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Biggest Bang for the Buck: Researchers Weigh Stimulus Proposals

recoveryEconomic stimulus plans being debated on the Hill address a multitude of potential remedies. Urban Institute researchers take a closer look at key components that could have a significant impact on recovery.


Accountability for Outcomes
Harry P. Hatry

Children
Olivia Golden

Contradictory Fiscal Challenges
(Testimony before Senate Budget Committee)
Robert D. Reischauer

Earned Income Tax Credit Expansion
Peter Edelman, Mark Greenberg, Harry J. Holzer

Employment and Training
Harry J. Holzer

Employment of Older Adults
Richard Johnson

Funding Decennial Census
Robert L. Santos

Homelessness Prevention and Affordable Housing
Mary Cunningham

K-12 Education
Jane Hannaway

Medical Assistance
John Holahan

New Markets Tax Credits
Martin Abravanel, Nancy Pindus, and Brett Theodos

Nutrition Assistance / SNAP
Sheila Zedlewski

Postsecondary Education
Elaine Maag

Prevention Activities
Barbara Ormond, Brenda Spillman, and Timothy Waidmann

Public Housing
Margery Austin Turner

Short- and Long-Term Fiscal Challenges
(Testimony before Senate Budget Committee)
Rudolph G. Penner

Small Businesses
Brett Theodos

State Budgets
Kim Rueben

Supplemental Security Income Benefit Payments
Melissa Favreault

Tax Stimulus Report Cards
Urban-Brookings Tax Policy Center

 

Employment and Training Proposals in the Proposed Recovery Package

Harry J. Holzer

Harry Holzer
Besides enhanced access to Unemployment Insurance and "safety net" programs, the recovery package should include job-creation provisions for the most disadvantaged workers.

As the nation’s labor market slides into a deeper recession, what kinds of employment and training provisions should be included for our least-educated and most-disadvantaged workers?

Such policies need to consider that:

  • Our least-educated workers, especially minorities and the young, will continue to suffer the largest increases in job loss and unemployment;
  • Many of these workers will also not qualify for such “safety net” programs as Unemployment Insurance (UI) and Temporary Assistance to Needy Families (TANF);
  • They will also have the lowest access to most construction and other “green economy” jobs created by the stimulus package, unless special provisions are made for them; and
  • Over the long term, these workers suffer from large gaps in skills and work experience (relative to more-educated workers) that “human capital” investments could alleviate during the downturn.

These considerations imply that, besides enhanced access to Unemployment Insurance and other "safety net" programs, the recovery package should include special job-creation provisions for the most disadvantaged workers – perhaps including set-asides of some fraction of the infrastructure and "green" jobs for these populations, as well as community service jobs for low-income youth and adults. 

Major education and job- training opportunities should also be included – with investments in “human capital” to match those planned for physical capital and infrastructure. These initiatives would stimulate the economy more and enjoy broader participation if accompanied by income stipends or paid work experience (such as apprenticeships) for the poor. 

How well does the proposed American Recovery and Reinvestment Act hold up when judged by these considerations? Several provisions in the bill do quite well. On top of major funding increases for Unemployment Insurance and health benefits for the unemployed, $5B of extra funding (over two years) would go for job training and employment services. Another $15B is for Pell grants for low-income students while $4B would go to Head Start and other child care services. Smaller sums would be spent on creating jobs in home weatherization, cleanup and restoration of public lands and parks, and blocks grants for community development and community services that should be more available to the poor. 

Still, as is, the bill has some limitations. Given a total proposed outlay of about $825B, the amounts for additional job training and job creation for the poor (especially outside of the Pell grants, which can help only the "college-ready") are quite small and are spread out thinly among numerous existing funding streams. This way, much of the money can be appropriated and spent without new legislation, but monitoring their targeting and effectiveness will be hard. Meanwhile, while there is a provision for summer jobs for in-school youth, the bill provides relatively few jobs for out-of-school youth or disadvantaged adults. There are no set-asides in the vast infrastructure funding to ensure that minorities and other disadvantaged groups will have access to these jobs; nor any there any income stipends for poor students or trainees. 

Three measures would close these gaps in the proposed bill:

  • Increasing funds for programs targeted explicitly to disadvantaged out-of-school youth and adults;
  • Allowing these funds to be spent on job creation and income stipends as well as training; and
  • Setting aside for disadvantaged groups or apprenticeships some new jobs, though not so many that implementation would slow down as a result.

Upgrade the Stock of Public Housing

Margery Austin Turner

marjery austin turner
Done right, funds to modernize public housing will improve housing outcomes for needy people, but investments should be directed to projects in reasonably healthy neighborhoods.

The stock of public housing represents a vital national resource, providing homes and apartments that our poorest and most vulnerable families, seniors, and disabled people can afford. But this stock is aging and federal funding for maintenance and renovations has consistently fallen short, so the backlog of capital improvement needs is huge. Over the last decade and a half, many of the most severely distressed projects have been demolished, heightening the urgency of preserving what's left.

The proposal to spend $5 billion to renovate public housing projects and make them more energy efficient meets many of the key criteria for an effective stimulus*. Funding mechanisms for transferring money from HUD to local public housing agencies already exist. Building renovations can get under way quickly because these agencies own the stock and know what needs to be fixed, modernized, or replaced. Renovations and retrofitting will create construction jobs, and almost all these jobs will be in central cities, where unemployment rates are highest. And, done right, these one-time investments will improve housing outcomes for needy people while also reducing long-term subsidy costs by cutting building maintenance and operating expenses.

But public housing modernization poses a trade-off between moving fast and being smart. HUD must take the time to figure out which public housing projects are really worth saving. Spending stimulus funds to preserve and upgrade public housing projects in severely distressed neighborhoods won't do anything to reduce crime and violence or restore dysfunctional public schools. It just consigns another generation of kids to the danger and damage of growing up at risk.

