Children of the Great Collapse

AP Photo/Kin Cheung

Here’s a piece of good news of which you might not be aware: The U.S. safety net performed a lot better than you thought during the recent downturn, which was the deepest since the Depression. Thanks to expansions to the Child Tax Credit, the Earned Income Tax Credit, food stamps, and unemployment insurance—all beefed up by the $840 billion Recovery Act—the safety net almost wholly mitigated the rise in child poverty. Even middle-income households saw most of their income losses substantially offset by tax and transfer policies that sharply ramped up to help them.

That’s the good news. The bad news is that most of the Recovery Act’s outlays have now been spent, and pressure to reduce deficits leaves other spending on children and families under assault.

While the safety net performed well during the worst phase of the downturn, other trends have been troubling. Families lost trillions of dollars in home equity, the largest source of wealth for working- and middle-class households. Long-term structural inequality persists, so the modest economic growth that has returned since 2010 is eluding most families. Budget battles are threatening both the basic anti-poverty outlays and the investments in children and families that could help push back on inequality and its impact on opportunity.

Progressives did well, at least during President Barack Obama’s first two years, at expanding the safety net during a serious economic emergency, using taxes and income transfers. But they have not done well in addressing the long-term trend of an erosion of “primary” income, namely wages and salaries. This leads to a paradox: A lot of people get help in a deep recession, but their incomes and life prospects stagnate during relatively good times. Looking forward, both the safety net and measures that might improve the primary income distribution will be under increasing attack from pressures to cut the budget deficit. In fact, there are plenty of strategies that could help reconnect families and children to restored economic growth, but policy is pushing in the opposite direction.

 

The Safety Net Grows, Then Shrinks

As officially measured, from 2007 to 2010, child poverty went up four percentage points, from 18 percent to 22 percent. But the official measure is incomplete, as it leaves out many income (or near-income) benefits that ramp up when the economy goes south. In the chart below, the flat red line is an alternative measure that includes tax credits and non-cash benefits that largely offset the increase in child poverty.

Specifically, these benefits include food stamps, refundable tax credits, and health-care assistance, all of which were expanded temporarily by Recovery Act provisions (unemployment insurance was also extended, but that income is counted in the official rate). Analysis by my colleagues at the Center on Budget and Policy Priorities finds that the safety net, including the Recovery Act expansions, “lifted 40 million people out of poverty in 2011, including almost 9 million children.”

Together, the EITC and Child Tax Credit moved 7.9 million people—of which nearly 4.1 million were children—out of poverty in 2011. Expansions of these credits kept another 1.5 million out of poverty, including 800,000 children. Unemployment-insurance benefits, boosted by expansions in their duration and level, kept 3.5 million people above the poverty line, including nearly 1 million children. Food stamps, now known as the Supplemental Nutrition Assistance Program (SNAP), kept 4.7 million Americans, including 2.1 million children, out of poverty in 2011 and are particularly effective at keeping children out of severe povertythat is, below half of the poverty line. In 2011, SNAP lifted more children—1.5 million—above half of the poverty line than any other program.

CBO data also shed interesting light on how the safety net worked in tandem with the tax system. Federal tax liabilities, which are progressive, fall in recessions. Income transfers, meanwhile, didn’t just help the poor but reached into the middle class. Wage and salary income for households in the middle fifth fell $6,000 in just two years, from 2007 to 2009 (in 2009 dollars). But federal tax payments fell $2,300 (a reminder that progressive taxation has an automatic stimulative function), and transfers, mostly unemployment insurance, went up $2,800, offsetting about $5,000 of the $6,000 loss.

In other words, the data make a solid case that the policies we’ve put in place over the years, in tandem with Keynesian expansions to meet the deep recession, worked well. But when you combine this perhaps underappreciated information with the well-known long-term stagnation of middle- and low-income working families’ incomes, we end up with the anomaly: A lot of folks get some insulation from the downturn but stagnate in the upturn.

