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Welfare Reform May Worsen Impact of Economic Downturns on the Poor

The number of Americans applying for help from the nation's four major welfare programs increases significantly during economic downturns, but current proposals to overhaul the welfare system fail to adequately address this issue, says Federal Reserve Bank of Cleveland Economist Elizabeth Powers.

Writing in the Bank’s Economic Commentary, Powers says, for example, that a 1-percentage-point rise in the 1994 unemployment rate would have added more than 1.2 million people to federal Food Stamp caseloads. Under current welfare reform proposals, that increased need may not have been met because of budget restrictions. Reform plans would fund welfare programs primarily through capped federal block grants to the states, and would set up contingency funds for recessions, emergencies, and population growth. Powers maintains that the grant ceilings and contingency funds are well below the needs suggested by recent recessionary periods.

Although states would have the option to cover welfare shortfalls from their own budgets, they would also be allowed to reduce their welfare spending by as much as 25 percent. Since guaranteed access to the major welfare programs would end, neither the federal nor state governments would be obligated to expand welfare spending to meet increased need, as they are under the current system.

Powers concludes that reduced payments and decreased opportunities for welfare participation will inevitably worsen the impact of economic downturns on the well-being of the poorest Americans.

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