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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 role for families as well as for the economy more broadly. Social programs can protect vulnerable families by making it easier for them to continue to meet basic needs. The social safety net can also act as a fiscal stimulus — increasing government spending when other spending is in retreat — and, in so doing, prevent further job loss. 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 response of the different programs during the Great Recession offers lessons on how reforms have impacted the responsiveness of the safety net.

Did the shift towards a more work-centered safety net impact the buffering role of social support programs during periods of high unemployment?

The Facts:

  • The U.S. safety net is a patchwork system, made of many programs with different rules about which groups are eligible for assistance (families with children, the elderly, or disabled individuals, for instance), what kinds of income and household and family units count towards eligibility, and what time periods this is considered over. 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), 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. 
  • Our safety net for low-income families with children was largely reconfigured in the mid- and late-1990s. Concerns that some social assistance programs created disincentives for people to engage in paid work (as well as disincentives to form two-parent families) led to reforms that sought to encourage greater work participation. First there were large changes to the Earned Income Tax Credit (EITC), expanding the program greatly for families with children in OBRA 1993 through 1996 (see here). Because the tax credit functions as an earnings subsidy, it is only extended to working families. Since the goal of the EITC is increasing the after-tax income of lower-earning taxpayers (primarily those with children) while incentivizing work, the expansion of the EITC figured prominently in the movement toward more in-work assistance in the U.S. safety net. The credit is now one of the federal government's largest antipoverty programs (see here). And, the potential income transfer is substantial: the maximum annual credit a single taxpayer with two children could receive was $5,236 in 2018.
  • Major reforms to the Aid to Families with Dependent Children (AFDC) program changed the way the program was funded and introduced work requirements in the mid 1990s. With the federal PWRORA bill, signed in August 1996, AFDC was replaced by Temporary Assistance for Needy Families (TANF). While AFDC was an entitlement program, with the level of federal funding responding to the size of the eligible applicant population, the new program was a block grant, fixed in nominal terms: TANF gives states an annual lump sum to be administered through programs designed by each state if they also commit to a certain amount of state funding. In addition, participation under TANF is limited to a maximum of 5 years of lifetime use and recipients face work requirements. These changes were designed to facilitate the transition from welfare to work and to reduce dependence on cash welfare. Spending on the program has fallen in inflation-adjusted terms in the decades since the reform. Caseloads have also fallen and a nontrivial share of spending has been diverted to noncash benefits (see here).
  • Welfare reform left Food Stamps rules relatively unaffected but did limit benefits for legal immigrants and able-bodied adults without dependents aged 18-49. SNAP assistance is aimed at low-income families and individuals (Food Stamps was renamed SNAP in 2008). However, eligibility for SNAP is universal and is not limited to certain targeted groups (such as families with children, the aged, and the disabled). The program reaches higher into the income distribution than AFDC/TANF and serves both the working and nonworking poor. Since PWRORA, adults 18-49 without dependents who can work have been limited in the length of time they can access SNAP. Finally, welfare reform radically changed the rules for authorized immigrants, reducing their access to these programs.
  • The Great Recession provided a test of how well this new, more work-oriented safety net would do in buffering consumption for families with children during an economic downturn. The Great Recession led to a large increase in unemployment, which rose to a peak of 15.4 million persons (seasonally adjusted) in October 2009. In the wake of this sharp downturn, official poverty increased from 12.5 percent in 2007 to 15.1 percent in 2010, with some areas of the country seeing sharper increases. The increase in official poverty gives a measure of the magnitude of the economic shock. However, official poverty figures are based on cash, pre-tax income and thus do not include in-kind and tax-based income sources, such as the resources provided by SNAP, the EITC and tax credits more generally. When income from in-kind benefits and tax credits are taken into account the increase in poverty during the Great Recession is of a smaller magnitude: Official poverty for the non-elderly increased by 24.6 percent between 2007 and 2010; during the same period, an alternative poverty measure calculated by the authors for the non-elderly including in-kind benefits and tax credits increased by 7.7 percent from 9.1 in 2007 to 9.8 in 2010. This suggests that the safety net provided an important buffer for the effects of the Great Recession (see here).
  • 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 in the early 1980s and 1990s (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. 
  • Did the safety net programs act as a countercyclical force in the recession? In research with Hilary Hoynes, I look at how these safety net programs responded to the Great Recession in relation to their responses to the early 1980s recession, effectively comparing how participation in the safety net changes when the unemployment rate changes. We find that TANF did not provide a stabilizing force during the Great Recession due to the fact that funding does not expand to accommodate higher demand due to the block grant structure of the program. In contrast, we find that spending for SNAP, for the EITC, and also, for unemployment insurance was responsive to the economic shock, with SNAP and unemployment insurance providing more protection (or no less protection) during the Great Recession than they did in previous downturns. 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. In research with Hoynes and Erika Kuka, I find that the EITC is countercyclical for two parent families, with higher payments when the unemployment rate is higher. But there is no significant countercyclical effect on payments to single parent families (see here). 
  • Unemployment insurance can act as a social support program in particularly bad economic times when the federal government has frequently stepped in to extend and fully fund benefits beyond what could be funded by this state-federal partnership. Unemployment Insurance (UI) is a central income replacement program in recessions. It is usually considered a social insurance program because employees and firms pay into a system to fund payments when individuals are laid off. During the Great Recession, these benefits were quite generous, extending the maximum length of benefits from the usual 6 months for the state program to 99 weeks of federally funded benefits. These generous expansions beyond regular state benefits were funded fully by the federal government through the Emergency Unemployment Compensation program from 2008 until its expiration in 2014. UI is not means tested, and eligibility and benefit levels are a function of earnings history. For this reason, the support provided by UI tends to reach further up the income distribution.

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. The current economic expansion is not likely to last forever. And many of the changes to the safety net suggested under the current administration may further limit the ability of the safety net to smooth consumption and provide spillovers for firms participating in these programs. Changes suggested for SNAP such as limiting eligibility for families with large deductions (broad based categorical eligibility) or rules about the broader safety net, such as limiting access for some immigrants to permanent residency if they participate in these programs, are likely to suppress some of the consumption smoothing aspects of the safety net in the next recession.

Topics:

Business Cycles / Child Poverty / Social Safety Net
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