Instead, investments to upgrade public housing for families should be directed to projects in reasonably healthy neighborhoods. There are plenty of these to choose from. HUD should require local agencies operating family projects in severely distressed neighborhoods to use stimulus dollars differently: acquiring and renovating apartment buildings and single-family homes in decent locations and transferring long-term public operating subsidy commitments to these replacement properties. Today's weak housing markets, with landlords and homeowners alike facing foreclosure, offer a unique opportunity to preserve and strengthen the public housing stock without blindly saving every building.

Public housing preservation alone can't solve the housing affordability problems facing low- and moderate-income renters in communities across the country. And the evidence is clear that housing vouchers —which offer families more choices about where to live — must play a central role in any long-term solution. But when public housing is located in decent neighborhoods, it constitutes a vital resource that we should preserve and strengthen.

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*The proposed package also includes $2.5 billion for similar upgrading of the privately-owned subsidized stock.


K-12 Education: Stabilization and Reform

Jane Hannaway

jane hannaway
The education stimulus would save jobs, protect services, and provide direction for longer term improvement.

K-12 education is in line to get a big chunk of the proposed economic stimulus. As much as $100 billion could go to cash-strapped school districts. For perspective, the U. S. Department of Education's entire fiscal 2008 discretionary budget is only $59.2 billion. The twofold rationale for the large infusion is that funds can be quickly dispersed using current formulas and that as an investment education can have high social returns. Much of the funding is designed simply to stay the course in education and thereby save jobs, but some of it is designed to move education forward in new ways. Both are important.

The bulk of the education stimulus package is slated to go to state and local governments to cover what, in better economic times, they would have paid for themselves. The funds would help prevent otherwise inevitable job cuts, given the sorry state of state coffers, and would also help protect the nation's current investment in students, especially those from poor families and those with special education needs.

Stimulus funds would also foster greater efficiency. Four so-far modest investments are noteworthy for their promise and for the signals they send about the new administration's priorities.

First, an additional $1billion is proposed for integrating technology to improve teaching and learning. Other sectors have enjoyed large productivity payoffs by substituting technology for labor. Now some may be on the horizon for education.

Second, an additional $200 million would more than double the Teacher Incentive Fund, a competitive grant program to provide financial incentives to teachers and principals to improve student achievement. Such efforts, yet unproven, are path breaking.

Third, $250 million in competitive grants would go to states to develop statewide longitudinal data systems. Until recently, education decisions were made largely on the basis of a hope, a prayer, and good intentions. The more than doubled federal investment makes better grounded strategic decisions possible.

Fourth, charter schools would get more aid for facility and renovation needs— a common stumbling block for these new start ups.

The education stimulus would save jobs in the short run, protect services to current students, and provide direction for longer term strategic improvement. Seems like a wise move.

Yet the Senate version stripped out the funds likely to leverage long term improvement in education—a short-sighted view given the importance of education to economic growth.


Critical Decennial Census Funding Included in the Stimulus Package

Robert L. Santos

Rob Santos
Stimulus funding for the Census would provide an infusion of new jobs, better community participation and a more accurate census.

Decennial censuses form the bedrock of knowledge about the U.S. population. Census data are vital for federal, state and local governments as well as the media, policy makers, and community organizations-indeed, virtually every sector of U.S. society. Yet at this moment of national and worldwide economic calamity, the Census Bureau faces its own crisis: successfully conducting the 2010 decennial census. The stimulus plan offers crucial assistance to preserve the nation's data infrastructure.

Title III of the American Recovery and Reinvestment Act of 2009 includes a $1 billion allocation to the Census Bureau for Periodic Censuses and Programs. The proposed funding addresses significant risks due to a necessary, late-breaking re-plan of the non-response follow-up (NRFU) portion of the 2010 decennial census. The funding includes $150 million specifically for communications and community outreach programs to improve participation among historically undercounted U.S. households and persons.

So why include Census funding in an economic stimulus plan?

A shovel-ready infrastructure project. The upcoming 2010 decennial census represents a critical "shovel-ready" infrastructure project. Just as crumbling roads and bridges slow traffic and pose dangers, a compromised decennial census would make census-based redistricting unnecessarily flawed and could impede or even mislead the census-based analytic findings for other data users. Stimulus funding would allow incremental hiring and training of field staff and expand community based partnerships in the critical months leading to the census. The payoff would be increased census participation in historically difficult areas and, thus, a more accurate census.

Infusion of new jobs. Continued lay-offs and negative job growth are expected through 2009-2010. Amid this economic downturn, the U.S. Census Bureau is launching the nation's largest-ever civilian mobilization-the hiring of decennial NFRU field enumerators and support staff. Yes, the jobs are temporary, but they would still provide meaningful stop-gap relief to some of our growing numbers of unemployed.

Long and short term benefits. A more accurate 2010 census discourages legal challenges that question its integrity. It would also provide better information on policy-relevant, historically undercounted groups, for instance at-risk subpopulations such as low-income families, minorities and the homeless.

Apart from the $150 million allocated to communications and partnership programs, there are no details yet on how the $850 million balance would be allocated—a problem but not a show-stopper. In any case, the Census Bureau should be held fully accountable for how it expends these funds.

Finally, the current absence of an appointed census director is a problem. The Bureau and the nation deserve fully staffed leadership as the decennial census approaches. The Obama administration is encouraged to make this appointment a priority.


Provide Financial Assistance for Postsecondary Education

Elaine Maag

Elaine Maag
Financial assistance to students may provide long-term results, but the tax credit could well reach students after the recession ends.

Attending college represents a promising path to higher future earnings and more stable employment. But when times are hard and jobs scarce, as they are now, attending school becomes relatively less costly than during better economic times when jobs are plentiful. Still, the direct costs of college may prohibit some individuals from attending.

To encourage potential students to get more postsecondary schooling, government could lower education costs directly by subsidizing schools or indirectly by providing more financial aid—particularly to students too poor to attend otherwise.

The House stimulus proposal increases financial aid to students in two ways—by increasing the Pell grant ($17.1 billion*) and increasing tax credits that offset the costs of higher education ($13.7 billion). The maximum credit under the Pell Grant would rise from the currently legislated $4,360 to $4,860 for the 2009-2010 academic year. The "American Opportunity" tax credit would provide students or their parents a tax credit of up to $2,500 to offset college expenses. The credit is partially refundable, so all who are eligible can receive up to $1,000, regardless of how much they owe in taxes.

