Welfare Reform Could Bump Into Fed Policy

AS Peter Barth drives about San Francisco, he frequently sees men or women holding signs at stoplights or drive-on ramps asking for money, food, or work.

Those few could turn into crowds of beggars and street vendors if welfare ''reform'' passes Congress, says the senior fellow at a new think tank. ''We are going to be like Brazil. It is the inevitable consequence of what is going on in Washington.''

This view stems from a failure of legislators to see the ''realities'' in the welfare picture, says Mr. Barth of Redefining Progress in San Francisco. The goal of bills in both the Senate and House is to turn welfare back to the states, giving them a block grant. The House would require strict work requirements and limits on benefits. The Senate would allow states to set such strictures. Some states have already moved toward requiring able-bodied welfare recipients to work for their benefits.

A basic problem with this plan is the explicit policy of the Federal Reserve to keep unemployment around 6 percent as necessary to keep inflation under control, notes Barth.

Only this week, the Fed decided not to drop interest rates further lest the economy pick up so much steam that unemployment, now at about 5.6 percent, drop even further below what Fed economists call the Non-Accelerating-Inflation Rate of Unemployment.

Economists figure that about 3 percent unemployment, or about 3.5 million of the 7.4 million jobless in the nation, are ''frictionally'' unemployed. That is, they are people changing jobs, often voluntarily, and out of work for only a short time. They may be construction workers awaiting a call for the next project, or managers looking for more challenge and money.

But the jobless picture for the remaining nearly 4 million out of work is more serious. Added to these are millions more adults who have exhausted any unemployment benefits and are too discouraged to seek work. That means, according to Barth, that capitalism requires roughly one-tenth of its potential workers to be jobless for the sake of price stability.

So if the states, under federal law or otherwise, decide to require adults on welfare to go to work after a limited period of benefits, say two years, where will they find jobs?

There are not quite 5 million welfare cases in the country, so at least that many adults are on welfare. Many presumably aren't fit for work for various reasons. But say 2 million were forced to seek work and found it. That would mean 2 million employed workers would have to lose their jobs if the Fed insisted on keeping unemployment at 6 percent of the labor force.

''What you will get is a shuffling,'' says Dean Baker, an economist at the Economic Policy Institute in Washington. Because many on welfare lack good job qualifications, they will often be competing for minimum wage or other low-paying jobs. A study by that institute, soon to be released, indicates wages of those with high school education or less could be depressed by 18 percent by competition from ex-welfare recipients. This would exacerbate a worsening distribution of income in the nation.

Many ex-welfare recipients couldn't support their families in such low-paying, often part-time, jobs. Yet business generally objects to measures that would raise the minimum wage.

Thus Barth charges that capitalism requires an army of workers living at bare subsistence level as well as an army of unemployed. He sees welfare children suffering inadequate nutrition and health care, perhaps joining their parents on the streets in a burgeoning subterranean economy.

The approach of President Clinton on welfare reform called for a two-years-and-out rule, but with funds for child care, job training, health insurance, and jobs of last resort. Finding work isn't left entirely to the availability of jobs in the private sector, which is subject to Fed monetary policy. New York City, among others, has put some welfare people to work cleaning up the city.

If the states are given full responsibility for welfare, many will be reluctant to take on the extra expense of providing government jobs and child care for single mothers or others on welfare. Rather, history suggests, many states will attempt to keep welfare benefits so low that welfare families will move to other states with more generous benefits - or wash windshields.