Transcript The Wisconsin Idea and the Institute for Research on Poverty

Chapter 17: Poverty
Read Chapter 17 Carefully
My lecture will not follow the textbook chapter as closely as it
normally does. Instead I will discuss
-Poverty measurement
-How many are poor in America and why should we care
-Constructive steps in anti-poverty policy
How is Poverty Measured?

Adam Smith


Relative measures – the absence of a linen shirt.
U.S. today

Mollie Orshansky in the mid 1960s took the cost of
a minimally adequate diet (the Economy Food
Plan) and multiplied by 3.



Since then the Orshansky measure has been increased
annually by the cost of living.
The poor are those whose yearly income was below this
threshold for a family of a given size.
The poverty threshold for a family of 4 is $19,484.
For 3 it is $14,776.

There are clear conceptual problems with how poverty is
measured in the U.S. But I will focus on other things
today.
Why Are So Many Poor 40 Years
After the “War on Poverty?”

There is, of course, no single explanation.
But the following play some role.






Changes in the U.S. economy, particularly the shift
from agriculture and manufacturing base to a
“knowledge-based” service economy.
Poor schools, particularly in the urban core.
Drugs, gangs, anti-social behavior.
Incarceration policy, particularly for African
American men.
Changes in family structure, including a startling
rise in the fraction of children raised in single
parent households.
Fairly anemic public interventions.
Let Me Say Something (Brief)
on the Last Three Items

Incarceration policy:


In 2001 16.6 percent for black men in 2001 had
spent time in a state or federal prison
Among black men without a college education and
born between 1965 and 1969, 30 percent had
been in prison by 1999


Among those in this cohort without high school diplomas,
the proportion is nearly 60 percent.
Single-parent households:

In 1990, 26.6 percent of births were to single
women. In 1998, this percentage was 32.8.
Figure 3: Total Benefits or Program Costs for Various Cash and In-Kind Programs, 19702002
(constant 2002 dollars)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
Head Start
Housing Aid
Food Stamps
AFDC/TANF
EITC
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
0
19
70
Total Benefits or Program Costs ($ million)
40,000
Another Issue, Highlighted by the Krugman Reading, is that Americans appear to
tolerate more income inequality than people in other countries
Table 2
Share of Aggregate Income Received
by Quintile of Household for OECD Nations
Income Quintile
Country (year)
First
Second
Third
Fourth
Fifth
Austria (1995)
7.0
13.2
17.9
24.0
37.9
Belgium (1996)
8.3
14.1
17.7
22.7
37.3
Canada (1997)
7.3
12.9
17.4
23.1
39.3
10.3
5.8
14.5
11.0
17.7
15.5
21.7
21.9
35.9
45.9
Slovak Republic
(1996)one-fifth in the
The poorest
U.S. receive a smaller share of
Sweden (1995)
income than in the typical
Turkey (2000) OECD country.
United Kingdom (1995)
8.8
18.7
22.8
While the14.9
richest one-fifth
receive
considerably
more. 23.4
9.1
14.5
18.4
34.8
6.1
10.6
14.9
21.8
46.7
6.1
11.7
16.3
22.7
43.2
Unweighted average
7.6
12.7
16.9
22.5
40.3
United States (2002)
3.5
8.8
14.8
23.3
49.7
Czech Republic (1996)
Portugal (1997)
34.5
One Reason to Care: Poverty and Children
Source: Duncan and Brooks-Gunn (1997)
0.8
Reported cases of child abuse and neglect
5.4
1.6
Experience hunger
15.9
3.6
Female teen out-of-wedlock birth
11
9.6
High-school dropout
21
14.1
Grade repetition
28.8
4.1
Hospitalizations (per 100 childen)
8.1
Stunting
5
Lead poisoning
4.7
10
16.3
6.5
Fair or poor health
11.7
0
5
10
Poor Children
15
20
Non-poor Children
25
30
Central Issues for Poverty
Research and Policy

Child poverty

More than 1 in 6 children in America live in a household with
income below the poverty line.

This is after the longest economic expansion in U.S. history
(from 1992-2000) and 10 years after we “ended welfare as we
know it.”

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Violates fundamental American values of opportunity and has high
social costs.
Welfare reform and ‘devolution’


Fundamental shift in responsibility for the safety net.
Similarly far-reaching changes in what states are doing.
Central Issues, continued…

Concerns arise with Antipoverty policy (as with many
policy areas) about unintended consequences

Cash payments can reduce employment and/or hours of
work, and create resentment from other working families.




If employment is reduced, one might worry about “role models”
for children.
“Living wage” proposals may make it difficult for lowskilled workers to find jobs.
Mandatory paternity establishment and child support
guidelines – does this lead to unmarried men working in
the underground economy?
It is critical for policy to be ensure the incentives
align with societal norms.
THE MORAL HAZARD COSTS OF
WELFARE POLICY

Prominent economist Authur Okun once compared the
process of income redistribution to a “leaky bucket”

We are carrying money from the rich to the poor, but some money
leaks out along the way.