It’s as if a bunch of us live on little boats, trying to make our way on a river. It used to be that if you spent some time caring for your vessel, making sure the sails were strong, and putting some muscle into the oars, you could gain some distance. In fact, the current helped move you and your crew in the right direction. The occasional storm would send you off course, but you could get back in the current once the storm passed.

Nowadays, the current seems to flow in the other direction, and the little boats don’t get far even in calm weather. Yet when a storm hits, you might not get pushed back as far as you used to. You just kind of stay where you are, in good times and bad. Except for the yachts, which keep getting bigger, rocking the rest of us in their wake as they rumble ahead.

 

What’s Next?

Now that the official recession is in the rearview mirror and the Recovery Act has faded, the policy agenda coming out of D.C. has been uniquely horrible. Fiscal policy has focused largely on spending decreases targeted at the budget deficit, to the detriment of the jobs deficit. An interesting exception to the austerity consensus is the Federal Reserve, which has been doing its part to stimulate job creation and bring down unemployment. But the Fed is fighting fiscal headwinds caused by the expiration of the payroll tax cut and the sequester, which together could shave as much as 1.5 percent off the growth of gross domestic product this year, costing us hundreds of thousands of jobs.

Moreover, the budget reductions that have been made already strike not at the factor placing the most pressure on the long-term budget deficit—the growth of health-care costs—but at so-called discretionary spending—a part of government spending that targets inequality and promotes opportunity.

Republicans and many Democrats agree that spending must be cut. While the president’s new budget offers a grand bargain that reduces Medicare and Social Security outlays in exchange for new tax revenues, thus far almost all the reductions have come from the discretionary parts of the budget. That includes programs like Head Start, WIC (the nutritional program for low-income pregnant mothers), child care, and housing subsidies. State and local support for education and related services that help children and families have been on the chopping block, and worse is ahead.

How did we get here? The Budget Control Act—the deal that grew out of the debt-ceiling standoff of 2011—took $1.5 trillion over ten years from the discretionary part of the federal budget. The $1.2 trillion sequester, of which $85 billion hit in fiscal year 2013, reduces mostly the same part of the budget, about half in defense and half in discretionary domestic spending.

The threat to domestic discretionary spending is acute, because it has almost no defenders and lots of defunders. Even the White House brags that President Obama’s budget will reduce such spending  will on the final compromise. Though the caps imposed by the Budget Control Act are already too binding, the president offered House Speaker John Boehner yet another $100 billion in domestic-discretionary cuts during their fiscal-cliff negotiations, a cut that’s now part of the president’s budget.

Two other factors place even more pressure on the anti-poverty, pro-opportunity parts of the budget. First, the spending cuts mandated by sequestration are now built into the budget baseline for the rest of the year (through the end of September). Second, Representative Paul Ryan’s House Republican budget lays out a draconian vision of the future from the perspective of low-income programs.

 

The Consequences for Children and Families 

Head Start: The sequester is just now beginning to reduce Head Start slots. The National Education Association estimates that about 50,000 preschool students will ultimately lose out on the program, and recent anecdotes are downright scary. News reports from Indiana tell of random drawings “to determine which three-dozen preschool students will be removed from [Head Start], a move officials said was necessary to limit the impact of mandatory across-the-board federal spending cuts.”

Pell Grants: This tuition-assistance program, expanded under the Recovery Act, is exempted from the sequester, but the Ryan budget goes after it big-time, freezing the maximum award for ten years with no adjustment for cost inflation.

Local Education: About a third of non-defense discretionary funding is grants to states and localities, and a quarter of those funds support local education, ending up at elementary and high schools and targeting kids from lower-income families and kids with learning disorders. Some of these resources also support Head Start teacher training and smaller class sizes.

Nutrition Programs: The WIC program provides food, counseling, and health-care referrals to low-income pregnant women, new moms, their infants, and kids under five. According to CBPP estimates, sequestration could result in 575,000 to 750,000 women and children losing WIC eligibility this year.

