Social Protection for the Economic Crisis: The U.S. Experience


Since February 2008 the U.S. government has taken a number of steps aimed at dealing with the most severe financial crisis experienced by the United States in nearly eight decades. The crisis originated in America’s real estate and banking industries and has now spread to the rest of the economy and to much of the world. Emergency legislation passed by the U.S. Congress in 2008 and early 2009 attempted to (1) prevent the failure of major U.S. financial institutions; (2) minimize the impact of financial institutions’ weakness on ordinary business and consumer borrowing; (3) provide immediate stimulus to consumer spending by raising after-tax household income through temporary tax reductions and increases in government transfers; (4) provide temporary funds to state and local governments in order to reduce their need to boost taxes or reduce spending during the recession; (5) protect the incomes and health insurance of newly laid off workers and members of other economically vulnerable populations; and (6) provide direct federal support for infrastructure investments and research and development projects in health, science, and efficient energy production.

In this paper I focus on the measures Congress has taken to protect household incomes and improve the American social safety net. None of the emergency measures adopted by Congress will result in permanent changes to the U.S. system of social protection, but a couple of temporary programs represent dramatic departures from the past. For the first time, Congress authorized generous subsidies so that laid off workers can continue to receive employer-sponsored health insurance. Most working-age Americans and their families rely on an employer-provided health plan to provide their insurance. When they are laid off from their jobs they generally lose the employer subsidy for this insurance, and for many workers the loss of the employer subsidy makes continued health insurance coverage unaffordable. By offering to pay 65 percent of the cost of the first nine months of post-layoff health insurance premiums, the U.S. government will make health insurance affordable for many of the newly unemployed. In another departure from past economic stimulus policy the Congress appropriated substantial funds for the nation’s education system. State governments were given large temporary grants to support primary, secondary, and post-secondary schooling, thus reducing the need for state and local governments to make cuts in educational services. In addition, the federal government appropriated special funds for a large increase in means-tested financial assistance so that low-income students can pay for post-secondary education. Stimulus funds will also provide major increases in grants for post-secondary institutions so they can invest in new buildings and research in innovative health and energy technologies. It is unusual for the federal government to focus so much of its counter-cyclical stimulus policy on the education system and on research and development. Finally, state governments were provided generous but temporary general fiscal relief, linked to the local unemployment rate, so they do not have to cut spending or increase taxes as much as would be necessary without the emergency federal aid.

This paper considers the current financial crisis and the American government’s response to the crisis in the area of social protection. The remainder of the paper is organized as follows. The next section considers recent trends in the U.S. economy, particularly those trends that make the current recession different from earlier ones. The following section discusses the U.S. government response to the recession, with special reference to Congressional actions affecting the social safety net. Aside from the extraordinary measures taken by the Administration, Congress, and U.S. Federal Reserve to shore up the nation’s ailing financial system, the government’s main instruments for addressing the crisis are designed to provide direct income assistance and public services to households, to offer fiscal relief to state governments, and to encourage new investments in public infrastructure and research and development. The conclusion of the paper offers a brief assessment of the U.S. social safety net response to economic crisis. The response has two main components. The first is the automatic stabilization system already in place, even before Congress and the Administration took special steps to address the crisis. The second is the extraordinary measures that Congress has authorized since February 2008. How likely is it that these two kinds of measures will assure social protection to Americans in the current economic crisis?