Redistribution comes with potentially large moral hazard costs. The social
welfare function quantifies the efficiency-equity tradeoff between less redistribution
and more social efficiency, and more redistribution and less social efficiency.
The “leakage” from transfers comes from:



Administrative costs.
Taxation on higher income individuals may affect their labor supply
and savings.
And, by insuring against being poor, safety net programs create an
incentive for individuals to change behavior to qualify for transfers.
Behavioral responses to a welfare program with
100 percent “clawback” rates on benefits
Figure 3
Individuals
make constraint
different
This
is the budget
choices
based on
$ of consumption
before welfare
is preferences.
introduced.
per year
25,000
20,000
A
Z
Welfare is introduced with
a $9,000 guarantee and a
BRR of 100%.
Y
10,000
G = 9,000
5,000
B
Others are initially ineligible, but
reduce their work effort, too.
D
X
Some will be “mechanically”
eligible and reduce hours of work.
400
1,200 1,280
1,600
C
2,000
Hours of leisure
per year
Figure 4
Lowering the benefit reduction rate improves work
incentives but may cost more money…
$ of consumption
per year
25,000
A
18,000
And person Z
becomes eligible.
Z1
B
Z2
Lowering the BRR
changes the
budget constraint.
2
Y2
X2
Y
G = 9,000
1
B
Hours also fall for 1
person Y.
560
D
X1
Hours of work fall
for person X.
1,280
C
2,000
Hours of leisure
per year
The moral hazard costs of welfare policy
The “iron triangle” of redistributive
programs

The iron triangle means that there is no way to
change either the benefit reduction rate or benefit
guarantee to simultaneously encourage work (have
desirable incentives), redistribute more income (be
compassionate), and lower costs (be good stewards
of scare taxpayer dollars).


If the tax rate is lowered, work could be discouraged for
some and costs could go up.
If the guarantee is lowered, work increases and costs fall,
but redistribution falls.
Reducing the moral hazard of welfare
Moving to categorical welfare payments


One way to mitigate the moral hazard problem is to
focus eligibility on characteristics that are easy to
verify, hard to change, and relate closely to low
earnings.
What characteristics make a good targeting
mechanism?



Characteristics that are unchangeable.
Characteristics that target those with low earnings
capacity.
In reality, welfare programs target characteristics like
blindness, age, disability, and single motherhood.
Reducing the moral hazard of welfare
Using “ordeal mechanisms”

An alternative approach is to try get individuals to reveal
themselves as less able through ordeal mechanisms.
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Ordeal mechanisms are features of welfare programs that make
them unattractive, leading to self-selection of only the most needy
recipients.

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Work or training requirements of TANF are an example of such a
mechanism – they impose a cost on individuals who are just using welfare as
a means of increasing their leisure.
The provision of in-kind benefits rather than cash is another example. If
the government gives away cash, then individuals who are not needy will
pretend to be needy to qualify. If the government offers, instead, a
somewhat run-down public housing project, those with high ability may not
be interested in taking up the benefit.
The paradox of ordeal mechanisms is that by making the less
able worse off could make them better off, because the
government can make a fixed budget go further.
Reducing the moral hazard of welfare
Increasing outside options


The third approach to reducing moral hazard is to
increase the outside options available so that it is no
longer as attractive to be on welfare.
There are five different approaches the government
can take to increase outside opportunities for
welfare recipients:
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Training
Labor market subsidies
Child care
Child support
Removing welfare lock
So, The Causes of Poverty Are
Complex, the Consequences are
Severe, and the There are Difficult
Constraints in Designing Programs
in a Way That Maintain Good
Incentives…

Is the Current state of affairs
inevitable?

I want to say a little now about efforts to
combat poverty, focusing on “what works.”
What Works? Public
Expenditures Can Reduce Poverty
and Inequality

One possibility is to look at data from other
countries.


These comparisons mask many differences:
structure and dynamism of the economies, ethnic
homogeneity, and perhaps other cultural
differences.
Cross-country measures are difficult to construct.
Most common international standard is to measure
the fraction of the population with income that is
less than half the median.

