Spotlight Exclusives

April 6, 2009: The Stimulus and Poverty: First Steps toward a Strong Antipoverty Policy, By Timothy Smeeding, Director of the Institute for Research on Poverty

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Over the coming weeks, Spotlight is running a special series that examines how the American Recovery and Reinvestment Act affects low-income Americans.

Economist Timothy Smeeding, who founded the Luxembourg Income Study, which enables cross-national comparisons of poverty, opens the series with an overview of the sea change in Washington and the opportunities it presents to reduce poverty and enhance social and economic mobility for those who are less fortunate.

The stimulus bill signed into law by President Barack Obama on February 17, 2009, not only contains fiscal relief to states and job creation strategies, but also signals a new revolution in American social policy. The new budget just passed by the House and Senate does even more for the poor. If we look at federal, state, and local government budgets, we realize that about 80 percent of what governments tax and spend can be classified as “health,” “education,” or “welfare” (cash or near-cash benefits, refundable tax credits, and the like) in their broadest sense.

The $787 billion stimulus package contains about $175 billion in direct aid to individuals, including $20 billion in additional food stamp (SNAPSupplemental Nutrition Assistance Program) funding, $40 billion for expanded Unemployment Insurance Benefits, $25 billion for COBRA health insurance premium relief, $17 billion in education assistance, and $70 billion in refundable tax credits. The budget, passed on April 2nd, likely does even more, though its effects are yet to be analyzed. The effects of both actions on income poverty are expected to be substantial.

For instance, the refundable “Making Work Pay” tax credit and the child credit provisions in the income tax code are expected to help 13 million kids under the age of 17. With the stimulus bill, it now reaches about three million more kids and gives the families of another 10 million already-participating kids as much as $825 more per year than they receive now. There are enough refundable credits to stop one million kids and their families (2.3 million people) from being pulled below the poverty line by the recession, according to the Center on Budget and Policy Priorities.

Single-parent families have been hit especially hard in the recession, making child support more essential than ever as a source of income. This affects a lot of children, as about half of all American children will spend part of their childhood living in single-parent households, and currently 17 million children one in four receive child support services. The stimulus bill will aid struggling families by temporarily suspending a 2006 cut in federal matching funding for states۪ child support enforcement. This suspension will make funding available to states and counties, many of which were facing imminent cuts in services, through September 2010. Analysts suggest that states stand to benefit significantly from this aid. Wisconsin, for example, could receive up to $52.8 million in these performance-incentive matching funds; California, one of the hardest-hit states, could receive up to $154.5 million.

President Obama۪s stimulus bill goes beyond providing immediate assistance to ensure the basic necessities and provides funding for long-term efforts that could help reduce the education gap. This, in turn, could ameliorate the high economic inequality in the U.S. House and Senate April 3rd approval of the 2010 budgets, to be reconciled in the coming weeks. It also clears the way for President Obama۪s major social policy initiatives that follow the stimulus.

The Institute for Research on Poverty (IRP) is vitally interested in these issueshow the new spending and tax provisions in the stimulus and budget bills help keep families and children from poverty in these hard times, how the education initiatives prevent layoffs due to falling housing prices and foreclosures (which reduce the state revenues needed to keep schools open) and might help raise graduation rates of our colleges, and how the health care dollars help families who lose their health insurance when they lose their jobs.

The Luxembourg Income Study (LIS) has enabled us to put American poverty in perspective by comparing the U.S. poverty rate with the rates in other rich countries. In a recent study using LIS data that compared U.S. rates with those in Canada and nine European countries, we found that poverty in the United States was the highest of all, at 17 percent, prior to the recession. Poverty rates in Canada are substantially lower, at 11.4 percent, and they are especially low in the Scandinavian countries, 5.4 percent in Finland and 6.5 percent in Sweden. Worse still, the U.S. poverty rate for households with children is very high, at 19 percent, in contrast with rates of 3 percent in Finland and 4 percent in Sweden. And UK poverty rates for children have fallen below United States child poverty rates as well.

With the economic recession worsening, these poverty rates will definitely climb higher still in the United States. Most other rich nations have more advanced and well funded safety nets that will reduce the recession۪s impact on the poor, though not to zero. The stimulus and budget bills can be viewed as our national attempt to protect the poor. We have learned a great deal about how to reduce poverty in our nation, and it appears that some in the leadership in Washington have both the will and the wisdom to apply that knowledge, in these hard times, to a renewed drive to reduce poverty and inequality in the world۪s richest nation.

In England, Tony Blair and Gordon Brown were able to halve absolute poverty within 10 years by making poverty reduction a national priority, while devoting one percent of national income to attaining that goal. America can have the same success if it also makes poverty reduction a national priority. A goal to halve U.S. poverty can be reached by a combined effort of poor individuals۪ own work efforts, government actions such as those enacted by the Obama administration, and, finally, the help of nonprofits and faith-based organizations. But especially in these difficult times, work alone (assuming one can find it!) will not solve the poverty problem. It will take a national effort and effective antipoverty policy to both combat the recession and then to significantly reduce income poverty as the nation recovers from the severe economic slump now engulfing us.

This summary draws from an IRP seminar held on March 5thin response to the need to know how the stimulus bill provisions change the social policy playing field. IRP Director Timothy Smeeding moderated the presentation, with IRP Faculty Affiliates Daniel R. Meyer, Professor of Social Work, commented on the bill۪s cash and non-cash transfer programs; Sara Goldrick-Rab, Assistant Professor of Education Policy Studies and Sociology and Scholar at the Wisconsin Center for Advancement of Postsecondary Education, commented on aid to education; Pamela Herd, Assistant Professor of Public Affairs and Sociology, commented on health and health care support; and Andrew Reschovsky, Professor of Public Affairs and Applied Economics and Affiliate of the Wisconsin Center for Advancement of Postsecondary Education, presented a synopsis of how federal stimulus funding influenced the State of Wisconsin۪s education budget.

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