Of these two proposals for helping low-income students, the Pell expansions may more effectively encourage people to attend school. Most important, Pell funds reach cash-constrained students when they most need it—at the time of enrollment-- whereas benefits from the tax credit can lag actual tuition payments by up to 15 months. Additionally, most Pell grants go to students with family incomes below $50,000. Education tax credits, on the other hand, help students with incomes of up to $180,000 (married couples) or $90,000 (individuals). Prior research on similar proposals aimed at this broad group suggests a large portion of the funds will indeed go to higher income students (Burman, Maag, Orszag, Rohaly, and O'Hare 2005).

It is unclear how much either of these proposals will stimulate the economy. The tax credit could well reach students after the recession ends. If so, students who attend or complete college as a result enjoy long-run gains, but today's flagging economy might not.

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*The proposed package includes $15.6 billion for increasing the maximum Pell grant by $500 and $1.5 billion to cover a shortfall in the Pell program stemming from an already mandatory increase in the Pell grant of $490 each year. Much smaller expansions of the work-study program, student aid administration, and increasing student loan limits have also been proposed.


Support Small Businesses

Brett Theodos

Brett Theodos
The SBA is positioned to help America's small businesses, but to encourage job creation, it will have to do more.

America's small businesses need help. Like large corporations and homeowners, the credit crisis is making it difficult for small businesses to get loans. The Small Business Administration (SBA) which, until recently, guarantied over 100,000 small business loans a year through its 7(a) and 504 programs, is positioned to help, but has remained on the sidelines in lending processes throughout the country and in policy discussions in Washington. The American Recovery and Reinvestment Act of 2009 contains several needed measures, but to be most effective the agency also needs to refocus its efforts.

When the financial crisis first started, many hoped the SBA would offer a counter-cyclical boost to the economy. The agency provides federal guarantees of up to 85 percent of loans to small businesses that are underwritten, approved, and processed by private lenders. Prevailing wisdom held that in times of financial duress, when losses mounted and credit standards tightened, lenders would originate more loans with a SBA guaranty. This has not been the case: lenders made 29 percent fewer SBA loans in 2008 than in 2007, forcing thousands of small businesses to delay expansions or openings, lay off staff, or even close up shop. The first quarter of fiscal year 2009 proved even worse: SBA loan originations were down 62 percent from their peak in 2007.

The American Recovery and Reinvestment Act addresses the three factors that produced this decline. First, it seeks to reinvigorate the secondary market for the guaranteed portion of SBA loans which has virtually frozen. Illiquid and unable to sell loans, many banks have halted their SBA lending. A few regulatory fixes and the Term Asset-Backed Securities Loan Facility (TALF) initiative are underway, but the Recovery Act goes further to ensure a functioning secondary market by providing guarantees for 504 Program first lien loans and lending to secondary market brokers.

Second, lenders have tightened credit standards just when creditworthiness among borrowers is declining along with the collateral value of real estate property. The stimulus legislation authorizes the SBA to temporarily increase its guarantee from 85 percent to 95 percent. This change will reduce the risk faced by lenders when originating an SBA loan, and make lenders more willing to lend.

Finally, SBA lending is down because demand for loans has deteriorated with the worsening economy. To date, the SBA has been relatively inflexible with respect to refinancing, but this legislation allows lenders to use an SBA guarantee for refinance loans - vital in today's financial environment. This change will allow small businesses to take advantage of interest rates that, in the guaranteed market, are at historical lows. Subsidies that temporarily reduce program fees could be added to the legislation in an effort to make SBA loans more affordable to small businesses.

To encourage job creation, the SBA will have to do more. Urban Institute research found that 7(a) firms add just one employee on average in the three years following the receipt of an SBA guaranteed loan. In the coming months, the SBA should focus its programs toward job creation and retention, abandoning the mindset that all small businesses are equally likely to grow. New programs and new funding vehicles should provide patient equity and soft debt capital, rewarding good ideas and promising businesses that are likely to expand their employment.


Make Accountability for Outcomes a Key Element of the Authorization

Harry P. Hatry

hatry_sm
Provisions for financial accountability aren't matched by those for achieving the funding package's intended results.

The January 2009 draft House of Representatives Authorization Act reflects fine intentions to build in accountability for the use of this extraordinary amount of funds. However, provisions for financial accountability aren't matched by those for achieving the funding package's intended results.

The Authorization clearly identifies the basic key outcomes that each package is intended to achieve and that the public expects. Some examples:

  • Road and bridge investments of $30 billion are for bringing roads and bridges back to safe and satisfactory levels and for creating roughly 835,000 jobs.
  • Investments in Department of Interior's Bureaus of Land Development, Fish and Wildlife, Reclamation, and National Park Service funds are for rehabilitating facilities to maintain visitor safety and preserve natural, animal, and cultural resources.
  • Added investments in Border Protection technology are for meeting minimum technology performance standards for security scanning.
  • Educational investments in both the Department of Education and National Science Foundation are for improving youth literacy and math and science knowledge.

Largely missing in the Authorization are provisions requiring:

  • Tracking and reporting of the results of the individual packages. Yes, some outcomes for some investments will take years. In such cases, intermediate and early outcomes should be tracked, such as the initial increase in the added number of persons employed.
  • Explicit, time-phased, outcome targets for each package with regular subsequent comparisons (at least annually) of these targets to the actual results-and regular reports to Congress and the public.
  • Selected in-depth evaluations of major funded programs. Rapid feedback techniques, for instance, could provide preliminary performance evaluations while more extensive benefit-cost analyses could give the big picture in retrospect.
  • Selected initial systematic analyses of the costs and benefits of major alternative projects before funding them. Each funding package will inevitably require major choices among alternative projects. To get the most results for the money, some version of cost-effectiveness or cost-benefit analysis (such as that done by the U.S. Army Corps of Engineers) is needed - even if it is a "quick" version.

