Government plays key role in keeping people out of poverty

Approximately one in seven West Virginians found themselves in poverty during the recession years of 2008 and 2009. This number would have been even higher without crucial assistance from government programs (Figure 1).

Figure 1. West Virginians in poverty with and without government programs

Source. Current Population Survey, Annual Social and Economic Supplement, 2010. Microdata analysis by author.

If West Virginia families had relied solely on their own resources and on assistance from their employer, relatives and friends, or non-governmental agencies, twice as many people – an additional 272,000 people – would have been in poverty. Without governmental aid, three in ten West Virginians would have found themselves below the poverty line.

Two programs in particular proved to be the greatest anti-poverty tools. Social Security had the largest effect, keeping nearly 217,000 people out of poverty. This roughly equals the combined population of Charleston, Huntington, Morgantown (including students), Wheeling, and Parkersburg! The effectiveness of this program might be dampened in 2010 and 2011, because benefits will not increase by a cost of living allowance.

Unemployment insurance also played a key role in keeping many West Virginians out of poverty. As joblessness rose in the state, more unemployed workers qualified for assistance. In addition, provisions in the Recovery Act that increased weekly benefits and weeks of benefit coverage made unemployment insurance an even more effective anti-poverty program. Without these jobless benefits, an additional 15,000 people in West Virginia would have been in poverty.

Is federal spending out of control?

As the election grows near, if there is a a dominant message to be heard from the candidates on the national level, it’s that federal spending has been out of control and needs to be drastically cut. Advertisements often cite the financial bailouts, the stimulus plan, and the new health care law as examples of the unprecedented spending that is driving up the federal deficit. But is that really the case? This chart shows federal expenditures and receipts since 2000.

Source: U.S. Bureau of Economic Analysis
So what can this chart tell us? Well for starters, we began the decade with a surplus, as federal receipts were higher than expenditures. In 2001 the first of what was to be known as the Bush Tax Cuts were enacted, which lowered revenue and dropped receipts below expenditures.  The recession in 2002 and 2003 lowered revenue further, along with the rest of the Bush Tax Cuts, which were enacted in 2003. These factors kept federal receipts flat for a time, never catching up with expenditures again.

During the time before the current recession, there were three main factors driving the increases in expenditures, the war in Afghanistan, the war in Iraq, and the Medicare prescription drug program, all three of which took effect in 2002 and 2003, at the same time tax cuts were depressing revenue, causing the gap between expenditures and receipts that was the source of the federal deficit.

That brings us to more recent history, when the deficit began to really take off. As the chart shows, when the recession began in late 2007, expenditures continued to grow, but not at a significantly greater pace than they had been all decade. But as the economy sputtered to a halt, tax revenues fell, and federal receipts plummeted. 

But spending has been higher, just not for the reasons the political ads would lead you to believe. To start with, the bailouts were a one time cost, and while substantial, it appears the government will get most of its money back. The stimulus bill had a large price tag, but 40 percent of it came from tax cuts. Another significant portion was aid to state and local governments. Only what was left consisted of federal spending. And unlike the 2003 Medicare program, these aren’t new programs, they are temporary measures enacted in response to the recession. The new health care law does create a new program, but according to the Congressional Budget Office, while it does have new spending, it is offset by cost-saving provisions, and actually will lower the deficit over the next ten years. In fact, according to the CBO, the combined costs of bailouts, the stimulus, and the health care law, will be less over the next ten years than costs of the Medicare prescription drug program, enacted back in 2003.

The real source of the increase in spending, just like the decrease in revenues, is due to the recession. Its no secret that the recession put millions of  people out of work and in need of help, and indeed social safety net spending has increased. Between 2007 and 2009, unemployment insurance spending increased by $97 billion, Medicaid spending increased by $46 billion, and SSI, food stamps and other aid increased by $45 billion. This, along with a $73 billion increase in Medicare spending and $90 billion in Social Security spending with many new retirees, is to be completely expected in the face of the extraordinary economic downturn we have faced, and is government spending functioning exactly how it is intended.

Recessions will naturally cause budget deficits, and once the economy fully recovers, tax revenues will rise, safety net spending will fall, and the gap will begin to close. The problem is when the deficit is structural, like what we created in 2003, when new programs and spending were met with large tax cuts.

So while its easy to look at the federal deficit and attribute it to out of control federal spending, that doesn’t tell the complete story and is pretty disingenuous. 

West Virginia Jobs-Employee Mismatch Continues

Less than half of all West Virginia jobs (49%) will require some post-secondary education training beyond high school in 2018,  according to a recent study from the Georgetown Center on Education and the Workforce. West Virginia was the lowest among all the states plus the District of Columbia.  West Virginia ranks 51st in the proportion of its 2018 jobs that will require a Bachelor’s degree.

Among our neighboring states, Maryland and Virginia ranks above the national average.  West Virginia is the only state in the country that has less than half of its jobs requiring less than a college degree. 

There are an inadequate number of good paying jobs to accommodate resident West Virginia college graduates who can earn higher wages outside of West Virginia, especially for workers who’ve earned a Bachelors’ degree.   Consequently, one-third of West Virginia’s most highly qualified college students leave the state in order to find good paying jobs because of the lack of suitable employment. 

