Slump will test a more porous safety net

With unemployment in the United States headed toward 6 percent, perhaps higher, concerns are growing about the adequacy of the government's safety net for the jobless and the poor.

Layoffs are rising as the economy sputters - probably into a recession. It is unclear how deep the slump will be, but even a mild downturn would be the first hard-times test of a dramatically altered system of aid for the needy.

Among the developments that poverty experts find worrisome:

• For the first time since the launch of federal welfare in 1935, some people will be ineligible because they have hit a five-year limit, set by Congress in 1996.

• Already, some states are running short of funds for assisting the newly jobless. All states but one must balance their budgets, so the problem could deepen as rising unemployment coincides with falling tax revenue.

• Since the last recession, in 1990-91, the scope of the food-stamp program has been narrowed. Since 1996, eligibility has been limited for legal immigrants and childless 18- to 50-year-olds. Benefit levels were also trimmed.

"The safety net is not as strong as it was in the recession of the early 1990s," says Heather Boushey, a labor economist at the liberal-leaning Economic Policy Institute in Washington.

The programs collectively known as the safety net - which are generally administered by states using a mix of federal and state funds - are meant to bolster the income of the jobless.

But the safety net also serves a broader function that benefits the whole economy, not just the poor: It can help maintain enough consumer spending to prevent hard times from growing worse. If the jobless cut back sharply on spending, businesses may have to lay off more workers.

Despite the acknowledged benefits, some of the programs have been controversial. Critics have lamented a culture of dependency and government disincentives for single mothers to marry and work.

Changes in the 1990s and 1980s constrained safety-net programs such as unemployment insurance and welfare.

To date, welfare reform has been largely hailed as a success. Welfare rolls have fallen in half as recipients - mostly single mothers - went to work.

But the 1996 act's five-year time limit is only now beginning to kick in, with formulas varying from state to state. And it has yet to be tested by recession.

Now, with the economy faltering, leaders in both parties have taken some steps to close perceived safety-net gaps. President Bush has proposed extending unemployment insurance by 13 weeks in certain circumstances, on top of the usual 26 weeks.

To some Democrats, his plan is not generous enough.

"Unfortunately, the president's proposal lacks the resources to help all the people who need it," House Democratic leader Richard Gephardt said Oct. 4.

Encouraged by the 51-member Progressive Caucus, the Democratic leadership in the House is expected to call next week for several measures to brace the safety net as part of a plan to stimulate the economy.

A further concern is that states are scrambling to balance budgets amid rising bills for unemployment insurance, welfare, and Medicaid, the nation's health-insurance program for the poor. Some states will cut back on this spending or boost taxes in a recession. Texas and New York could face trouble within a year.

"Many states find themselves between a rock and a hard place," says budget expert Robert Reischauer, president of the Urban Institute in Washington.

In the prosperous 1990s, some states cut their unemployment insurance taxes to be more attractive to businesses. That means less money saved up for times when layoffs surge.

The Progressive Caucus calls for a return of federal revenue-sharing to help the states out.

At the beginning of September, the unemployment rate was 4.9 percent of the labor force.

That rate is low compared with earlier recessions. But the jobless rate is what economists call a "lagging indicator." It rises for a time even after the economy has started to expand once more. Many economists see the rate hitting 6 percent - and some predict as high as 8 percent - in 2002.

The challenge comes at a critical time for the welfare program. Many who left welfare when jobs were plentiful now face layoffs and the prospect of going back on welfare. Moreover, the five-year limit is nearing for many people with physical or mental disabilities who never found work, even during the 1990s boom.

Another problem for states: The 1996 act provided that the federal payments they receive to help cover welfare costs will not automatically rise in a slowdown. In that sense, and because of the time limits, welfare is no longer an "entitlement" program.

The federal contribution is made as fixed block grants. So, if the number of newly jobless mothers multiplies, it is not certain that all states will be able to make full welfare payments.

"Now we are going to test that," says Mr. Reischauer.

Some also call for a broadening of unemployment benefits.

Robert Greenstein, director of the Center on Budget and Policy Priorities in Washington, urges that the most recent earnings be used in determining a jobless worker's eligibility and benefit levels. And more of those who work only part time should qualify for benefits, he suggests.

One area where the safety net has been strengthened in the past decade is the Earned Income Tax Credit. It now puts more cash in the pockets of low-income families. But they must be working to receive the payments.