The current Authorization Act version calls on the General Accountability Office to do some of this evaluative work. But GAO's resources are highly limited. It can provide only highly limited coverage of the funding packages and the information needed on each.

Paying more attention to results isn't micro-managing the executive branch. Rather, such steps as those laid out here meet Congress', the public's, and the executive branch's need to: (1) assure that the funds are spent on work likely to be most effective; (2) provide vitally needed information on what works; and (3) achieve openness as to the outcomes of the funding, that is, achieve accountability for results.

 


Invest in Homelessness Prevention and Affordable Housing

Mary Cunningham

Mary Cunningham
To prevent homelessness and residential instability, Congress must simultaneously invest in homelessness prevention and rebuild our affordable housing infrastructure.

The American Recovery and Reinvestment Act of 2009 is on the right track, but homelessness will increase significantly if Congress doesn't boost investment in affordable housing programs.

Widespread homelessness emerged during the 1980s when a deep recession, coupled with dramatic shortages of affordable housing, left a staggering number of people homeless. Despite significant build-ups of emergency shelters and the transitional housing industry, widespread homelessness persists, and the current recession puts millions of Americans at risk.

Our failure to solve the homelessness problem is due to misguided policy priorities, not a lack of policy solutions. We know what works; policymakers just need to make the investment.

Only recently, guided largely by research, have communities begun to shift resources from critical but limited short-term fixes-to Housing First approaches that provide permanent, affordable places to live. Early evidence suggests that this investment is paying off; in 2007, HUD announced that chronic homelessness among adults fell 30 percent from 2005 to 2007.

Tackling the current economic recession, policymakers should heed this success and give long-term, evidence-based solutions top priority as they allocate economic recovery resources. Instead of building more shelters, government should invest in homelessness-prevention programs that help people stay housed or, if they have already lost their housing, easily get such rapid re-housing services such as housing search and relocation assistance and funds for security deposit, utilities, and short-term rental and stabilization assistance.

The current version of the American Recovery and Reinvestment Act of 2009 includes $1.5 billion for such services administered through the Emergency Shelter Grant Program. Passing this bill will go a long way in preventing homelessness.

But the Act alone won't go far enough. The nation's affordable housing programs must also be rebuilt. After years of deterioration, significant funding cuts, and inept leadership at the U.S. Department of Housing and Urban Development, our affordable housing infrastructure is too weak to meet rising demand. Today, only 1 in 4 people who qualify for housing assistance receive it, leaving millions on the brink of homelessness. And while the 30,000 foot view shows a housing surplus, this lens is misleading because most of these units are at the moderate to high-end. The need for affordable housing was great prior to the economic crisis and is growing as the recession deepens.

To meet the current need for rental housing assistance, the Housing Choice Voucher Program would have to be increased by 400,000 vouchers and the National Housing Trust Fund funded at $10 billion. Neither program is in the current economic recovery bill.

As job losses hit record numbers and foreclosures reach once-unthinkable levels, more Americans—many with children— need help. To prevent homelessness and residential instability, Congress must simultaneously invest in homelessness prevention and rebuild our affordable housing infrastructure.


Medical Assistance Provisions in the House Economic Recovery Package

John Holahan

John Holahan
Assisting states with the costs of Medicaid during severe recessions is extremely important, preventing cuts in enrollment and the need for tax increases.

The Congress is considering providing states with $88 billion in Medicaid assistance as part of the fiscal stimulus package. The aid would essentially come in two forms. First, there would be a general increase in the federal matching assistance percentage (FMAP). Second, there would be additional amounts that would be targeted to states with particularly high unemployment rates.

Assisting states with the costs of Medicaid during severe recessions is extremely important. During economic turndowns people lose jobs, experience income reductions, and can lose access to employer sponsored insurance. Even workers who stay employed could be faced with employers dropping insurance coverage to reduce labor costs. Many people become eligible for Medicaid, others become uninsured. At the same time, a severe recession means substantial declines in state revenues. One estimate is that states will face deficits of over $350 billion over the next 30 months. Historically in economic downturns, states reduce Medicaid payment rates to hospitals, physicians, dentists, and other providers. They also eliminate or curtail some or all optional benefits. Both payment rates and benefits are generally restored once better times return. In the most serious recessions, states as a last resort often restrict eligibility leading to more uninsured people.

In a paper Bowen Garrett and I wrote in January 2009, we estimated that if unemployment rates increased to 7% in 2009, the number of people with employer sponsored insurance would decline by 5.9 million, Medicaid and SCHIP enrollment would increase by 2.4 million, and there would be an additional 2.6 million uninsured. If unemployment rates increased to 10%, employer sponsored insurance would fall by 13.2 million, Medicaid and SCHIP would increase by 5.4 million, and the uninsured would increase by 5.8 million. These would mean substantial increases in state expenditures. In addition, there would be substantial increases in the number of uninsured; a burden to states and localities to fund increases in uncompensated care. At the same time, state revenues would decline.

We estimated that the combination of the costs of increased Medicaid enrollment, the greater costs of the uninsured and declining revenues would amount to Medicaid "financing gaps" of $21 billion at a 7% unemployment rate, and $47.1 billion at a 10% unemployment rate. Over a 24-30 month period, these financing gaps would be substantially greater. States would need to make substantial cutbacks in spending or increase tax rates, both of which would have pro-cyclical effects.

To avoid this Congress has proposed a substantial amount of aid to states targeted to the Medicaid program. The essence of the legislation is that it would give all states a 4.9 percentage point increase in the share borne by the federal government. For example, a state that had a 50% FMAP would have that rate increased to 54.9%. The problem with across the board increases is that states have been affected by the recession by very different amounts. For example, data from 2008 showed that 8 states have unemployment rates of less than 4.5%, while 9 states have unemployment rates of 7.5% or higher. The proposed legislation acknowledges this variation in state economic conditions and would provide further increases in the federal matching assistance rate depending on the extent to which a state's unemployment rate exceeds a base period from early 2006.

