Economic Casualties

For the first time in a decade, our economy is in recession. It's not official
yet--the group that dates recessions doesn't act until after the fact--but
there's little doubt that we're in the midst of a downturn. The tragedy of
September 11 didn't sink the economy; it was already listing badly. But the
terrorist attacks will undoubtedly extend its length and depth.

Low-income working families have always been the least insulated from market
forces. When the economy sneezes, they get pneumonia. It's been a while since
we've had to think about how to help these families get through a period like
this, and a lot has changed. For the first time in decades, the full-employment
economy of the late 1990s brought real wage gains for the lowest-paid workers.
The safety net also changed a lot, in some cases intentionally (welfare reform)
and in some cases owing to neglect (unemployment insurance). One of the most
notable trends--the millions of low-income mothers who left welfare for
work--reflects both economic and policy changes.

To understand the current and potential plight of low-wage workers and their
families, we need to examine recent developments both in private markets and in
public programs. How high has the boom lifted working-class families, and how far
might they fall? What is the condition of the safety net whose very purpose is to
provide protection when the market fails? How well are states prepared to meet
the needs of their most vulnerable citizens?

There's much cause for concern. The downturn is already taking a toll on those
who traditionally bear the brunt of recessions: blue-collar workers in
manufacturing, minorities, and other less-advantaged workers. Two key components
of the safety net--welfare and unemployment insurance--are less prepared than in
past downturns. On the plus side, more children have access to health insurance
through Medicaid or other state programs this time around. Still, many states may
soon be unable to finance their share of this and other important
recession-related initiatives.

Jobs and Wages

The late-1990s boom, particularly the first full-employment economy in 30
years, was tremendously beneficial to low-income families, the
non-college-educated, and minorities: the very groups who had been losing ground
since the late 1970s [see Jared Bernstein and Dean Baker, " HREF="/print/V12/19/bernstein-j.html">Full Employment at
Risk," TAP, November 5, 2001]. For the first time in decades, their
real wages and incomes rose significantly, as the tight labor market provided
with the bargaining power they lack when there's too much slack in the economy.

As the slack returns, these long-awaited trends will likely reverse. Since the
end of last year, when unemployment started rising, minority workers have lost
the most ground. While overall unemployment rose 1.5 percentage points from its
low of 3.9 percent last October, African-American and Hispanic unemployment
increased 2.3 and 2.2 points, respectively; for black teens, it's gone up 6.2

Welfare reform and the increase in demand for low-wage labor have caused the
share of single mothers in the paid labor force to soar. The Institute for
Women's Policy Research points out that six million more children now have
working moms compared with 10 years ago. But as the economy slows, these
opportunities are drying up. Beginning last summer, the employment rates of women
who head families fell sharply, by three percentage points in three months. And
wage increases for people who still hold jobs are already slowing. If past
patterns hold, wage stagnation for middle- and low-wage workers should be
expected to arrive by early next year.

The Safety Net

Ever since the New Deal, it has been widely recognized that business cycles
are, well, cyclical, and that people need help when, through no fault of their
own, the invisible hand takes a swipe at them. Thus, we've long had a set of
countercyclical policies to temporarily help those displaced by recession or
worse. The most visible of these are unemployment insurance (UI) and welfare (now
known as Temporary Assistance for Needy Families, or TANF). It's also worth
remembering in this context that the vast majority of working families get their
health care coverage through an employer.

Unemployment Insurance

With the surge in benefit claims, UI and its
shortcomings are finally receiving some attention. This is a program designed for
the labor market of a bygone era--for full-time male workers. In a variety of
ways, it is not set up to meet the demands of a contemporary downturn in a
primarily service economy (this is not to negate the sharp recession in
manufacturing that's been ongoing for at least a year). The main problems are
eligibility, benefit levels, and state trust funds.