While food stamps were exempt from sequestration, the Ryan budget cuts $135 billion from the program—almost 18 percent—and converts it to a block grant, meaning it won’t be able to expand in recession (as noted above, SNAP helped immensely in the recent downturn). If these cuts were implemented solely by decreasing eligibility, about 12 million people would have to be removed from the food-stamp rolls.

Sequestration is likely to lead to the loss of housing vouchers for 100,000 low-income families. Close to four million long-term unemployed workers will lose about $130 per month—about 11 percent—from their unemployment insurance benefit. Under Ryan’s budget, Medicaid would suffer the same block-granting fate as SNAP, with funding cut by one-third and coverage lost for tens of millions, and that’s not counting the low-income people who would lose Medicaid coverage due to Ryan’s repeal of the Affordable Care Act.

But you get the point: Between tight-and-getting-tighter caps on non-defense discretionary spending, sequestration, and the threat that the Ryan budget will become a touchstone in this debate, not only will our highly functioning safety net be compromised but less advantaged families will lose the services that can give them the lift they need in good times—the preschool, the training, the college access that can help them claim a bit more of the growth.

The Stimulus Peters Out but the Downturn Continues

Meanwhile, federal support through the stimulus for states and localities, an important lifeline during the downturn, had largely faded out by late 2011, and the pressure on state budgets has led to hundreds of thousands of laid-off public-sector workers. Even while state revenues have begun to grow again, they still face a budget shortfall of around $55 billion this year, down from about twice that amount last year.

The figure below provides one clear example of this trend.  The Recovery Act’s aid to states offset as much as 40 percent of state budget shortfalls, through both a State Stabilization Fund (mostly for educational assistance) and through Medicaid assistance (and since those dollars are fungible, states used them to support not just health but other services too). But as the figure shows, after peaking in 2010, they are essentially gone now. As far as children are concerned, outside of Pell grants and the extensions to refundable credits and unemployment insurance, most other Recovery Act programs (or bump-ups to existing programs) are fading or expired as well. The act’s increase in SNAP benefits will expire at the end of this year, costing families of three around $250 per year. The jobs program subsidized by Temporary Assistance for Needy Families was a great bang-for-the-buck employment program that led to employment for hundreds of thousands of low-income parents, but it is now long gone. And while extra Recovery Act spending on Pell grants, Head Start, and unemployment insurance is still in place, those programs are all facing cuts, either from the act’s expiration, the sequester, or generalized budget austerity.

Of course, stimulus spending is, by definition, temporary. But despite the widely heard critique that the problem with the Recovery Act was that it was too small, a more precise criticism is that it didn’t last long enough. Given the depth and length of the downturn, the definition of “temporary” needed to be extended.

These shortfalls have been acutely felt in classrooms at all levels. According to recent work by my CBPP colleagues, K-12 school funding has not yet recovered its pre-recession level and 35 states are providing less funding per student than they were in 2008. In 17 states, those cuts surpass 10 percent in real dollars. Higher-education spending is down almost 30 percent per student, about $2,300 in 2013 compared to 2008. When public colleges and universities lose funding at these magnitudes, tuitions rise sharply (up 27 percent at four-year public colleges over this period) and services get cut, including faculty positions, course offerings, campus access, and library services.

 

What Should We Be Doing?

Too many policymakers on both sides of the aisle, unfortunately, have bought into the premise that deficit control is a symbol of serious governing. That may be so during normal times, but not in a prolonged downturn. Since Republicans have been somewhat successful in fighting back against tax increases (the deficit savings achieved thus far have been $2.30 in spending cuts for every $1 in new tax revenue), most of the pressure comes on the spending side of the equation.

 I can tell you from my own stint in the Obama White House that one powerful interpretation of the 2010 losses for Democrats was that the people wanted their government to turn from stimulus to deficit reduction, regardless of the wrongheaded economics of that premature pivot. The president, to his credit, often says forcefully that deficit reduction alone is not a growth plan and that reducing debt won’t bring down the unemployment rate. But he is stuck in the cramped budget politics of Washington, and the implications of his rhetoric are awfully hard to see in his budgets. As noted, in his new 2014 budget proposal, he offered to go even deeper into domestic discretionary cuts.