This assistance will go far to helping states address the rising costs of Medicaid. It will prevent states from making undesirable cuts in provider payment rates (already quite low) and in benefits. Most important, it will mean that states will not be making cuts in enrollment, preventing further increases in the number of uninsured. Finally, it would have beneficial economic effects by reducing the need for pro-cyclical spending reductions or tax increases by states.

 

Earned Income Tax Credit Expansion

Peter Edelman, Mark Greenberg, Harry J. Holzer

Implementing these recommendations would increase EITC benefits by about $10.3 billion, with virtually all of the benefits concentrated in households with incomes below $30,000.

We propose an Earned Income Tax Credit (EITC) expansion for childless adults to coordinate with the Making Work Pay (MWP) credits proposed by the Obama Transition Team.

Our premises are that an EITC expansion for individuals without qualifying children is important and that it makes sense to structure it in a way that effectively coordinates with MWP. Accordingly, assuming MWP at 6.2 percent of first $8100 of earnings, we recommend:

  1. Set the EITC percentage for individuals without qualifying children at 13.8 percent. We, and others, have previously urged that the EITC percentage for individuals without qualifying children at 20 percent. So, if MWP is being implemented at 6.2 percent, the 20 percent rate could be achieved by setting the EITC percentage for individuals without qualifying children at 13.8.
  2. Set the phase-in amount for the EITC for individuals without qualifying children at $8100 — the same as the amount for MWP. One clear message from the EITC experience is the virtue of effective outreach and informing, and to accomplish that, it'd help enormously to foster simplicity. If the same phase-in amount is used for EITC and MWP, it'll be much more possible for local efforts to communicate a clear message to affected populations.
  3. Set the beginning of the phase-out range at minimum wage times 2000 hours (full-time work), using the idea that had originally been in the Bayh-Obama legislation (though with immediate implementation). In 2009, when the minimum wage increases from $6.55 to $7.25 during the year, this would translate to the phase-out beginning at $13,688.
  4. Extend the benefits of the EITC for individuals without qualifying children to young workers age 21-24 who are not full-time students.

Based on some simulations which the Tax Policy Center has done on our proposals, we find that:

  • Implementing the above recommendations would increase EITC benefits (and costs) by about $10.3 billion, with virtually all of the benefits concentrated in households with incomes below $30,000, and much of the benefit (42 percent) concentrated in households with incomes below $15,000. Most of the benefits (56 percent) would be provided to households working full-time or part-time year-round.
  • If the EITC percentage was not increased, but the rest of the above recommendations were implemented, the benefits (and costs) would be considerably less, but still quite significant — the estimated cost would be $4.3 billion, again with much of the benefit (44 percent concentrated in households with incomes below $15,000, and most of the benefits (provided to households working full or part-time year-round.

Boost Employment of Older Adults

Richard W. Johnson

Richard Johnson
The sound workforce-development idea needs to be backed up by more funds for training and employment services or few jobless seniors will find work.

The proposed American Recovery and Reinvestment Act includes $120 million to train low-income older Americans and help them find jobs. This is a laudable goal that could stimulate the economy and bolster retirement security, but the proposal is under funded so can't have much impact.

As the population ages, older workers are taking center stage and hold the key to our future prosperity. The pool of 25- to 54-year-olds—traditional mainstays of the workforce—will grow by only 2 percent through 2020. And workforce stagnation can choke off economic growth, reduce tax revenues, and strain the government's ability to finance essential services.

The good news is that older workers are beginning to step in and fill the gap. Over the past decade, the labor force participation rate at ages 55 to 69 jumped eight points to 56 percent. Workers ages 55 and older now account for one fifth of the labor force ages 25 and older, up from 14 percent 15 years ago. Only if these trends continue can the economy expand.

Even though they are no longer bit players, older workers are not used to their full potential. Back in 1950, when jobs were more physically demanding and health problems at older ages were more common, nearly 7 in 10 men ages 55 and older worked. Today, fewer than half do. Labor-force participation rates especially lag for older adults with little education and limited skills. Only one in six adults ages 55 and older who didn't finish high school have jobs. For college grads, it's more than two of every five.

The recession makes it even more difficult for older workers to find jobs. In December 2008, the unemployment rate for adults ages 65 and older reached 5.1 percent, the highest level for seniors since March 1977. In past recessions, many older workers retired when they lost their jobs. But few laid-off seniors can afford that route when stock market losses deplete retirement accounts. Helping older Americans find and keep jobs would bolster their current incomes and improve their future retirement security, increase consumer spending, and stimulate the economy.

The stimulus proposal aims to help low-skilled older Americans find work by adding $120 million to the Senior Community Service Employment program (SCSEP), the nation's only workforce development initiative targeted to older adults. This program helps workers ages 55 and older with incomes below 125 percent of the federal poverty level acquire job skills, provides training and other supportive services, and places participants in subsidized, part-time community services assignments.

SCSEP helps only a small share of the older adults who could use it, and that number won't increase much under the stimulus proposal. The program now serves only about 80,000 adults, and the requested recovery funds would cover 24,000 more participants. For perspective, 1.4 million adults ages 55 and older were unemployed in December 2008 and more were underemployed. And that's excluding the untold numbers who have given up looking for work. In sum, the sound workforce-development idea embodied in the stimulus proposal needs to be backed up by more funds for job training and employment services for older workers or few jobless seniors will find work.


Supplemental Security Income Benefit Payments as Stimulus

Melissa M. Favreault

Melissa Favreault
These modest one-time supplements would ease immediate pressures on these households. While the spotlight is on SSI, Congress should consider modernizing this neglected program.

Often called the forgotten safety net, the Supplemental Security Income (SSI) program provides cash payments to those ages 65 and older, the blind, and the disabled. Arguably, SSI has a much lower profile than Temporary Aid for Need Families (TANF), but reaches more people. In December 2007, 7.1 million Americans received federal SSI benefits, compared with 3.9 million for TANF.

The American Economic Recovery and Reinvestment Plan authorizes a one-time emergency payment to SSI beneficiaries (and to beneficiaries cut off in the prior two months because their incomes exceeded program limits). In the House version of the bill, the sum would average about $450 for individuals and $630 for couples. Payments, based on the average monthly SSI payment, would be made within 90 days of enactment and cost, the Congressional Budget Office estimates, about $4.1 billion in 2009.  In the Senate bill, one-time payments to SSI beneficiaries are more modest, set at $300 and Social Security beneficiaries would also get one-time grants. Total program costs would increase to closer to $16.7 billion. 