UI is a joint federal-state program. In most states, part-timers, temps, and
others with nonstandard schedules or short work histories are ineligible for UI
benefits. During the boom, there was an expansion in types of jobs unlikely to
qualify for UI. Part of this reflects the interaction of welfare reform and the
strong economy--as poor, single parents were more likely to work part-time or

Benefit levels also have suffered from neglect over the years. They now
only 33 percent of an average worker's lost earnings, down from 36 percent in
1990. The percentage of unemployed workers who actually get UI benefits has also
declined over the past 40 years, peaking at 49 percent in 1975 and declining to
around 37 percent in 2001.

Finally, numerous states neglected their UI reserve funds during the long boom
and are unprepared to meet the current surge of claims, much less expand
eligibility and benefit levels. Although the federal UI trust fund is pretty well
stocked, Congress and the president must act quickly to use those funds for
temporary extensions and expansions of state unemployment programs.

Welfare (TANF)

In 1996, just as the boom was surging, President Bill Clinton
signed the bill ending welfare as we knew it. Whether TANF is judged scourge or
blessing, it hasn't been through a downturn. To us, it looks like a fair-weather
ship about to hit some rough seas.

While TANF's predecessor, Aid to Families with Dependent Children, was
deficient in many ways (it provided only minimal subsistence and did not offer a
ladder out of poverty), it was countercyclical. That is, it automatically
expanded when more families became eligible. TANF, which is funded through fixed
block grants to the states, does not share this important feature. For the first
time since we introduced federal welfare in the midst of the Great Depression,
needy families with children can be turned away.

Even before the downturn began, 100,000 income-eligible families lost
assistance owing to time limits--a number that is bound to grow in the future. In
just the first three years of TANF, 540,000 families had benefits terminated for
not complying with program rules. (Studies show that these families typically
don't understand the rules or they face unreasonable barriers to compliance.) Few
of these families will return to the welfare rolls in this recession, regardless
of their needs.

Even so, the welfare rolls will grow as more parents lose jobs, since many
poor families still have access to temporary assistance. Depending on the length
and depth of the recession, some states will have sufficient welfare reserves to
help these families. However, the drain on cash benefits will likely require cuts
in some of the useful work supports that states have built up over the past few
years, such as child care and job training.

On the other hand, reserves are relatively thin in a number of states,
including Illinois and Michigan. Given the administration's budget priorities,
states cannot expect additional federal funds when the reserves run out. So the
costs of higher caseloads will fall heavily on already weakened state coffers.
States could be forced to scale back TANF-funded job training or work supports or
to limit caseload increases.

Food Stamps

Since a considerable number of low-wage working parents who are
laid off will get neither unemployment benefits nor welfare, food stamps will
take on added importance. After unemployment insurance, this has been the federal
program most responsive to rising unemployment. But eligibility restrictions for
legal immigrants and unemployed adults without children have narrowed the
program's scope. And even among eligible individuals, the participation rate has
fallen sharply in recent years because of barriers to access.

On the positive side, because food-stamp benefits are funded entirely by the
federal government, the recession may give states an incentive to make it easier
for families to get food stamps. Increased participation brings more federal
funds to states and thus provides an economic stimulus.

Medicaid/Children's Health Insurance

A bright spot in government policy for low-income working families in recent
years has been an expansion of health-insurance coverage. Every state has
increased coverage for children,
usually up to 200 percent of the poverty level (that is, up to about $35,000 for
a family of four). Parents who suffer a loss of earnings can keep their children
insured even if their income isn't so low as to qualify for welfare.
Unfortunately, few states have done the same thing for adults (whether or not
they have children). Half of working adults who lose their jobs will become
uninsured. And growing Medicaid programs have made this form of aid a bigger
target for state-budget cutters during the current recession, putting some of
these expanded benefits at risk.

All of these economic pressures will fall heavily on immigrants, who represent
one-fifth of the low-wage workforce but are the least able to seek temporary
The 1996 welfare law made many legal immigrants ineligible for food
stamps, cash assistance, and Medicaid. Though children in immigrant families
often are U.S. citizens and thus are eligible for assistance, their parents must
apply. Not surprisingly, ineligible parents often are unaware that they can seek
assistance for their children or are reluctant to do so, and this means that the
whole family suffers. Recent research shows that the risk of hunger has risen
significantly among immigrants affected by these safety-net restrictions.