Leaving aside the limits of current politics, it’s important to emphasize the policies that we should be pursuing, not just in the downturn but also in the expansion. What types of measures might help give families and kids a fighting chance at claiming more of the economy’s growth? Just being bold enough to call for such policies can alter the dynamics of debate.

On the issue of child poverty, research points to two promising ideas targeting economically disadvantaged families with young kids, one of which is in place and another that’s in the president’s new budget: income support and quality preschool.

Poverty researchers Greg Duncan and Katherine Magnuson tracked poor children into adulthood and found that income supports to their families when they were younger than five were associated with both better school performance and better job and earnings outcomes later in life. Moreover, increments to income are uniquely beneficial to kids in poor families: “For families with average early childhood incomes below $25,000, a $3,000 annual boost to family income is associated with a 17 percent increase in adult earnings [and] 135 additional work hours per year after age 25.”

The Earned Income Tax Credit and the Child Tax Credit can combine to add considerably more than $3,000 for working parents with a couple of kids. One problem, however, is that the unemployed suffer a double loss—of their jobs and of supplemental income, such as the EITC, that is tied to work. We need income supports for the families of unemployed parents as well. The fiscal-cliff tax deal somehow managed to permanently lock in 80 percent of the Bush tax cuts, but these refundable tax credits for the working poor were only locked in for five years (though the president’s budget proposes to make them permanent). Protecting them is a critical progressive goal.

President Obama’s universal preschool proposal is smart and overdue, though one is hard-pressed to see how it grows out of the highly constrained budget debate we are having. A large body of research shows both how important quality preschool is for later outcomes and how its returns over a lifetime far surpass its costs. In his State of the Union address, the president cited the well-documented finding that $1 of investment in good preschool returns $7 of benefits. These results are particularly strong for kids from less advantaged backgrounds. While the president’s proposal is nominally universal, it is intended to be free only for kids from families with modest incomes, below two times the poverty line—about $45,000 for a family of four with two kids.

One can—and should—argue the case for quality preschool for all on equity grounds. The outlays of affluent parents on high-quality preschool show that they know how important this is. A program of the type the president appears to have in mind could cost $5 billion to $10 billion a year, which is a bargain given the net benefits. But under the budget rules, you can’t “score” prospective benefits that are years down the road. And of course, in the spirit of the times, the president asserted that his proposal wouldn’t add “one dime” to the budget deficit.

That means he needs what Beltway budget mavens call a “payfor”—some tax increase or spending cut elsewhere that will cover the cost of the new program. His new budget proposes to pay the cost with higher tobacco taxes, likely as heavy a lift as any other conceivable offset. But in an economy in which so much inequality is sapping so much opportunity from so many kids, it’s hard to think of a better cause.

Finally, there’s macroeconomic policy. In the current context, we might as well be bold and call it full-employment policy. In decades of carefully watching poverty and income trends, the only time I saw middle and lower-income families get ahead, in the sense of their income growing apace with productivity, was in the latter 1990s, when the unemployment rate was so low that employers had to increase compensation to attract and keep the workers they needed.

Thanks in part to the austerity movement sweeping across advanced economies, we’re far away from full employment. But as the economy finally works through the excesses that brought us the deep recession, will the private labor market create the quantity and quality of jobs that we need? For reasons that go beyond my scope here, having to do with advances in laborsaving capital technology, I fear not.

Yet, there’s a lot to be done in America. Our lagging social investments have the potential to provide jobs for people of varying skill levels, while boosting the nation’s productivity. At some point, we’ll get to these investments. The current expansion—if we don’t strangle it with austerity economics—is an opportune moment for productivity-enhancing social investment to help move the economy closer to full employment. We must protect the safety net so it can perform as well in the next downturn as it did in the last. But we can’t stop there. We must build an economy not only in which working families don’t fall behind in bad times but also in which they get ahead in good times.

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