Chapter 17: Poverty

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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

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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.

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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.

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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.

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Another Issue, Highlighted by the Krugman
Reading, is that Americans appear to
tolerate more income inequality than people in
other countries
Share of Aggregate Income Received by Quintile of Household for OECD Nations Share of Aggregate Income Received by Quintile of Household for OECD Nations Share of Aggregate Income Received by Quintile of Household for OECD Nations Share of Aggregate Income Received by Quintile of Household for OECD Nations Share of Aggregate Income Received by Quintile of Household for OECD Nations Share of Aggregate Income Received by Quintile of Household for OECD Nations
Country (year) Income Quintile Income Quintile Income Quintile Income Quintile 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
Czech Republic (1996) 10.3 14.5 17.7 21.7 35.9
Portugal (1997) 5.8 11.0 15.5 21.9 45.9
Slovak Republic (1996) 8.8 14.9 18.7 22.8 34.8
Sweden (1995) 9.1 14.5 18.4 23.4 34.5
Turkey (2000) 6.1 10.6 14.9 21.8 46.7
United Kingdom (1995) 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
The poorest one-fifth in the U.S. receive a
smaller share of income than in the typical OECD
country.
While the richest one-fifth receive considerably
more.
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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.
• 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.

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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
  low-skilled 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.

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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.

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Behavioral responses to a welfare program with
100 percent clawback rates on benefits
Individuals make different choices based on
preferences.
This is the budget constraint before welfare is
introduced.
of consumption per year
A
25,000
20,000
Welfare is introduced with a 9,000 guarantee and
a BRR of 100.
Z
slope -wage -12.50
Y
10,000
G 9,000
B
D
Others are initially ineligible, but reduce their
work effort, too.
5,000
X
Some will be mechanically eligible and reduce
hours of work.
C
Hours of leisure per year
2,000
1,600
1,200
400
1,280
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Lowering the benefit reduction rate improves
work incentives but may cost more money
of consumption per year
A
25,000
Z1
Z2
Lowering the BRR changes the budget constraint.
18,000
B2
And person Z becomes eligible.
Y2
slope -wage -12.50
slope -net wage -6.25
X2
Y1
G 9,000
B1
D
Hours also fall for person Y.
X1
Hours of work fall for person X.
C
Hours of leisure per year
2,000
560
1,280
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The moral hazard costs of welfare policyThe
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.

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Reducing the moral hazard of welfareMoving 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.

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Reducing the moral hazard of welfareUsing
ordeal mechanisms

• An alternative approach is to try get individuals
  to reveal themselves as less able through ordeal
  mechanisms.
• Ordeal mechanisms are features of welfare
  programs that make them unattractive, leading to
  self-selection of only the most needy recipients.
• 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.

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Reducing the moral hazard of welfareIncreasing
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
• Training
• Labor market subsidies
• Child care
• Child support
• Removing welfare lock

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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.

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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

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What Works? A Strong Economy!

• 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.

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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).

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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

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What Works? Welfare Reform

• Good news
• 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.

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What Works? Welfare Reform (continued)

• Bad news
• 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.

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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.

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In Closing

• The problems are exceptionally difficult.
• Poorly performing schools, poor labor markets for
  low-skilled 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.

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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.

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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 Americans
  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.