The Alleviation of Poverty: How Far Have We Come?

55 Pages·2011·0.23 MB·English

The Alleviation of Poverty: How Far
Have We Come?

Robert D. Plotnick

University of Washington

Prepared for:
Oxford Handbook of the Economics of Poverty
Philip N. Jefferson, Editor

January 2011

JEL classifications: D31, I3, J1, J3
Keywords: poverty, measuring poverty, market income, antipoverty policy, demographic
change

I thank participants in the Cornell Population Program seminar and Robert Hutchens for
helpful comments on earlier drafts.

Daniel J. Evans School of Public Affairs
University of Washington
Box 353055, Parrington Hall
Seattle, WA 98195-3055
Phone [phone]
FAX [phone]
[email protected]

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Abstract
This chapter discusses trends in U.S. poverty since 1964 and the factors behind
those trends. Between 1965 and 1970 the official poverty rate fell significantly because
market poverty declined and the antipoverty impact of transfers improved. After 1970
market poverty stopped declining but since the antipoverty impact of transfers improved
for several more years, official poverty kept falling until the mid 1970s. The adjusted
poverty measure, which takes account of non-cash benefits, taxes, and tax credits,
declined until 1979. Since 1980 there has been little overall progress against poverty.
Changes in market poverty, in the antipoverty impact of public programs, and in
demographic structure contributed to the lack of progress. Market poverty failed to
decline because powerful economic forces depressed low skill workers’ earnings.
Workforce development programs, welfare reform and other public policies intended to
increase earnings were inadequate to counteract these forces. High immigration and
increases in single parent families resulted in Americans increasingly living in families
that were relatively more likely to be poor. The antipoverty impact of public programs
eroded during the late 1970s and early 1980s, and has yet to recover.
Continuing obstacles to reducing market poverty and the clouded prospects for
better income support and poverty-reducing demographic change suggest that poverty
will remain a pressing issue in the second decade of the 21st century. The chapter’s final
section sketches policy options for raising low-skill workers’ earnings, improving the
antipoverty impact of transfers, and reducing the share of families at high risk of being
poor.