Boosting SSI payments would stimulate the economy. All SSI beneficiaries have low incomes and few assets. Close to half live in poverty and slightly more than half receive no other income so are likely to spend their payments quickly. These modest one-time supplements, amounting to about two-thirds of the base federal benefit (set at $674 per month for an individual and $1,011 for a couple in 2009), would ease immediate pressures on these households. 

Payments to Social Security beneficiaries, in contrast, would be targeted less well.  While many Social Security recipients are also economically vulnerable, many are not.  Providing payments to higher-income beneficiaries is likely to be less effective than targeting families hurt more by the economic downturn.

While the spotlight is on SSI, Congress should consider modernizing this neglected program. The federal monthly benefit grows annually with inflation, but other features of SSI have not changed in decades. For example, the program's asset limits have remained at $2,000 for individuals and $3,000 for couples since 1989. (Eligibility criteria do permit a home, one car, personal effects, and modest burial funds/insurance.) Recipients would need almost twice that much today just to maintain the same purchasing power. Increasing these limits could efficiently reduce poverty among older women, an especially vulnerable group.

Likewise, SSI's income exclusions have not changed since 1981. Beneficiaries can receive full SSI benefits if they have earned or unearned income of up to $20 and (further) earnings of up to $65 per month. Earnings beyond those meager sums reduce benefits by fifty cents for every additional dollar earned, and other excess unearned income (for example, from Social Security, Veteran's benefits, Worker's Compensation, or an employer pension) reduces benefits on a dollar-for-dollar basis. These outdated asset and income limits deter SSI beneficiaries from working and saving.

Other needed SSI reforms to consider in the longer term include further reducing the program's work disincentives, simplifying rules covering living arrangements, and addressing the difficulties child beneficiaries--now numbering over a million--face transitioning to adulthood when benefits may stop abruptly. Also in dire need of fixing is a tortuous benefit-application process, which is especially long and complicated for those with disabilities. Additional recovery funds are targeted toward modernizing Social Security Administration computers and helping to eliminate Social Security and SSI processing backlogs. Along with modernization of asset limits and income disregards (the amounts of income permitted without jeopardizing program eligibility), this funding could help increase the program's low participation rate.

(Updated 2/10/09)


Stimulus Proposals and State Budgets

Kim Rueben

Kim Rueben
How effectively this money will stimulate the economy depends on which formulas are used to allocate revenue and how quickly the money can be sent to states and ultimately spent.

The House and Senate recovery plans aim to boost the economy and foster employment. States and local governments will get a hefty share of the funds to maintain programs and foster new investment. Roughly $100-150 billion will be available to help fund current state services and potentially offset state budget shortfalls, largely through increases in Medicaid funding and a new “Fiscal Stabilization Fund” that increases payments for education programs by $79 billion in the House bill and a much-reduced $39 billion in the Senate version. Other funding measures cover pay for more police and boost local revenue coffers.

Channeling stimulus funds to states can help them avoid either raising taxes or cutting spending to comply with balanced budget rules. These funds seem the most timely type of stimulus, especially compared to other proposed relief to states—including tax credits for municipal bonds or infrastructure spending, which would take longer to spend. Clearly, having states layoff workers or increase taxes will have an anti-stimulative effect, often on the regional economies that are hardest hit.

Currently, states face budget shortfalls estimated at $300 billion or more over the next three years, so while the current stimulus bill will help stave off further budget cuts it can’t wipe out all shortfalls. Instead, new funds will help states reverse recent program cuts and some resultant layoffs or service denials. How effectively this money will stimulate the economy depends on which formulas are used to allocate revenue and how quickly the money can be sent to states and ultimately spent. Funds will have the most impact if directed to the most economically distressed areas. If, instead, money is distributed equally across all states, the best off may face windfalls while the worst off continue to wrestle with deficits and the attendant spending cuts or tax increases.

Under the current stimulus bill, most stimulus funds will be distributed to states using funding formulas already in use, making pay-outs faster and easier but less targeted and strategic. Medicaid funds do increase for states with higher unemployment rates. In contrast, stimulus funding for education is largely distributed based on population, though some programs consider the characteristics of students.

Because this recession is nationwide and most states are facing shortfalls, getting money out quickly probably trumps more fine-tuned targeting of relief. Even relying on current formulas takes months before states will have additional funds in hand—no matter that many state budgets have been short of funds for much of the last two years. The federal government could, alternatively, have allocated new discretionary funds to states, ideally based on current or changing economic circumstances. In the last recession, funds were distributed based on population. Funds were less well targeted but allocations were more straightforward and states had more spending responsibility and discretion.

Automating this process may be a better way to provide a stimulus or state fiscal relief—one that doesn’t require such a painful trade-off between speed and efficiency. For example, information about economic factors could be built into current funding formulas, or, better, government could establish a program that automates federal payments to states, based on changes in economic circumstances. Recognizing that state balanced budget rules often force states to cut spending or raise taxes during economic downturns, Congress might enact automatic stabilizers. Options could include automatic increases in Medicaid match rates, or we could adopt more explicit payments to states that would kick in when unemployment increases or other economic conditions deteriorate. This approach would give Congress less control on how states could spend the money but if transparency and accountability were built into such a system we could hold states accountable. Building in such automatic changes could mean that the next stabilization will occur automatically, faster, and with a tad less pain.

(Updated 2/10/09)


Increasing Nutrition Assistance

Sheila R. Zedlewski

sheila zedlewski
SNAP benefit increases will provide an effective stimulus and help America's neediest. To make long-term dependence less likely, the package might also fund more workforce-development services.

The Supplemental Nutrition Assistance Program (SNAP, formerly the Food Stamp Program), provides the only near-universal assistance to low-income households. Most benefits go to America’s neediest. About nine in ten SNAP recipients live in poverty; more than one in ten has no other source of income. Over eight in ten such households contain a child or an elderly or disabled person.