With these caveats…
Relative Poverty Rates and Antipoverty Effects in 8 Rich
Nations at the Turn of the Century
(Percent of Persons with Market Income and Disposable Income Less
than Half of Adjusted National Disposable Median Income)
Source: Smeeding (2004)
US 2000
17.0
23.7
31.8
UK 1999
12.3
Canada 1997
24.8
11.9
Netherlands 1999
21.6
8.9
Germany 2000
8.2
Belgium 1997
7.9
28.6
31
Sweden 2000
29.2
6.4
Finland 2000
18.1
5.4
26.1
Overall Average
9.8
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Percent of Population
Market Income (Pre- Tax and Transfer) Poverty
Disposable Income (Post- Tax and Transfer) Poverty
35.0
Relationship of Cash Social Expenditures for the Non-elderly and 10/50 Ratios in Eighteen
Countries in the 1990s, Source: Smeeding (2004)
70.0
R2 = 0.7224
65.0
P10 (10th to 50th Percentile)
60.0
Sweden
Norway
Germany
55.0
Luxembourg
50.0
Canada
45.0
Australia
Netherlands
France
Belgium
Denmark
Spain
Japan
Finland
United Kingdom
Italy
40.0
United States
35.0
30.0
Russia
Mexico
25.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Non-elderly and Cash and Near-Cash Social Expenditure Level (as Percent of GDP)
18.0
What Works?
A Strong Economy!
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March 1991-March 2001: 120 months free of
recession
Payroll employment increased by over 20
million jobs over this period.
Unemployment was around 4 percent.
Wage growth since 1993 has been evenly
distributed across income groups.

Poverty rates fell and welfare caseloads declined a
great deal.

The 1980s, where growth was strong but poverty did not
fall much, differed from the 1990s, where growth was
accompanied by sharp reductions in poverty.
What Works?
The Earned Income Tax Credit



The EITC raised the incomes of 4.3 million
people above the poverty line in 1998.
54 percent of the EITC directly fills the
“poverty gap.” It reduces the poverty gap by
5.2 percent.
The EITC positively affects labor market
participation for single-parent families.

One prominent study finds the EITC accounts for
63 (37) percent of substantial increase in LFP of
single mothers between 1984-96 (1992-96).
What Works? Investments in
Early Childhood Education!

“Recent studies of early childhood investment show
remarkable success…”


“Early childhood interventions of high quality have lasting
effects on learning and motivation.”
“An important lesson to draw from the entire literature on
successful early interventions is that the social skills and
motivation of the child that are more easily altered – not IQ.
These social and emotional skills affect performance in
school and in the workplace. We too often have a bias that
only cognitive skills are of fundamental importance to
success in life.”

Nobel Laureate James Heckman
What Works? Welfare Reform

Good news

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Sharply declining caseloads.
No systematic evidence of increased
homelessness, food pantry usage, etc.
Substantial numbers of former recipients
have equal or higher family incomes.
Considerable diversity and creativity in
State programs.
What Works? Welfare Reform
(continued)

Bad news




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The safety net is gone. The food stamp eligibility
process can be a nightmare in some places and
TANF is time-limited.
Few families have reached time limits.
No minimum national standards.
Wicked problems remain: family structure, crime
and incarcerations, horrible schools, lack of
affordable, high-quality child care, insurance…
Fiscal pressures burden state policymakers
and their citizens.

The safety net is frayed.
While We Know a Lot About
the Poverty Problem

Welfare reform is clearly not




A “silver bullet” – many households appear as well
or better off, but child poverty rates are still very
high.
Extreme US-style devolution can still lead to a
“race to the bottom.”
The system appeared to have survived a mild
recession, but can it stand up to a more severe
fiscal downturn?
There is no systematic evaluation requirement.
In Closing

The problems are exceptionally difficult.

Poorly performing schools, poor labor markets for lowskilled workers, drugs, crime, children being raised in
single-parent households.



These create formidable problems for some families and
individuals to achieve a standard of living above poverty.
The fiscal situation is fairly dire, though this can
turn around reasonably quickly with prudent fiscal
management.
The politics and problem of poverty have not yet
stirred the voting public.

Though some (John Edwards most recently) have tried
to push this forward.
An Essential Part of the Story:
Combating Policy Cynicism

We will never make progress if the public is
convinced that “nothing works.”


Antipoverty policy requires an activist government.
There is a long cycle of policy initiatives where initial ideas
are hyped, there is inadequate implementation and
expenditures, and later, the problem remains.


This gives the perception that “nothing works.”
It is essential for advocates, scholars, and citizens to tell the
stories and gather evidence for cost-effective approaches
that work.

I have listed a set of policies today, that can form the basis of
an efficient, successful anti-poverty strategy.
Moving Forward

Welfare reform, which many (including me)
thought was punitive and ill-considered, may
result in a more effective antipoverty policy, if…


Careful evaluation is conducted on state initiatives to
better understand what works.
Taxpayers believe that all need to work and that “poor
support” is targeted to families “doing the right thing.”


There is a striking difference in American’s antipathy toward
“welfare” and their professed willingness to “assisting the
poor.”
Serious, successful efforts to reduce poverty can
be an enduring part of national politics.