Safety-net programs critical to family and economic stability

This column appeared in the Denver Business Journal as a counterpoint to a column by Justin Longo of the Independence Institute. (Link to similar column use because of copyright restrictions.)

By Rich Jones

As we continue to grapple with the widespread personal and economic devastation of the Great Recession, it is increasingly clear how much worse things would be without key safety-net programs such as unemployment insurance and food stamps.

The purpose of these programs is to help workers and their families in times of need. Unemployment insurance benefits temporarily and partially replace wages for workers who lost jobs through no fault of their own. Food stamps (now called SNAP benefits) help mostly low-income people – many of whom work or who lost jobs – pay for food.

Both of these programs ramp up as the economy turns down and more people are laid off. They help families put food on the table, pay the mortgage and make car payments. By replacing some of the lost wages, they help maintain consumer spending. That's critical in an economy that depends on consumer spending for about 70 percent of its output.

Just ask the grocer, the mechanic or the landlord how important it is for laid-off workers to still have money to pay their bills. Businesses can continue to provide products and services rather than make more cuts that result in further unemployment and economic decline.

Although our economy is performing better than many other states, a lot of Colorado families are still hurting. Our unemployment rate was 8.5 percent in July, better than the national rate of 9.1 percent. Still, close to 230,000 Coloradans remain unemployed.

In Colorado, unemployment benefits replace about half of a worker's average weekly wage. The benefits are capped at $500 per week – roughly half the average weekly wage in the state.

Employers pay a tax on the first $10,000 of each worker's wages to fund these benefits. During good times, when few people claim benefits, these taxes build a surplus in the unemployment insurance trust fund. Money in the trust fund is drawn down when recessions hit and more people are out of work. The tax rate that employers pay depends on the number of their workers who receive unemployment benefits - those with a lot pay a higher rate.

The most recent data shows that 203,000 Colorado families are receiving SNAP benefits, almost twice as many as before the Great Recession. These are low-income families. Nationally, about nine out of ten SNAP recipients live at or below the poverty line. Four out of ten live at half the poverty line. SNAP benefits cost the federal government $56 billion in 2009. That's less than 2 percent of the total $3.1 trillion budget.

In addition to helping families, most mainstream economists agree these benefits help stimulate the economy. Recently, conservative critics have had a field day taking pot shots at President Obama's press secretary for saying unemployment benefits help create jobs. But he is right.

The nonpartisan Congressional Budget Office (CBO) recently concluded the federal stimulus package increased the number of people employed as of June 2011 by between 1.0 and 2.9 million. According to the CBO, among the package's most effective provisions were transfer payments such as unemployment insurance and SNAP benefits.

The president's Council of Economic Advisers estimated that in September 2010 there were about 800,000 more people employed than would have been had Congress not extended unemployment benefits during the sluggish recovery.

Mark Zandi, chief economist for Moody's Analytics has argued that extending unemployment benefits and temporarily increasing food stamps are two of the best ways to stimulate the economy. Benefits are spent quickly and result in between $1.64 and $1.73 in economic activity for every $1.00 spent on them. He recently called for extending emergency unemployment benefits as a way to promote the economy and avoid job losses.

A study by the Urban Institute and IMPAQ International, an economic modeling firm, also found that unemployment insurance benefits help stabilize the economy. These benefits generate about $2.00 in economic output for every $1.00 spent on them – even after taking into account the taxes to fund them.

Some argue that paying more unemployment benefits discourages people from looking for work. Economists generally agree that this can happen in some cases, but a study by the San Francisco Federal Reserve Bank determined the broader effects on economic growth far outweigh any disincentives some workers might have to look for work.

Unemployment and SNAP benefits help those most in need get through hard times. At the same time they can help stimulate the economy. What we really need are jobs, of course, and no one argues paying these benefits constitutes a long-term economic recovery strategy. But without them the Great Recession might have become another Great Depression, and if we cut them now we will further endanger our already fragile recovery.

Rich Jones is Director of Policy and Research and the Bell Policy Center, a non-profit research and advocacy organization in Denver.