The recovery proposal would spend $20 billion on temporarily increasing SNAP benefits and drop the benefit time limit for able-bodied adults without dependents. The proposed SNAP benefit increase of 13.6 percent will provide an effective stimulus. By U.S. Department of Agriculture estimates, each additional food stamp dollar should generate $1.84 dollars in total economic activity. The increased benefits will also help low-income families pay for groceries. The average benefit today provides only $7 a day to feed an entire household. SNAP benefits are adjusted annually as the cost of the items in the Thrifty Food Plan change. Still, many recipients report running out of grocery money every month.

The benefit increase, along with recent state efforts to simplify the application process, could encourage more eligible families to apply for benefits. In 2006, only 67 percent of people eligible for SNAP received benefits. Thus, an extra $300 million in the proposal would help states administer increased caseloads.

Dropping the time limit on SNAP benefits for able-bodied workers, itself a stimulus, will help unemployed adults without children get by in this job-jettisoning recession. The current time limit aims to encourage work among this group by requiring at least 20 hours of work a week to stay eligible after the first three months.1

But expect trouble when the provisions expire at the end of fiscal year 2010. Since households still on the food stamp rolls will feel what amounts to a benefit cut then, lawmakers instead should consider a one-time permanent benefit increase. This move would recognize the near impossibility of feeding a household on $7 per day. As the economy recovers and fewer need this help, the impact on the federal budget will diminish.

To make long-term dependence on SNAP less likely, the recovery package might also include money for states to offer more adult beneficiaries workforce- development services. Today, SNAP’s small employment and training service component covers relatively few recipients. As more low-wage adults turn to SNAP for help, adding employment services to the benefit package makes good economic sense for them and policy-makers concerned about the program’s size over time.

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[1] States with unemployment rates in excess of 10 percent already can apply for waivers from the time limit.


Maximizing the Stimulus Effect of Prevention Activities

Barbara Ormond, Brenda Spillman, and Timothy Waidmann

How big these effects are, who is affected, and the economy-wide impact depend greatly on the allocation of resources between population-based primary disease prevention and more clinically oriented secondary prevention.

The House version of the stimulus package includes substantial funding for public health and prevention activities, as did the Senate bill until the final round of cuts prior to passage.  Should the funding be included in the conference report, the magnitude of the long- and short-term effects on health, who is affected, and the impact on jobs and the economy depend greatly on the allocation of resources between population-based primary disease prevention and more clinically oriented secondary prevention.

Much of the ongoing debate about the cost-effectiveness of prevention stems from the failure to clearly distinguish among different types of prevention or adequately address the range of prevention benefits. Primary prevention is aimed at preventing illness, secondary prevention at early detection and treatment of disease to slow or prevent its progression. Most secondary prevention focuses on clinical interventions, while primary prevention may be either clinical or nonclinical. All clinical prevention activities raise health care costs in the short run, though not necessarily in the long run.

The cost-effectiveness debate often focuses on secondary prevention, such as screening and treatment. These interventions unquestionably increase short-run medical care costs, although there may be positive societal value created through improvements in productivity among workers and school attendance and achievement among children. In contrast, nonclinical primary prevention, which includes community-based programs to promote healthier behaviors, improve the local environment, and add or improve such infrastructure as sidewalks, parks, and recreational facilities to encourage healthier lifestyles, by definition, doesn’t increase medical costs. Such measures have been shown to reduce health spending fairly quickly and, in addition, may have spillover effects on local quality of life and economic vitality.

The farther upstream in the disease process that prevention occurs, the larger the pay-off. As Figure 1 illustrates, the medical cost savings from secondary prevention that keeps individuals with early diabetes and hypertension from developing complications (heart disease, stroke, kidney disease) accrue entirely from reducing the number of very high-cost cases. The savings from primary prevention that reduces the number of people who ever develop diabetes or hypertension accrue from both reduction in high-cost cases with complications and reduction in the treatment costs associated with uncomplicated disease. In our calculations, the health care cost savings from early prevention are more than twice the savings of efforts focused farther along the typical disease pathway.

Evidence suggests that community-based interventions to promote and facilitate healthy lifestyles offer an effective means for the primary prevention of many chronic conditions. A Massachusetts pilot program showed sufficient effect on child health outcomes that it is being replicated in additional communities across the country. Research in Scandinavia and in France has shown the effectiveness of community programs in reducing the incidence of adult diabetes and overweight. These studies demonstrate the beneficial health effects of well-targeted investments in community infrastructure even in the short run. In the longer run, reductions in expensive complications of diabetes and obesity can be expected.

Stimulus spending priorities should take into account the economic sectors each wellness-related provision affects. Investment in community infrastructure can create construction jobs. The new spending on pharmaceuticals or physician services implied by secondary prevention would create fewer new jobs overall and many fewer jobs among low-income workers. In addition, infrastructure development and improvement can be targeted easily to communities most in need of investment where, not coincidentally, health problems are greatest.

For the greatest effect on population health and the economy:

  • Prevention funding should focus on primary prevention and be targeted to communities with high disease prevalence.
  • Evaluation should be built into all programs so policy-makers can learn which interventions or combinations of interventions work best in what situations and so merit replication.
  • Assessments of primary prevention programs should consider avoided medical costs in both the short and long runs as well as the increased productivity at school and work resulting from reduced disease.

Figure 1. Medical Care Expenditure Savings from Primary and Secondary Prevention
(per capita, 2004 dollars)

 Medical Care Expenditure Savings from Primary and Secondary Prevention



New Markets Tax Credits: Focus on Job Creation

Martin Abravanel, Nancy Pindus, and Brett Theodos

Since challenges to low-income communities are especially acute in the current environment, NMTC can be an important economic driver. Policymakers should consider focusing on projects that can quickly add to or retain jobs, de-emphasizing other important aims.