States of Need

Recessions wreak havoc on state budgets. Unlike the federal government, 49 of
the 50 states cannot run a deficit: Except for Vermont, they must have a balanced
budget. When revenues dry up as economic activity falls, states quickly use up
their rainy-day funds and then are faced with tough choices on spending cuts or
revenue increases.

In many states, large budget deficits are in the offing. California projects a
shortfall of $9.5 billion. Deficits exceeding $1 billion are expected in New
Arizona, Ohio, and Florida. The picture is likely to become bleaker in coming
months as other states issue revised projections.

Budget cuts are being considered or have already been implemented in at least
30 states. Governors have ordered agencies to cut back 15 percent in California,
7 percent in Indiana, and 4 percent in Arizona and North Carolina. Eight states
raised taxes and fees significantly in their fiscal year 2002 budgets.

In the recession of the early 1990s, nearly every state froze or reduced cash
assistance for poor families with children. Cash-aid programs for poor
non-elderly adults without children were hit even harder, with benefits
or eliminated for nearly 600,000 people. Those general-assistance programs have
not come back, leaving childless adults with almost no safety net.

Even the tax increases that states enacted in the last recession fell heavily
on the poor. More than half came in the form of regressive sales taxes. And tax
increases leave low-income families with less to spend.

In this recession, Medicaid faces trouble. It's one of the biggest programs in
most state budgets, so it's especially vulnerable to cuts. Some states are
considering eligibility restrictions: 180,000 Tennesseeans could lose coverage,
and a referendum that extended eligibility to working-poor Arizona families could
be reversed. The ranks of the uninsured, already growing as laid-off workers lose
employer-provided coverage, could grow even more. Elsewhere, cutbacks in services
covered by Medicaid are a possibility.

State spending cuts and tax increases are harmful not just to individuals but
to state economies as a whole. At a time when states need stimulus,
budget-balancing efforts make their economies shrink. Cutting government programs
usually means less money in residents' pockets, more state employees out of work,
or fewer goods and services purchased from private businesses.

The important economic question has shifted from "Are we in a recession?" to
"What should be done about it?" The administration's response does almost nothing
for the families most at risk. Instead, the federal government ought to move
quickly on the following fronts:

  • Update Unemployment Insurance: At least temporarily, the federal
    government should increase benefits, extend the benefit period, and change
    eligibility rules to allow more part-time workers and those with only limited
    job tenure to qualify.

  • Bolster TANF Programs: This would mean giving states more
    federal-block-grant funds, thus reducing pressure to restrain welfare caseloads
    or scale back job supports.

  • Implement Enhanced State-Revenue Sharing on a Temporary Basis: Many
    economists endorse this policy, including recent Nobel laureate Joseph Stiglitz.
    One efficient way to accomplish this would be to increase the federal matching
    rate in existing programs, particularly Medicaid.

President Bush's tax plan (which was signed into law in June) and the proposed
House stimulus bill will hurt state finances rather than help them. The repeal of
the federal estate tax could cost states up to $3.5 billion by 2004, since
states' estate taxes are based on the federal tax. If the House stimulus bill
becomes law, it will allow businesses to write off their investments at an
accelerated rate. Yet because state corporate-income taxes typically use federal
provisions as a starting point, state revenues will fall, too, by $5 billion per

During the boom, economic policy became ever more enamored of free markets,
especially when they were juiced up with powerful new technologies. More than a
few policy makers and journalists wondered if the new economy rendered the
business cycle obsolete. Now, the new economy looks suspiciously like the old
one, and the recession is already threatening to reverse the short-lived gains of
the late 1990s. If we act fast, we can contain the damage, protect the living
standards of the most vulnerable, and stimulate growth. But if we dawdle over
partisan plans that will fail to meet the pressing needs of working families,
we'll needlessly and selfishly subject them to the ill winds of recession.

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