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1. Introduction
In 1964 President Johnson proclaimed: “This administration today, here and now,
declares unconditional war on poverty in America.” This chapter provides a critical
discussion of how far the nation has come in the nearly 50 years since Johnson’s famous
commitment to end poverty.
The next section presents benchmark trends in income poverty using the official
poverty measure. In view of the widespread criticisms of the official measure by scholars
and by advocates and policy makers from both the left and right, the section then
examines how the trends differ under alternative measures of poverty. These measures
include “market” poverty (sometimes called “pretransfer” poverty) and “adjusted
income” poverty (cash income plus some non-cash benefits and Earned Income Tax
Credits, less direct taxes), both based on the official poverty lines. They also include
rates based on the National Academy of Sciences (Citro and Michael 1995)
recommendations for revising the official measure and on a measure of relative poverty.
Section two also compares the level and trend in income poverty among the U.S. and
other wealthy countries. The section appraises where there has been significant progress
in alleviating poverty and where little or none has occurred.
Section three examines the economic, social and policy factors that have driven
trends in poverty since 1964. It first presents a simple analytic framework for
understanding the mechanisms through which changes in those factors can affect poverty.
The framework directs our attention to understanding how the factors have affected
market poverty, the demographic structure, and the antipoverty impacts of taxes and
income support programs.
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The broad assessment of the historical record finds that some factors changed in
ways that helped alleviate poverty, while others changed in ways that tended to increase
it. Yet others changed in both directions during the nearly 50 years since the War on
Poverty began. The major social and economic factors considered in the analysis include
economic growth, earnings inequality, labor force participation, education, unionization,
and demographic change including immigration. The policy factors include workforce
development programs, employment tax credits, the minimum wage, cash and in-kind
income support policies (including welfare reform), income and payroll taxes, and the
behavioral incentives of income support policies. Other chapters in the Handbook
provide more detailed analyses of many of these factors, as well as of important factors
not considered here because of space limitations.
Section four briefly discusses the prospects for alleviating poverty during the next
decade. The final section discusses policy options for raising earnings among low-skill
workers, improving the antipoverty impact of the safety net, and reducing the share of
families at high risk of being poor.
2. How Far Have We Come?
Any assessment of how poverty has changed since 1964 must start with the
official poverty statistics. Mollie Orshansky, an economist at the Social Security
Administration, developed a definition of poverty in 1963. With a few changes, the
federal government adopted it as the official definition of poverty in 1969, and has
modified it in small ways since. It provides a set of poverty lines that vary by household
size, the age of the household head, and the number of children under eighteen. The lines
do not vary geographically and are updated by the change in the Consumer Price Index
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(CPI-U), so they represent the same purchasing power each year. For 2009 the poverty
line ranged from $10,289 for a single person over age 65 to $47,514 for a family of 9 or
more (U.S. Census Bureau 2010a). For the iconic family of 4 with 2 children it was
$21,756, or $418 per week. If a family’s annual income falls below its poverty line, its
members are counted as poor.
The official definition measures income as pre-tax money received from wages,
self-employment income, dividends, interest, rental income, child support, and
government cash benefits such as Social Security, Supplemental Security Income,
unemployment insurance and public assistance. The measure does not include capital
gains, cash benefits from the Earned Income Tax Credit (EITC), and noncash forms of
income such as fringe benefits, Medicaid and food stamps, nor does it subtract income
and payroll taxes. Despite extensive criticism of the official measure (Blank, 2008; Citro
and Michael 1995), attempts to revise it have been unsuccessful to date. It remains the
basis for allocating billions of federal social program expenditures among states and for
determining families’ eligibility for a number of federal benefits.1 It has been an
important social indicator since its first use in the 1960s..
How far have we come? If we examine the official rate of poverty for all persons
(middle line of Figure 1), the short answer is: not far at all. After a rapid decline in the
mid 1960s, there has essentially been no progress. The official rate reached its all-time
low of 11.1 percent in 1974. From 1980 through 1997 it fluctuated in a narrow band of
13 to 15 percent. The prosperity of the late 1990s brought the rate to 11.3 percent in
2000, slightly above the historic low. The weaker labor market since 2000 raised the rate
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to 12-13 percent during 2002- 008. The Great Recession pushed it to 14.3 percent in
2009 – virtually the same level as in 1967.
The share of the official poverty population with income below half of the
poverty line jumped from 30 percent in 1975 to 39 percent in 1983. Since 1983 it has
tended to gradually increase and reached 44 percent in 2009. This trend suggests that the
severity of poverty has been rising for more than 35 years even as the overall rate has
fluctuated without trend during the same period.
Hidden under the stasis of the overall poverty rate during the past three decades
are large differences in trends for important demographic subgroups. When we
disaggregate by age, we find that elders have come a long way. Their official poverty
rate of about 30 percent in the mid 1960s was cut in half by 1976. It has gradually
trended down since then and stood at 8.9 percent in 2009. Poverty among persons age
18-64 has always been lower than the overall rate, but the pattern over time is the same –
decline until the early 1970s, then an increase followed by fluctuation within a band of
about two percentage points. Children under age 18 have retrogressed substantially since
their official poverty rate hit its historic low of 14.0 percent in 1969. Between 1981 and
1993 the child poverty rate was fully 40 to 60 percent higher than in 1969. It steadily
declined between 1994 and 2001, then trended up. In 2009 the official child poverty rate
was 20.7 percent, or nearly 50 percent higher than in 1969. Because of these divergent
trends, elders now comprise a much smaller share of the poor than 40 years ago: 7.9
percent in 2009 compared to 19.8 percent in 1969.
Like age groups, race and ethnic groups differ in how far they have come.
Because non-Hispanic whites account for most of the population, their pattern of official
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poverty over time mirrors the overall rate. Their level has always been about one third
lower than the overall rate. Compared to non-Hispanic whites, poverty among Hispanics
