This commentary first appeared October 1, 2012, in Spotlight on Poverty and Opportunity.
The new poverty data and the recent employment report paint a bleak picture of lost opportunity. Poverty is at a 40-year high, with 46 million poor people and 22 percent of children living in families below the federal poverty line. Unemployment and underemployment remain at recession levels — 12.5 million unemployed people and another 8 million working part-time involuntarily, plus 2.6 million more who sought work in the past year but not actively in the last month.
According to economists Carmen Reinhart and Kenneth Rogoff, who have studied the history of economic crises, fully recovering from a recession caused by a severe financial crisis takes seven to ten years. And yet we continue to act as if normal policy measures are all that will be required to get us out of the hole.
An adequate policy response must build on a clear understanding of how we got into this situation and must address both the short- and long-term dimensions of today’s poverty and employment problems. A good place to start would be confronting our increasingly inadequate safety net.
Since the Great Society, antipoverty policy has been built on a three-legged stool — income support programs to tide families over during tough times, human capital investments that would equip individuals with the skills needed to obtain gainful employment, and a growing economy that offered good jobs to those who obtained those skills. This formula was based on reasonable assumptions in the immediate post-war decades, when economic growth, labor productivity, and workers’ wages moved higher in lockstep.
Starting in the mid-1970s, however, GDP and labor productivity growth continued upward — but not workers’ earnings.
In the 1990s, policymakers made a concerted effort to make sure that work was the best route out of poverty. Welfare reform’s work requirements, time limits, and restrictions on welfare recipients’ participation in education and training were all designed to reinforce that message. At the same time, the Earned Income Tax Credit (EITC) expanded to become the nation’s largest income transfer program, offering supplements to earnings of up to $5,700 per year for many low-wage workers with children. And this strategy made sense in the midst of a booming economy and a five percent unemployment rate.
The Great Recession — and the protracted jobless recovery — has been an unprecedented test of the safety net redesign undertaken in the 1990s. While the rolls of the Supplemental Nutrition Assistance Program and unemployment insurance have risen to meet growing needs, the state-managed cash welfare program has been largely unresponsive to the crisis. And, of course, only people with jobs can receive the EITC.
As we slowly recover from the Great Recession, we have entered an extended period in which there is not likely to be enough jobs to go around, suggesting that we need to rethink the nation’s safety net built around work.
A more responsive safety net would promote work and self-sufficiency in good times while expanding to provide support for the nation’s poorest citizens in difficult economic times like these. Creating a permanent welfare emergency fund that would only be triggered by high poverty and unemployment indicators would enable states to support families when jobs are scarce.
The temporary welfare Emergency Fund created by the American Recovery and Reinvestment Act was used by states to create more than 250,000 subsidized jobs — many in private industry — during the recession. Unfortunately, the Fund expired in 2010. But if we prefer work over welfare, public job creation may be necessary during this extended downturn, much as the Works Progress Administration and the Civilian Conservation Corps did during the Great Depression.
If we are no longer awash in jobs, it may not make sense to condition income assistance receipt on work alone. We may need to consider other ways to establish a new bargain, possibly by tying benefit receipt to other activities — for example, creating standards that require participants to make adequate progress in education and training and prepare them for jobs in the new economy.
The jobs people do find will likely pay very low wages, as a recent National Employment Law Project brief confirmed, making it difficult to support a family. Men’s earnings have been especially hard hit by low and stagnant wages, a trend that undermines their potential provider role as husbands and fathers.
A next generation of labor market policies that help to “make work pay” — by providing earnings supplements like the EITC to all low-wage workers (preferably without marriage penalties) — will be especially important in this economy. For single parents, there is strong evidence demonstrating that such supplements lead to increases in employment and earnings, followed by improvements in their younger children’s school performance. Extending the EITC to singles — much as the payroll tax holiday did — could result in more resources for children from noncustodial parents and from second-earners in two-parent families.
While policymakers can be forgiven for not having anticipated the Great Recession, today’s leaders can build on our recent experience to create a more flexible safety net that continues to reward work when jobs are plentiful, provides employment to poor families when jobs disappear, and begins to address the even more consequential problem of stagnant wages at the low end of the labor market.