energy gets the most hype, the jobs are really found in sectors that have been around for a while – waste management/recycling, public transit, and conservation.

The clean economy involves over 40,000 companies engaged in a diversity of activities and spread across sectors and industries, as you can see in the charts above and below. The largest share of green jobs are in fields that have been around for a while – waste management (14% of jobs), public transit (13%), and conservation (12%). Renewable energy, which gets much of the press, accounts for only 5% of the clean economy.

(2) The clean economy is growing, but slowly. Young firms and sectors are experiencing the strongest growth.

The clean economy has grown over the last decade: one-fifth of the 2.7 million green jobs in existence today were created since 2003. From 2003 to 2010, the sector grew at an annual rate of 3.4%, slightly lower than the 4.2% growth of the economy as a whole. But unlike the rest of the economy, the clean sector continued to see strong growth during the Recession, likely due to clean energy subsidies from the stimulus bill.

It is the young firms and sectors that grew fastest in recent years. Four-fifths of the green jobs created since 2003 were in companies founded in or after 2003. Certain cutting-edge clean energy segments – wave/ocean power, solar thermal, and wind energy – experienced rapid expansion, averaging 15 to 20% growth annually.

 (3) “The clean economy offers more opportunities and better pay for low- and middle-skilled workers than the national economy as a whole.”

The green sector has been touted by some political leaders as an industry that can provide opportunities for workers at all educational and professional levels, provided they have the right training. The Brookings study provides some evidence for this claim: median wages in the clean economy are 13% higher than in the economy as a whole and these good-paying jobs aren’t just reserved for highly advanced professionals. Nearly half of green jobs employ workers with a high school degree or less, compared to 37% of jobs in the economy as a whole.

I’ll have another post up soon about where clean economy jobs are located…

Sizing the Clean Economy: A National and Regional Green Jobs Assessment
Brookings Institution // Mark Muro, Jonathan Rothwell, Devashree Saha // July 13, 2011

No New Taxes: A Pledge That Isn’t As Simple As It Seems

Like a household whose finances are out of whack, our government can deal with its looming budget deficit in two ways: spend less or earn more. Political leaders are currently negotiating to find the right balance of these two strategies, but several Republicans have threatened to block any plan that involves raising taxes. In our current Congress, all but 7 Republican Senators and 6 Republican Representatives have signed Americans for Tax Reform’s well-known pledge to oppose any and all tax increases (only 3 Democratic Congressmen have signed).

But hewing to a mantra of “no new taxes” can be more complicated than it seems, because the division between taxes and spending isn’t always clear-cut. A significant amount of government spending is hidden in the tax code in the form of tax breaks for certain groups: homeowners making mortgage payments, companies conducting scientific R&D, workers receiving employer-sponsored health insurance, and investors earning capital gains. Altogether, the Treasury Department has identified over 170 preferences that cut taxes for specific taxpayers, activities, or types of income. If these “tax expenditures” were structured as spending programs rather than tax breaks, in 2007 they would have accounted for 17% of federal spending.

What makes these tax breaks different from other parts of the tax system, like differential rates based on taxpayers’ incomes? According to a new article by Donald B. Marron, Director of the Urban-Brookings Tax Policy Center, tax expenditures have the same impact on the economy, government budget, and distribution of income as if the government directly handed out checks to the beneficiaries. Elected officials use the tax system because it’s legislatively easier and politically more palatable to insert a benefit into the tax code than to increase discretionary spending by a comparable amount.

“Because tax cuts often sound more appealing to policymakers and voters than spending increases —  especially in today’s political climate — the temptation to spend through the tax code is enormous.” – Donald B. Marron, “Spending in Disguise”

Unfortunately, politicians find it much more difficult to eliminate a tax break than to cut a comparable spending program. We saw this a few weeks ago when anti-tax Republicans struggled with how to vote on a measure to end tax credits for ethanol producers. Some, like Senator Tom Coburn, saw the credit for what it is – a spending program in disguise – while others stayed true to their promise not to vote for tax increases of any kind and rejected the measure.

Marron suggests that by eliminating or simplifying many existing tax expenditures we can streamline the tax code, decrease government involvement in the economy, reduce the deficit, and maintain or perhaps even lower tax rates. But eliminating tax expenditures won’t be painless. Despite our stereotype of massive corporations receiving huge breaks – see Obama’s latest rhetorical target, accelerated depreciation for corporate jets – only 10% of the revenue lost to tax expenditures benefits corporations. The other 90% of breaks are for individuals, though many deductions disproportionately benefit the wealthy.

Sometimes spending through the tax code makes sense: it may be more efficient, accomplish important policy objectives, or benefit a broad spectrum of taxpayers. In other cases, these approaches can be overly complex and used to hide unpopular programs that benefit a select few. But the biggest problem is when politicians and voters don’t see tax breaks, good or bad, for what they are – a form of spending – and treat them accordingly.

Spending in Disguise
National Affairs
// Donald B. Marron // Urban-Brookings Tax Policy Center // Summer 2011

Quick Hits: Debt Crisis Conference Follow-Up

Image credit: Salvatore Vuono

On Tuesday, the Committee for a Responsible Federal Budget convened a major conference to discuss the nation’s long-term fiscal crisis. Key players like Ben Bernanke, Gene Sperling, Alan Simpson, and Paul Ryan were in attendance. You can read my recap of the event here; below is some follow-up on a few things I wrote about earlier.

(1) Most of the coverage of the conference has focused on Fed Chair Ben Bernanke’s warning to politicians not to mess around with the debt ceiling or treat it as a political game. As I pointed out, many others at the conference, including Gene Sperling and Neel Kashkari, gave the same warning. Hopefully it will be heard.

(2) Two additional perspectives on what level of economic growth the U.S. can realistically achieve in the coming years: Stanford economist and Hoover Institution Fellow John B. Taylor says we can reach 5% with the right policies in place. Donald Marron of the Urban/Brookings Tax Policy Center argues that reaching that level of growth and sustaining it over several years is highly unlikely.

(3) I posted earlier today about Larry Lindsey’s discussion of three ways we are underestimating the size of the coming debt crisis. One of his assertions was that we are underestimating the costs of the Affordable Care Act, a claim he based on a recent study from McKinsey. I pointed out that he was citing the McKinsey report incorrectly and that the study’s findings aren’t in line with previous estimates. I looked into it further today and found that a lot of people have been questioning the validity of this research.

Depite the weaknesses of the latest study, I think what I wrote in my earlier post is still valid – that we are likely misestimating (it could be under- or over-estimating) the costs of healthcare reform because there are so many unknowns about the impact it will have.