Lessons of the Great Recession: How the Safety Net Performed

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

Though the economy is clearly improving, we’ve yet to fully escape the gravitation pull of the great recession.  The job market remains weak, and wages and middle-class incomes remain stagnant.

But we’re on the mend, and the likelihood of slipping back into recession is low.  So it’s none too soon to begin asking the question: what have we learned about economic policy in this crash that should inform our thinking forthe next downturn?  Lord (Keynes) knows, there’s been a lot of policy â€" fiscal, monetary and financial â€" to evaluate.

Let’s start with the safety net since it’s a fixture of advanced economies and serves the critical function of catching (or not) the most economically vulnerable when the market fails.  What follows is a brief overview of a many-faceted topic, but there’s solid evidence that key parts of the safety net performed well â€" probably better than you thought.

Before I get to the evidence, a word about context.  First, as suggested above, there’s another recession lurking out there somewhere, so let’s learn what worked and what didn’t.

Second, and this is particularly important in today’s political economy, too many policy makers devalue the safety net.  In Representative Paul Ryan’s terminology, it’s a “hammock.”   For ! Ronald Reagan, it was a feckless weapon in the “failed” war on poverty (though to his credit, he extended a wage subsidy for low-wage workers that has become a highly effective anti-poverty tool).  For many of today’s conservatives, the increased use of a safety-net program is proof that there’s something wrong with the user, not the underlying economy.

But while people do abuse safety nets â€" and not just poor people (think bank bailouts and special tax treatment of multinational corporations) â€" I want to see receipt of unemployment insurance, the rolls of the Supplemental Nutrition Assistance Program (food stamps), and so on go up in recessions.  In fact, their failure to do so would be a sign that something’s very wrong, like an air bag that failed to deploy in a crash.

The figure below tracks three programs, two which responded quite elastically to the downturn, and one â€" Tmporary Assistance for Needy Families, or T.A.N.F. â€" which did not.  (I’ll get to why unemployment insurance has gone down while SNAP remained elevated in a moment.)

Sources: TANF data from Office of Family Assistance, SNAP data from United States Department of Agriculture, unemployment (continuing claims) and unemployment rate from Department! of Labor! /Bureau of Labor Statistics.

There are two reasons that T.A.N.F. was so unresponsive.  First, welfare reform in the mid-1990s significantly increased its work requirements, which worked well then, as the policy change interacted with historically strong demand for low-wage labor.  Since then, and especially in the great recession, the low-wage job market has been much less welcoming.

Second, T.A.N.F. was “block granted,” meaning states receive a fixed amount that is largely insensitive to recessions (my colleague Liz Schott has noted some minor wrinkles) and inflation.  Since the block grant began, the real value of T.A.N.F. funds is down 30 percent. Now, consider this: it is a fixture of conservative policy on poverty to apply this same block grant strategy to food stamps and Medicaid.  The numbers and the chart above show this to be a recipe for inelastic response to recession, or, more lainly, a great way to cut some big holes in the safety net.

A useful way to show the effectiveness of the safety net in the downturn is to look at poverty rates before and after counting the value of its benefits.  The figure below gets close to that for child poverty.  As officially (and incorrectly) measured, poverty rates reflect the impact of only a minority of safety-net benefits.  For example, they include unemployment insurance but not SNAP.

Source: Census Bureau, official and National Academy of Sciences alternative poverty measures.  For the alternative measure, the figure plots the MSI-GA-CPI version (medical out-of-pocket costs subtracted from income; poverty lines include geographical adjustments, are updated with consumer price index).

The official rate for children goes up over the recession, from 18 percent to 22 percent, but once you include the full force of safety-net (and Recovery Act) measures that kicked in, it holds steady at about 15 percent.  Though child poverty rates even under the alternative measure are still too high, this figure provides strong evidence of the effectiveness of the American safety net in the worst recession since the Depression.

Finally, because the recession is receding, shouldn’t the SNAP rolls be coming down as well?  The answer gets back to the points made above regarding the ongoing weakness n the job market.  In a recent paper, the economists Peter Ganong and Jeffrey Liebman asked the following question: based on the historical relationship between SNAP rolls and unemployment, where would we expect SNAP roles to be?

The answer: pretty much where they are.  Though their growth has decelerated, SNAP rolls remain elevated because their function remains critical in what’s still a tough job market for low-income households.  Unemployment insurance rolls, on the other hand, have come down in part because they serve a broader swath of the population, and in part because extended benefits have been prematurely cut back.

Source: Ganong, Liebman as cited in text, from Appendix Table 2, population-weighted results.  As their table stops in 2011, I derived the 2012 result using the predicted growth rate for that year provided by the authors.

I’m not suggesting we celebrate elevated SNAP rolls.  Their height is evidence that the economy remains too weak for eligible households to afford adequate nutrition and that our current economic policy agenda isn’t doing enough to offset that weakness.  But the fact is that markets fail, and when they do, income and food supports must rise to protect the most economically vulnerable families.

So let’s get this straight: the poor and their advocates were not the ones who tanked the economy.  Nor should they be on the defensive when the safety net expands to offset soe of the damage.  The right question at such times is thus not why the SNAP rolls are so high.  It’s whether SNAP, unemployment insurance, T.A.N.F. et al are expanding adequately to meet the needs of the poor.