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Recession Could Cause Large Increases in Poverty and Push Millions into Deep Poverty

Stimulus Package Should Include Policies to Ameliorate Harshest Effects of Downturn*

Executive Summary

Like previous recessions, the current downturn is likely to cause significant increases both in the number of Americans who are poor and the number living in “deep poverty,” with incomes below half of the poverty line. Because this recession is likely to be deep and the government safety net for very poor families who lack jobs has weakened significantly in recent years, increases in deep poverty in this recession are likely to be severe. There are a series of steps that federal and state policymakers could take to soften the recession’s harshest impacts and limit the extent of the increases in deep poverty, destitution, and homelessness.[1]

Goldman Sachs projects that the unemployment rate will rise to 9 percent by the fourth quarter of 2009 (the firm has increased its forecast for the unemployment rate a couple of times in the last month). If this holds true and the increase in poverty relative to the increase in unemployment is within the range of the last three recessions, the number of poor Americans will rise above its 2006 level by 8.4-10.9 million, the number of poor children will rise by 2.6-3.9 million, and the number of children in deep poverty will climb by 1.5-2.4 million. (This increase will not take place in a single year, but will occur over several years.)

Already there are signs that the recession is hitting low-income Americans hard. Between September 2006 and October 2008, the unemployment rate for workers age 25 and over who lack a high school diploma — a heavily low-income group— increased from 6.3 percent to 10.3 percent. Yet low-income workers who lose their jobs are less likely to qualify for unemployment benefits than higher-income workers, due to eligibility rules in place in many states that deny benefits to individuals who worked part time or did not earn enough during a “base period” that often excludes workers’ most recent employment.

As another sign that poverty is now climbing rapidly, food stamp caseloads have increased dramatically in recent months, rising by 2.6 million people or 9.6 percent between August 2007 and August 2008, the latest month for which data are available. In 25 states, at least one in every five children is receiving food stamps. Because monthly food stamp caseload data are available long before the official Census poverty data for the prior calendar year, rising food stamp caseloads are the best early warning sign of growing poverty.

Furthermore, the nation’s basic cash assistance safety net for very poor people who are jobless is much weaker and less well equipped to meet the challenges that a serious economic downturn poses than it was in previous major recessions. The biggest changes in that safety net have resulted from changes in public assistance policies at both federal and state levels. As a result of changes in such policies, basic cash assistance reaches many fewer poor families with children than in the recessions of the 1970s, 1980s, and 1990s. Today, only about 40 percent of families eligible for cash assistance under the Temporary Assistance for Needy Families program actually receive it. That is about half the percentage of families eligible for TANF’s predecessor (the Aid to Families with Dependent Children program) that received its benefits during the recessions of earlier decades. 

In addition, those poor unemployed individuals not raising minor children who don’t qualify for unemployment insurance no longer are eligible for any type of cash assistance. State general assistance programs — formerly the safety net of last resort for this group of people — were largely eliminated across the country in the late 1980s and early 1990s (except for programs for people with disabilities). Many of these individuals cannot even qualify for food stamps; in most parts of the country, jobless people aged 18-50 not raising minor children are restricted to three months of food stamps out of every three-year period. As a result, there is a substantial population of individuals for whom there is little or no safety net at all. That population will grow much larger in the next year or two.

Options are available to policymakers to help stave off large increases in severe poverty and hardship in this recession. Among the options that policymakers can consider are the following, virtually all of which also would rate high as effective stimulus measures in terms of “bang for the buck” — i.e., the amount of new spending they would infuse into the economy for each dollar that the federal government spends.

  • A temporary increase in food stamp benefits.  This would offset the impact of rising food prices and help millions of households make ends meet when they lose their jobs.
  • Additional rental assistance through the housing voucher program. This would provide assistance to more households with very low incomes; 40 percent of families receiving housing vouchers had incomes below about half the poverty line even before the recession started. (It also would help some of the families most affected by the mounting number of foreclosures — renters who are evicted from foreclosed properties due to the owner’snon-payment of the mortgage.) Many cities and school districts already are reporting an increase in the number of homeless families as the worsening economy exacerbates the turmoil in housing markets, and this situation likely will worsen in 2009 as the recession deepens and many more homes enter foreclosure. Additional vouchers would help families struggling with high rental costs and low incomes to find stable housing during the recession.
  • Expand and improve the TANF contingency fund. The TANF program includes a "contingency fund" that was created to provide additional resources to states when recessions increased the number of poor families that need assistance. There are several problems with the fund that need to be addressed, so it can serve its intended purpose. First, the fund is likely to run out of money in fiscal year 2009 and will need to be replenished. The additional funding should be targeted to states where the recession is pushing up the number of families qualifying for and receiving assistance. Second, the contingency fund requires state matching funds that many states will be hard pressed to find, given deteriorating state fiscal conditions.
  • Expand and extend unemployment benefits. Fewer than 40 percent of unemployed workers now receive unemployment benefits, in large part because many states still use policies designed several decades ago — for the workforce of that era — that cause many low-wage and part-time workers (especially women) to be ineligible for unemployment insurance when they are laid off. Bipartisan legislation that the House approved in the fall of 2007 would provide states with incentives to modernize these rules so that low-wage and part-time workers who are laid off have better access to unemployment benefits. This legislation, which implements several recommendations that a blue-ribbon congressionally chartered commission on unemployment insurance made in the mid 1990s, is pending in the Senate. Consideration should be given to a temporary, federally-funded increase in unemployment benefit levels. (In welcome news, last week legislation was approved to extend the number of weeks of unemployment insurance.)
  • Provide significant fiscal relief to states. The weak economy is causing great fiscal distress among the states. Because states cannot run deficits, even in recessions, they must close their shortfalls by cutting spending or raising taxes — actions that take money out of the economy and thereby make the downturn deeper and more protracted. Sharp budget cuts also hamper states’ ability to respond to the rising need for health care and other services that occurs when workers lose their jobs, and their incomes plummet. 

Based on the rate at which states’ revenues are declining and the history of prior recessions, total state budget gaps for state fiscal years 2010 and 2011 are likely to be about $100 billion each year. Without significant fiscal relief from the federal government, states will be forced to institute extensive budget cuts that would both weaken the economy further and likely affect large numbers of Americans facing hard times. Such cuts are likely to affect basic services that states provide in areas ranging from emergency assistance to forestall evictions and provide emergency food aid through food pantries to in-home care for the elderly. Providing fiscal relief to states would both reduce the scope and depth of painful cuts and bolster the economy.

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End Notes

* This paper was originally released November 24, 2008.  It was revised August 2009 to correct a mistake in the unemployment rates and the resulting poverty projections.  The August 2009 revisions do not reflect events that took place after this paper’s November 2008 release, such as the enactment of the American Recovery and Reinvestment Act.

[1] As unemployment rises, many workers and their families also will lose their health insurance or find coverage unaffordable. Policymakers can consider initiatives to lessen the magnitude of the increase in the number of uninsured people. A discussion of health-related proposals is, however, beyond the scope of this analysis.