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Responsiveness of the Safety Net During Downturns: Lessons from the Great Recession

By ·October 28, 2019
University of California, Davis

The Issue:

During economic downturns the social safety net can play a critical buffering role for families as well as for the economy more broadly. However, over the past couple of decades there has been an important shift in U.S. social policy towards a system that makes the availability of assistance more dependent on participation in paid-work. Does this shift hinder the ability of social programs to play a buffering role during periods of high unemployment?

The Facts:

  • There are several important programs that have the capacity to respond relatively quickly to worsening economic conditions, providing cash (or a near equivalent) to working-age adults and families. These include: the Temporary Assistance to Needy Families program (TANF), which provides cash assistance to low-income families with children; the Supplemental Nutritional Assistance Program (SNAP, formerly known as Food Stamps), which provides benefits for acquiring unprepared foods to low-income families; and the Earned Income Tax Credit (EITC), which is a refundable tax credit and provides large cash transfers to low-income families, particularly those near poverty.
  • Official poverty for the non-elderly increased by 24.6 percent between 2007 and 2010; an alternative poverty measure for the non-elderly that takes into account in-kind benefits and tax credits such as the resources provided by SNAP and the EITC increased by a much smaller 7.7 percent during the same period. This suggests that the safety net provided an important buffer for the effects of the Great Recession.
  • The extent to which each program responded to increased need during the Great Recession varied. TANF's role in protecting families was smaller relative to the role it played in previous recessions (see chart). In contrast, SNAP provided significant support to households. Fueled partly by benefit increases included in economic stimulus legislation, SNAP expenditures rose to close to $73 billion in 2011, with more than one in seven people in the U.S. receiving benefits. Benefits for the EITC were also raised in the economic stimulus package. 
  • While the EITC has been shown to lead to many good outcomes, it is not designed to provide consumption smoothing at the bottom of the earnings distribution in bad times. The lowest skill workers who likely have the lowest earnings are more likely to leave the labor force and perhaps lose benefits when faced by an economic shock. By contrast, those with higher earnings when hit with a shock will remain eligible, or perhaps even move from the ineligible region where their income is too high to the eligible region.

What this Means:

During the Great Recession, SNAP and Unemployment Insurance programs acted as a counterforce to the economic shock: greatly increasing government spending and expanding income support to families in a way that was at least equal to the cushioning role that they have played in previous recessions, if not more. The EITC, while a large share of our cash transfers to low income families with children, did not do much in terms of providing a countercyclical force. And the AFDC/TANF program provided essentially no role in smoothing the income fluctuations experienced by families. Further, it is likely that the countercyclical smoothing from SNAP and Unemployment Insurance was in part due to explicit federal responses to the Great Recession. A better safety net would have automatic triggers prompting expansions in times of need without requiring local, state, or federal interventions.

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Clearing the Air on the Costs of Pollution

By ·October 18, 2019
Cornell University

The Issue:

While the regulation of air pollution has visible costs — such as decreased manufacturing employment, sectoral reallocation, and increased production costs — putting a dollar value on the benefits of cleaner air has been difficult. Researchers have turned to "natural experiments", situations that cause unexpected or random shocks to air quality, to better understand the impact of air pollution. Using such tools, an ever-growing literature shows that breathing dirty air can increase medical costs, shorten lifespans, hinder learning, and even impair our ability to make everyday decisions.

The Facts:

  • Studies of economic shocks affecting industrial production provide evidence of how changes in air quality can cause health effects. When a labor strike shut down the local steel plant in Utah Valley in the 1980s, local pollution levels decreased, as did hospital admissions for various health conditions. Similarly, a broader economic shock, the industrial recession of the early 1980s, had health benefits to counter the economic losses. One study estimated that the reductions in particulates caused by the change in industrial production meant 2,500 fewer infants died during the recessionary period of 1980–1982.
  • Exposure to transit pollution can have measurable impacts on the health of children. The introduction of electronic toll devices in parts of New Jersey and Pennsylvania, for instance, meant fewer idling cars at toll stations and led to improvement in a variety of birth outcomes such as premature birth and infant birthweight among mothers living close to toll stations. 
  • In adults, exposure to pollution has been linked to negative outcomes ranging from lowered work output and earnings to increased mortality. The effects of pollution aren't limited standard physical factors like mortality and hospital visits. There is evidence exposure to pollution can impact cognitive performance in the long term and day-to-day.

What this Means:

For the first time in decades, the air quality in the United States got worse over the last year. This reversal of air quality trends may be temporary – an unusual number of wildfires in 2017 generated some big negative effects. But scientists expect climate change will increase the size, frequency, and intensity of wildfires, which means that this is unlikely to be a one-time problem. Moreover, anthropogenic pollution sources, both in the United States and abroad, remain the largest contributors to air pollution on the planet. Research is providing increasing evidence that exposure to air pollution reduces health at birth; decreases cognitive ability and memory; increases medical visits; and increases premature mortality. As we debate the costs and benefits of environmental regulation and climate action, we must consider the human health and mortality effects of dirty air.

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The Costs of U.S. Tariffs Imposed Since 2018

By ·October 10, 2019
University of California, Davis

The Issue:

Economists have used a variety of methods to estimate the impact of new tariffs implemented in 2018 and 2019 on U.S. firms and households. Variation across emerging estimates reflects more than measurement issues.

The Facts:

  • An important part of the cost of the tariffs for U.S. households and firms consists of the tax incidence — the portion of the tax that is passed on to various buyers and sellers of targeted goods once they arrive at the U.S. border.
  • Tariffs also generate efficiency losses. Households and firms may have to substitute away from goods targeted by the tariff toward alternatives that cost more than they were paying before, or that are less well suited to their needs or preferences. Some buyers may find that they are no longer able to afford as much of the good, or may decide to go without it. These broader costs, called "deadweight loss," may be between half and 3 times the direct burden of the tariff.
  • Trade policy uncertainty can affect the investment and hiring decisions of firms, slowing economic activity. Tariffs have been introduced rapidly; their ultimate size, scope and duration is as yet unknown; and the range of retaliatory tariffs is likewise evolving. All of these issues present uncertainty, introducing an additional risk in investing and hiring because firms may find it harder to anticipate the costs of imported inputs or the scope of their export market. This results in the economy growing less than it otherwise would.
  • Tariffs also may benefit protected sectors of the economy and are a source of government revenue.
  • The evolving range of estimates depends on which costs and benefits are taken into account. See this table for a listing of recent tariff cost studies, their estimates, and the different factors each study takes into account.

What this Means:

Economists across academic and policymaking institutions have produced a number of different estimates of the impact that changes in trade policy since the start of 2018 have had on the U.S. economy. The lowest estimates involve only the direct incidence of the new taxes on consumers. The highest estimates include the direct costs of the tariffs, costs related to distortions the tariffs generate in firm and household behavior, and the drag on firm activity that increased uncertainty about trade policy has brought. Taking the full range of estimates into account, the new trade policy regime implemented in 2018 through June 2019 is likely to result in an average cost per U.S. household between $500 and $1,700 a year.

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