Recession, Poverty, and the Recovery Act

Millions Are at Risk of Falling Out of the Middle Class

The recovery package would help millions of families who are at risk of falling out of the middle class, write James Kvaal and Ben Furnas.

The middle class American dream is moving further out of reach for many families today. (AP/Douglas C. Pizac)
The middle class American dream is moving further out of reach for many families today. (AP/Douglas C. Pizac)

Download the full paper (pdf)

State-by-state tables: Additional people and children in poverty by 2010 without the recovery plan | Effect of select anti-poverty measures in the American Recovery and Reinvestment Act

The American economy is in a recession that is 14 months old, and the downturn appears to be growing deeper and more severe. Approximately 1.8 million Americans lost their jobs in the past three months alone—nearly 20,000 a day. It’s increasingly looking like “the worst recession since World War II” may be a best-case scenario.

The economic downturn means hard times for millions of Americans. If unemployment rates reach double-digits, as some economists fear, nearly 7 million people will lose their jobs, more than 7 million will lose their health coverage, and more than 12 million will fall into poverty.

The economic recovery legislation before Congress would cushion the blow for the most vulnerable families by cutting taxes and strengthening the safety net, while boosting the economy and creating jobs to make the middle class stronger and larger. Helping struggling families is not only the right thing to do in hard times; it is also one of the most cost-effective ways to fight the recession. Aid for low-income families generates five times more economic activity than aid for high-income families, according to some estimates, because these families are more likely to spend the money immediately on necessities rather than saving it.

Rising unemployment leaves millions of American families struggling

The six years of economic expansion before the recession began in December 2007 never reached millions of Americans. Thirty-seven million people were living in poverty in 2007—4 million more than when the economic expansion began in 2001. Real median household income grew by only 0.26 percent a year throughout the years of economic expansion, which kept income below 2000 levels. And nearly 7 million people lost their health insurance during that period.

Now the economy has turned sour. It has shrunk by 3.6 million jobs since the recession began 13 months ago. There are 11.6 million people out of work—the third-most since 1949. Leading indicators such as announced layoffs, inventories, and demand for temporary workers give no sign that job losses are beginning to slow. And the International Monetary Fund warns that the advanced economies may already be in a “depression.”

Signs of hard times are clear across the country. The number of homeless families is growing at double-digit rates in many cities. Demand for free and reduced price lunches in California has surged by 12 percent since last year—12 times the normal rise—and other school districts are seeing similar increases. In Miami, Florida, 1,000 job applicants stood in line for 35 firefighter positions, and in Hartford, Connecticut, 850 people applied for fewer than 50 jobs at a hotel and water park.

The economy could get far worse without quick action. The Congressional Budget Office projects that the unemployment rate could reach 9 percent in 2010. Some private sector forecasters are more pessimistic. Mark Zandi of Moody’s expects the unemployment rate to exceed 11 percent in 2010 and the economy to lose nearly 7 million jobs.

Rising unemployment rates mean that millions of families will struggle to make ends meet. Increases in poverty are sure to follow. As Figure 1 shows, unemployment and poverty rates have historically risen together.
Chart One

More than 12 million Americans are at risk. The number of people living in poverty will rise by 12.4 million by 2010—including 3.8 million children—if the unemployment rate reaches 11 percent, according to our analysis based on a methodology developed by the Center for Budget and Policy Priorities. And more than 7 million people will fall into deep poverty, living below half of the poverty line.

table one

Dramatic increases in poverty are consistent with past recessions. The number of people living in poverty grew by 9 million between 1979 to 1983, and it grew by 8 million between 1989 and 1993.

The weak job market will also raise the number of people without health insurance. A percentage-point increase in unemployment could raise the number of uninsured by 1.1 million. If unemployment rates rise according to Moody’s projections—increasing from 4.6 percent in 2007 to 11.1 percent in 2010—more than 7 million people will likely lose their health insurance.

The recovery package would help vulnerable and middle-class families

The American Recovery and Reinvestment Act would provide immediate assistance to help vulnerable families and prevent millions of middle-class Americans from falling into poverty. It would also stimulate the economy and create jobs, helping many additional families avoid poverty.

Tax cuts

The bill would cut taxes for low-income working families. It would expand the earned income tax credit—America’s largest anti-poverty program. The credit matches wages earned by low-income families, encouraging them to work and offsetting payroll taxes. Expanding the credit for families with three or more children would make nearly 1 million families eligible for the credit and give tax relief to a total of nearly 7 million.