While the work participation rate in 2008 for West Virginia public higher education graduates was 54 percent, which included both in-state and out-of-state residents, it was only 67 percent for in-state students.  That is, one-third of resident West Virginia graduates leave the state after graduation.    

In 2008, 2,301 of the 3,692 PROMISE graduates were employed by West Virginia companies after graduating during the 2003-2004 school year, yielding a work participation rate of only 62 percent. 

The inability of West Virginia to create good paying jobs by 2018 combined with the fact that we’re losing about one-third of our resident college graduates will continue to put pressure on West Virginia to compete with our neighboring states. 

How Has the Recession Affected Your Community?

Here is an animated “heat map” that shows how unemployment rates have changed across the state during the recession. While the national recession officially began in late 2007, it didn’t begin to impact West Virginia until late 2008. The map tracks unemployment rates by county from August 2008 to August 2010. As the unemployment rate rises, the colors change from white to green to red to finally gray as the unemployment rate reaches past 15%.

Unemployment Rates
Source: West Virginia Center on Budget and Policy analysis of BLS data

US Businesses Hoard Cash While Millions Remain Unemployed

America remains a nation of jobless workers; nearly 15 million Americans have no job to get up to each morning.  Among them are 70,000 West Virginians who also remain unemployed.  While the 2008 US recession officially ended in June 2009 large US corporations are no worse for the wear and tear as they have managed to borrow and hold onto more cash than at any time since 1964. 

American businesses are sitting pat on huge stockpiles of cash refusing to participate in the economic recovery, yet the federal government’s fiscal policy hands are tied because Congress lacks support to double down on its $787 billion dollar ante to stimulate the American economy. 

America needs its large corporate businesses to help pull this economy out of the doldrums – the federal government cannot do it alone.  US businesses, particularly large US corporations, are hoarding cash at record levels and borrowing huge amounts of cash created by the “easy money” monetary policy which lead to record low-interest rates in the bond markets.  Rather than investing this new found cash reserves on equipment, machinery, and the hiring of workers businesses have opted sit out the economic recovery process. 

The total value of all liquid assets held by non-farm non-financial US corporations is $1.84 trillion dollars, equal to 7 percent of corporate America’s total assets ($26.4 trillion dollars).[1]  That last time American companies stockpiled this much cash was in 1964, nearly 50 years ago (see, graph below).   

Critics of government fiscal policy routinely claim that government gets in the way of economic progress because they crowd out private investment.  Despite the fact that large US corporations are in the best position possible to help move this country forward and put millions of unemployed workers back to work, they have folded leaving the federal government alone to do all of the heavy lifting. 

So, the next time you hear pundits claim the federal government, through its fiscal stimulus program, is hurting American businesses or preventing the private sector from taking the initiative ask them about the huge amounts of cash businesses were hoarding.  America needs large US corporations to re-invest back into the American economy to help reduce the nation’s 9.6 unemployment rate

[1] US Federal Reserve’s Z.1, Flow of Funds Account of the US, Total Assets from line 1, Table B.102 and Total Liquid Assets from line 41, Table L. 102.

Recovery Act Reduced Poverty in 2009

Earlier this week, the Census Bureau released the 2009 data from the American Community Survey, which we have a summary for West Virginia here. The poverty rate in West Virginia increased from 16.9% in 2007, before the recession, to 17.7% in 2009. This increase, while not good, is not as much as one would expect considering we were in the midst of the worst recession since the 1930s. West Virginia lost about 30,000 jobs, the unemployment rate more than doubled, and real wages declined by a total of $246 million, but the increase in poverty was statistically insignificant.

 So why did the recession have a relatively small effect on poverty in West Virginia? Poverty is measured using income thresholds that vary by family size and composition. And in West Virginia, transfer payments make up a significant portion of personal income in the state. This is due to a couple of reasons, mainly than West Virginia has an older population, drawing on Social Security and Medicare benefits.
Transfer payments were the key targets of several provisions of the Recovery Act (ARRA or the stimulus bill). These provisions included additional weeks of emergency unemployment compensation, extending the period from 26 weeks to 99 weeks (and benefiting thousands of West Virginians), an additional $25 per week for unemployed workers to supplement their benefits, additional food stamp assistance, and a one time $250 payment to those who receive Social Security, SSI, or veteran’s benefits. These were in addition to other provisions like the new Making Work Pay tax credit and expanded Child and Earned Income Tax Credits, and the normal levels of transfers.
These provisions had a clear and measurable effect on West Virginians. Between 2008 and 2009 unemployment compensation increased by $285 million, Social Security benefits increased by $465 million, and SSI benefits increased by $44 million. These increases helped West Virginians’ income from falling dramatically in the recession, and likely kept thousands from falling into poverty. In fact, recent analysis has shown that unemployment insurance kept 3.3 million people out of poverty nationwide.
That’s not to say that poverty isn’t a problem, and now that the recession appears to be over we can forget about it and move on. Despite the Recovery Act and other policy actions, the recession still pushed over 12,000 West Virginians into poverty in 2009, and over 310,000 people in West Virginia are living in poverty. Economic growth has been sluggish and jobs have been slow to return. Without further action, those living in poverty may become trapped.