increased more sharply between the early 1970s and early 1990s, then fell much faster.
Yet in recent years the Hispanic poverty rate was about the same as in the early 1970s.
These patterns contrast strongly with the more encouraging ones for blacks and Asian
Pacific Islanders. Since 2002 poverty among blacks has been several percentage points
lower than it was in the mid 1980s. A similar pattern is evident for Asian/Pacific
Islanders. Despite this decline, in recent years black (and Hispanic) poverty rates have
been 12 to 16 percentage points higher than those of the other two race/ethnic groups.
Because of the marked fall in black poverty, blacks accounted for 23 percent of all the
poor persons in 2009, compared to 32 percent in 1972.
We also find divergent trends among family types in official poverty during the
past 35 years. Poverty among married couple families hardly changed during this period.
For single male-headed families it gradually rose from 10 percent in the late 1970s to
17.0 percent in 1994, dropped to 12-14 percent during 1995-2008, then spiked to 16.9
percent in 2009. In contrast, poverty among single female headed families has shown a
gradual, long run decline. It fluctuated between 33-36 percent from the late 1970s until
1994, fell rapidly to 25.4 percent in 2000, then stayed between 28-29 percent before
jumping to 29.9 percent in 2009 (U.S. Census Bureau 2010b).
Different trajectories of poverty among age, race and ethnic groups, and across
family structures strongly suggest that some economic, social and policy changes since
1964 helped alleviate poverty, while other changes acted in the opposite direction.
Section 3 discusses both types of changes.
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Alternative measures of poverty.
There is wide agreement that the official poverty measure has significant flaws,
though critics do not all agree on their relative importance. Some critics think the lines
are too low. Some argue for different methods of adjusting the lines over time, for family
size and structure, or for the local cost of living. Some want to revise the measure of
income by including non-cash benefits, subtracting taxes, and making other adjustments.
Because of these flaws, the official poverty measure has become less reliable for
assessing how far we have come in alleviating poverty.
In view of the official measure’s flaws, this section re-examines how far we have
come using four alternatives. “Adjusted poverty” retains the official lines for all years,
expands the income measure to include capital gains and losses, employer provided
health benefits, imputed income from home equity, EITC benefits, and government in-
kind transfers of food, housing, and medical care. It subtracts Social Security taxes and
both federal and state income taxes. Because it counts income more comprehensively,
the adjusted measure shows a lower rate of poverty than the official measure. Statistics
for adjusted poverty approximate a lower bound on the level of income poverty in the
U.S., conditional on accepting the official lines.2
In 1965, when in-kind transfers were much smaller than during the past three
decades, adjusted poverty would have roughly equaled the official poverty rate of 17.3
percent.3 When in-kind transfers expanded in the 1970s, adjusted poverty fell below the
official rate. In contrast to the official measure, this more comprehensive adjusted
measure shows that poverty continued to decline after 1973 until 1980, when it reached
8.2 percent.4 Based on the adjusted measure, poverty had been halved 15 years after the
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War on Poverty. In recent years the rate of adjusted poverty has been about 30 percent
lower than the official rate (Figure 1). It reached its lowest value, 8.0 percent, in 2000.
A core goal of the War on Poverty was to offer the poor “a hand up, not a hand-
out” so that they could earn their way out of poverty and, especially, not rely on welfare.
Assessing progress towards this goal requires a measure of “market poverty.” The
measure of market poverty used here, like adjusted poverty, retains the official lines for
all years. It differs from the official measure by using a narrower income definition.
Market income only counts before-tax private cash income, including capital gains, and
employer provided health benefits. Market poor persons (sometimes called the
“pretransfer” poor) live in families that cannot generate enough income from work and
other private sources to rise above the official poverty line. In this sense they have not
reached self-sufficiency, which is so highly regarded in the U.S.
Market poverty declined sharply in the late 1960s to 17.7 percent in 1970. It rose
rapidly from 1970 to 1975, and then rose and fell with the business cycle without
showing any trend (top line of Figure 1). Since 1970, when market poverty reached the
lowest rate ever recorded, it has never been below 18.0 percent, reached in 2000. During
1980-2008 market poverty has generally been 45-55 percent higher than official poverty.
Though both alternative measures differ from the official measure and each other
in important aspects, the three series show remarkably similar patterns since 1980: rising
and falling with the business cycle without discernible trend. To the question, How far
have we come?, each measure suggests the same answer: Since 1980 the nation has
made no progress against poverty.5
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A measure of relative poverty is the third alternative. A relative poverty line
roughly represents, in Adam Smith’s words (Smith 1937), the cost of “those things which
the established rules of decency have rendered necessary to the lowest rank of people.” A
relative poverty line will rise in step with a society’s real standard of living, in contrast to
absolute poverty lines like the official ones, which remain fixed in real terms.6 The
premise of a relative measure is that, whatever the level of absolute poverty, relative
poverty better indicates the socially relevant level of economic need in an affluent
society. Surveys suggest that the socially perceived relative poverty line in the U.S. has
been 45 to 50 percent of median income (Rainwater and Smeeding 2003, Blank 2008).
Meyer and Sullivan (2009, figure 7) provide consistent series for relative income
poverty based on a poverty threshold set at half the median of either pre-tax money
income or adjusted income. Each series shows substantially more poverty than the
corresponding series based on the official, absolute measure. For example, relative
poverty in 2005 was either 21.9 (pre-tax income) or 16.7 (adjusted income) percent. The
corresponding absolute rates were 9.7 and 6.7 percent. They also show that relative
poverty has been gradually increasing since the mid 1970s.7
The fourth alternative estimates are based on the widely discussed National
Academy of Sciences (NAS) recommendations for updating the poverty measure (Citro
and Michael 1995). The NAS poverty lines use different adjustments for family size and
composition than the official ones and, in some variants, adjust for geographic price
differences. They rise in line with changes in real growth in basic consumer expenditures
and, so, adopt a relative perspective when comparing poverty in different years. They are
based on the costs of food, clothing, shelter, utilities, a small amount for miscellaneous
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