It would also expand the child tax credit for the poorest working families, many of whom are ineligible for the credit today because their incomes are too low. By eliminating the income threshold, the House legislation would benefit 17 million children. The less generous Senate bill, which only lowers the eligibility threshold from $8,500 to $8,100, would provide significantly less help to fewer children.

Together, these two tax cuts could make a large difference in the lives of the poorest families. The Recovery and Reinvestment Act would lift 2.5 million Americans out of poverty, according to the Center on Budget and Policy Priorities’ analysis of the House version of the bill. No analysis is available for the Senate bill.

Another important tax credit is the Making Work Pay credit, which is a $500-per-worker tax cut for nearly all taxpayers. The credit would make a meaningful difference for both middle-class and low-income families.

Unemployment insurance and help for households

The recovery legislation would also help struggling Americans by expanding unemployment insurance so that the long-term unemployed can continue to receive benefits through the end of 2009. It also offers states financial incentives to modernize their unemployment eligibility rules, which disproportionately disqualify jobless low-wage and part-time workers. These changes would benefit 18 million unemployed workers, including 3 million who would otherwise be denied any claims at all.

Both the House and Senate bills also include help for other households. Both bills increase food stamp payments. The Senate bill includes one-time payments to Social Security recipients, poor people on Supplemental Security Income, and veterans receiving disability and pensions. And the House bill includes similar payments to poor elderly and disabled people.

Other important provisions for low-income families include child care assistance for working parents, Head Start programs to prepare low-income children for school, and Pell grants and tax breaks to make college more affordable. Assistance to state governments would prevent tax increases and cuts to crucial services. And new resources would help low-income families insulate their homes and pay their heating bills.

House vs. Senate legislation

The resolution of the differences between the House and Senate proposals will affect the final bill’s overall effectiveness. The two packages are similar in size, but the Senate version spends more on tax cuts that will do less for both working families and the economy as a whole.

The House legislation does more to expand the child tax credit for poor working families. Current law denies this credit to millions of children who need it most. The Senate legislation wipes out the majority of these gains, providing less help to fewer children.

The Senate bill also provides $40 billion less for states facing massive budget deficits, half the amount provided by the House bill. States are facing $350 billion in deficits over the next two and a half years. The resulting huge spending cuts and tax increase will impose hardships on working families and undermine the economic recovery.

The Senate bill is less generous in other areas as well. It does less to stabilize neighborhoods devastated by foreclosures, retrofit public housing, cover unemployed workers with health insurance, and enroll young children in Head Start. It meanwhile gives larger tax breaks to money-losing companies, which the Congressional Budget Office believes will have little or no impact on the economy.

The recovery package would boost the economy

Helping working families will not only keep millions of families out of poverty; it is also one of the most cost-effective ways to boost the economy and create jobs. As a result, it would strengthen and expand the middle class.

Tax cuts and transfer payments to families only generate economic activity if they are spent rather than saved. Low-income families are most likely to spend the additional income, and policies aimed at low-income households therefore tend to do more for the economy. One dollar for low-income people—including unemployment insurance, nutrition assistance, and refundable tax credits—adds between $0.80 and $2.20 to the economy, according to the Congressional Budget Office. A dollar of tax cuts for high-income households adds only between $0.10 and $0.50 cents.

The recovery legislation makes investments that will create jobs now and promote economic opportunity in the years to come. Both the House and Senate bills include a historic investment in renewable energy and energy efficiency that will immediately begin to create “green jobs” and continue promoting sustainable, affordable energy for decades. Both include nearly $50 billion for roads, public transit, and public housing. And both would allow a new wave of investment in our schools and colleges that will strengthen education and promote future growth.


Our economy is in a perilous state. Millions of middle-class families are likely to fall into poverty if Congress does not take swift action. The American Recovery and Reinvestment Act will make the middle class larger and more secure by strengthening the safety net and sparking economic activity to create jobs and raise wages. As a result, it will soften the blow on poor Americans while also preventing millions of people from falling into poverty.

Download the full paper (pdf)

State-by-state tables: Additional people and children in poverty by 2010 without the recovery plan | Effect of select anti-poverty measures in the American Recovery and Reinvestment Act

More from CAP on economic recovery:

Column: Getting the Stimulus Bill Right

Background brief: Recovery and Reinvestment 101

Interactive Maps: Recovery Beyond the Beltway

Interactive: Design Your Own Stimulus Package

Video: How the Recovery Package Creates Jobs

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