The Obama Budget's Promise and Peril

I've been asked for a few words about how the recession may affect poverty in the United States, and also about policy issues related to poverty that have emerged from the economic recovery legislation and from the budget debate on Capitol Hill.

When recessions occur, people lose their jobs and poverty rises. Based on historical experience in recent recessions - on the degree to which poverty rises for each one percent increase in the unemployment rate - we can estimate how much poverty may grow in this recession. The unemployment rate stood at 8.1% in February and is still rising. If it peaks at 9%, then the number of people living in poverty will likely rise by between 7.5 million and 10.3 million. Unfortunately, some forecasters expect the unemployment rate to rise above 9% and to reach double digit levels. So we're looking at very substantial increases in poverty.

Moreover, these increases in poverty will be made even more painful by two other developments. First, many states will be making substantial budget cuts in programs that affect low income people in order to help close the large budget deficits they are facing as a result of the recession. Second, over the past 30 years, the U.S. safety net has been made stronger for the working poor but much weaker for poor people without jobs, and we're in a recession where a growing number of people don't have jobs.

As the recession has deepened, consumer spending has contracted substantially. Even though the problems in the economy may have started in the financial and housing markets, we now have a broad recession where all kind of firms are laying off workers because consumers aren't buying the goods and services these firms produce.

To stem the job losses and the downward economic spiral, we need much more demand for goods and services. One piece of good news - on both the economic and anti-poverty fronts - is that the economic recovery legislation enacted in February recognizes that in a recession like this, the best way to inject more demand into the economy is to put more money in the pockets of low- and moderate-income families. People who live paycheck to paycheck spend almost every additional dollar they receive. In contrast, research shows that tax cuts for people at the top end of the income scale are largely saved rather than quickly spent. Accordingly, the recovery package enacted in February contains increases in what we call "refundable tax credits" for low- and moderate-income families (like the child tax credit and Earned Income Tax Credit), temporary increases in food stamp and unemployment benefits, and other measures that should help the poor and the unemployed significantly - and thereby also help the economy. Poverty and hardship will still rise a great deal because of the economic downturn, but the increases should be considerably less severe than they otherwise would have been.

This brings me to the President's budget. This budget is quite different than many previous budgets. It would devote resources and set priorities in ways that would be of considerable benefit to people living in poverty, both in the United States and around the world. I'm not going to go into detail on all of the ways that the budget is helpful here; one such area obviously is the call for universal health coverage. People without health insurance are primarily low or moderate income. The budget also would take the measures in the economic recovery package that temporarily expand refundable tax credits for low-income working families and make them permanent, and it would offset the cost of doing so by closing various unproductive tax loopholes. The improvements in the child tax credit alone would benefit over 15 million low-income children. And the improvements in the child tax credit and the Earned Income Tax Credit combined would lift nearly 1 million children - and more than 2 million Americans of all ages - out of poverty. The budget also includes major new resources to combat disease and poverty in very poor countries around the world.

The budget does all of this and reduces the deficit at the same time. Over the next ten years, budget deficits - while still uncomfortably high - would be nearly $1 trillion lower than if we simply continued current policies unchanged.

Some may wonder how you can pursue universal health insurance and other initiatives and reduce the deficit at the same time. The answer is that the initiatives in the budget would be "paid for" through a variety of proposals, ranging from rolling back overpayments and unwarranted subsidies to health insurance companies and other health providers in the Medicare program to closing an array of unproductive tax loopholes, many of which have been embedded in the tax code over the years as a result of powerful special-interest lobbying.

But there is a danger. Nearly every one of the President's budget proposals that would produce savings to help finance universal health coverage or to pay for improvements in tax credits for low-income working families or other anti-poverty measures is now under fire from powerful special-interest lobbies, many of which have hooks into both parties. So the outcomes on these proposals are in doubt. Will enough tax loopholes be closed to make the improvements in the refundable tax credits permanent and thereby reduce child poverty? This is unclear. Will Congress agree to remove unnecessary subsidies to banks and other middle men in the student financial aid programs to pay for the improvements the President has proposed in Pell grants for low income students so that more of those students can afford to get a college education? This, too, is unclear.

There are battles like this throughout the budget. This is essentially a budget that makes hard choices in order to reprioritize and to address critical unmet needs, including needs related to poverty both at home and abroad. Over the next year or two, some extremely important decisions related to budget and tax policies will be made. The outcomes on these decisions likely will have a large impact on the degree of poverty and hardship at home and abroad for years to come.

Bob Greenstein is the founder and executive director of the Center for Budget & Policy Priorities. This post is adapted from remarks he made recently during a media conference call announcing the Mobilization to End Poverty. Click here to listen to audio of the call.