The New Markets Tax Credit (NMTC) program was created in December 2000 to improve the economic viability and development of low-income urban and rural communities. A recent addition to an over half-century-long succession of such Federal government efforts, NMTC aims to redress the lack of access to "patient", reasonably priced capital. Because this lack impedes community and economic development even where viable opportunities exist, the program has directed $9 billion of investment to capital-short communities since it began.

NMTC works by competitively allocating scarce federal tax credits to special purpose entities associated with either for-profit or mission-driven organizations. Examples of those organizations include community development corporations and other types of non-profits as well as investment banks and real estate development and venture capital companies.

Decisions about which projects to fund originate with the special purpose entities themselves. The program’s broad mandate allows them considerable latitude with respect to investments because no one type or size project fits all communities. Tax credits have been used for projects ranging from modest expansions of small businesses to large mixed-use real estate developments, including industrial, retail or manufacturing. They have also been used to rehabilitate for-sale housing units or construct such community facilities as charter schools, health centers, or museums. Some require more time to implement than others, and some are more likely than others to create jobs or prevent job losses—objectives that are central to the current stimulus package but by no means the only or best measures of economic or community development outcomes.

Since community and economic development challenges to low-income communities are especially acute in the current environment, NMTC can be an important economic driver. And the demand for tax credits is high—just 24 percent of applicants receive credits and only 13 percent of the amount they request is awarded. This means that the provision in the Senate's American Recovery and Reinvestment Act of 2009 authorizing a supplemental $1.5 billion for the program in both 2008 and 2009 will not languish. But, with rapid economic recovery in mind, policymakers should consider reorienting the supplemental credits to focus on projects that can quickly add to or retain jobs, de-emphasizing other important aims.

For maximum impact, supplemental tax credits in the Recovery Act should be allocated to special purpose entities on evidence-based answers to the following questions:

  • Are qualifying projects ready-to-go and investors already lined up?
  • Will projects create jobs (and how many) or prevent job losses (and how many)?
  • Will the credits free up money for other needed projects or services in low-income communities?

Precedent exists for temporarily modifying the NMTC program for special interventions and otherwise leaving the larger program in tact. After Hurricane Katrina struck, Congress allocated an additional $1 billion of tax credits for use exclusively in the Gulf Opportunity (GO) Zone. Today’s national emergency also deserves a focused response.


Children and the Economic Recovery Package

Olivia Golden

golden__sm
Without an aggressive recovery package, children will likely suffer greatly from today’s deep recession. The multi-faceted approach passed by the House and proposed by the Senate is the right one.

The economic recovery packages passed by the House and proposed by Senate Democrats include provisions specifically targeted to children – for example, increases in education, Head Start, child care subsidies, the Earned Income Tax Credit, and the Children’s Tax Credit. These are buttressed by provisions to support their families’ income, work opportunities, and health care and to bail out state budgets to avoid program cuts. Given the large risks that the recession poses for children, this multi-faceted approach is the right one. That said, the federal, state, and local officials who will be implementing the programs need to start preparing now to coordinate them effectively.

Without an aggressive recovery package, children will likely suffer greatly from today’s deep recession. Many-- some 40 percent -- lived in low-income families even before the recession struck, and, Urban Institute research suggests, their families will lose proportionately more income than better off families and will take far longer -- perhaps five years—to return to pre-recession levels.*

Children also face the loss of health insurance coverage and the risk of instability in home, school, and child care. Even those who don’t become uninsured as parents lose work-based health insurance become dependent on state decisions to maintain public coverage through Medicaid or SCHIP – at just the point when state budgets are most strained. In today’s recession, children also may face the loss of their home to foreclosure – either a home their family owns or one they rent from a foreclosed owner. The risk to children’s stability is multiplied when changing neighborhoods means changing schools or early childhood programs. At the same time, parents may be forced to take children out of child care if one or both earners loses work hours and earnings or as states cut child care subsidies.

Research shows that even one major change in a child’s life – a move, a change in schools, a change in child care – raises risks of academic problems or other bad outcomes. Several such changes added to loss of income, unstable health insurance, and parental stress pose serious risks to children’s long-term well-being and prospects.

Fortunately, the recovery proposals strike directly at many of these risks simultaneously. They address the immediate consequences for children and their families, reducing the risk of long-term damage for children, while also fulfilling the stimulus’ overall goal of creating jobs. Children’s most immediate needs are for high-quality early childhood programs that help keep the most vulnerable children on track, child care subsidies so parents don’t have to pull children out of care, unemployment insurance, food stamps, and refundable tax credits so families don’t go without food and basic necessities while parents are unemployed, health insurance, and extra funding for state health care budgets so that coverage isn’t cut when families need it most. At the same time, many of these strategies wisely target resources to lower-income families who will quickly spend the money and to low-wage workers (for example, child-care paraprofessionals) who need paychecks.

Yet sensible as the strategy is, it will take hard work at all levels of government to carry off this ambitious multi-pronged proposal. Federal officials in dozens of agencies need to develop guidance for the states so they know what expenditures are allowed. State legislators need to turn on a dime amid budget-cutting sessions, analyze the newly offered federal dollars – for Medicaid match rates, for new unemployment insurance benefits, for education assistance, for child care subsidies, for job creation and workforce training -- and both erase planned cuts and expand programs expeditiously.

Once these basics are in place, state agency commissioners must make further choices and act accordingly. For example, how should child care dollars be allocated to families? Are more state agency workers needed to reach eligible families quickly? Should special up-front help be offered so nonprofit child care programs don’t close down (laying off more workers) before the dollars arrive? How can training child care workers be stepped up so programs can expand fast enough to meet need? And how can state agencies coordinate with local officials if new infrastructure work projects and child- care resources aren’t located in the same places?

The more this planning happens now, even while the shape of the federal legislation remains uncertain, the more effective the economic recovery plan will be in taming the recession’s damage to children and families. While policy experts debate the shape of the legislation in Washington, it’s critically important for those who will be responsible for delivering on the promise -- career public servants in federal agencies and state and local officials -- to prepare for this highly complex job now They can do it, but only if politicians and policy advocates who care about children understand and support their central role.

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*This is based on the experience of households at the higher and lower ends of the income scale during the 1980-82 recession (Acs 2009).

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