Instructor's Manual 167
Chapter 12
Poverty: Old and New Approaches to a Persistent Problem
What's in This Chapter and Why
Chapter 12 deals with the problem of poverty in the United States. It contains an unusually thorough integration of facts, analysis, institutional detail, and policy alternatives.
The principal questions addressed are: (1) How many people are poor? (2) What is the shape of the long-run poverty trend? (3) How effective have government transfers been in reducing poverty? (4) What factors tend to increase poverty? (5) Do government transfers, in particular, increase poverty through their adverse effect on work effort and transition out of poverty? (6) What are the policy alternatives for dealing with poverty?
Instructional Objectives
After completing this chapter, your students should know:
1. How poverty is measured.
2. How the official poverty rate has varied over the last 30 years.
3. That government transfers have been responsible for much of the reduction in poverty that has occurred, especially among the elderly.
4. That poverty has become concentrated more in families headed by females, blacks, and Hispanics.
5. That discrimination plays a limited role in generating and maintaining poverty.
6. That the increasing incidence of unemployment has had a disproportionate impact on the poor.
7. How government means-tested transfers can affect work effort and transition out of poverty.
8. The policy choices for dealing with the problem of the "working poor," and how they work.
10. The policy choices for enforcing and ensuring child support payments.
Key Terms
These terms are introduced in this chapter:
Instructor's Manual 167
Poor person
Official poverty threshold
Gross money income
Poverty rate
Pre-transfer poverty rate
Means-tested transfer
Basic benefit
Deduction for essential needs
Benefit reduction rate
Break-even gross income (BEGI)
Target efficiency
Instructor's Manual 167
Suggestions for Teaching
It is essential to begin a chapter on poverty with the issue of how to determine the number of people who are poor. To stimulate interest, remind your students that we must agree on the magnitude of the problem before we can generate the political will to do something about it. For example, the War on Poverty of the late 1960s was undoubtedly accelerated because of the facts brought to light in Harrington's The Other America and the initial estimates of poverty by the Council of Economic Advisors.
The next thing to do is present data on the official measure of poverty for selected years. Do this to underscore two important points: (1) that poverty is persistent, but (2) that the level of poverty varies over time. This is followed in due course by a look at the composition of the poor where it is pointed out that the racial composition of the poverty population has been relatively constant, but that the age composition of the poor has varied considerably.
Then examine the basic forces underlying the long-run trend. Economists really believed in the 1960s that poverty could be reduced effectively through real economic growth and investment in human capital. These factors are granted only a small role in poverty reduction.
The three most common sources of support for poverty families, other than income from work, are food stamps, the EITC, and TANF payments. Each of these is a means‑tested transfer. None is generous enough, by itself, to elevate very many families above the poverty threshold. Benefits from both the food stamp and TANF programs fall as income from work increases above a deduction for essential needs, raising the possibility that the loss of benefits discourages people from working. The EITC increases as AGI increases from $0 to $10,020, and remains constant from $10,020 to $13,090, encouraging work. Beyond that level, the EITC falls as AGI increases, discouraging work. The net effect of the three programs together probably does not discourage the poor from working at low wages but may adversely affect the transition from low to higher wages.
The establishment of the TANF program is a clear signal that Congress wants to increase the percentage of income that the poor receive from work. Accordingly, this chapter reviews several programs or policies designed to achieve that objective.
The examination of the relationship between unemployment and poverty suggests that policies to reduce unemployment are an important part of any strategy to reduce poverty. Data gathered to date on people who return to TANF after leaving TANF for work indicate that there is a need for more effective childcare assistance. It is believed that TANF clients are reluctant to leave TANF for work because of a fear that they will lose Medicaid benefits. This may be the case for adults, but not for children.
The changing composition of the poor, especially the greater concentration of poverty in working poor families and in families headed by females, is noted. Some of this trend is attributed to discrimination, but factors that encourage work and a transition out of poverty are also explored, such as unemployment policy, childcare assistance, medical protection, minimum wage, wage subsidies, and labor market discrimination policies.
The final programs considered are government efforts to assist single mothers with collecting child support payments from absent fathers. Efforts to date have resulted in significant increases in the amount of child support collected. Some believe, however, that the government should assure or guarantee child support payments while making further efforts to get fathers to pay.
Hopefully a relatively complete and up-to-date discussion of the principal poverty programs and options under consideration is presented. Still, it is difficult to keep up with the literature on this topic.
Additional References
In addition to the references in the text, instructors may with to read or assign one or more of the following:
1. Committee on Ways and Means, U.S. House of Representatives, Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means (Washington, D.C.: U.S. Government Printing Office). An annual publication that may be referenced in your library simply as The Green Book.
2. Thomas Corbett, "Child Poverty and Welfare Reform: Progress or Paralysis?" Institute Research on Poverty: Madison, Wisconsin Focus 15 (1) (Spring 1993).
3. David T. Ellwood, Poor Support: Poverty in the American Family (New York: Basic Books, 1988).
4. Bradley R. Schiller, The Economics of Poverty and Discrimination, 6th ed. (Englewood Cliffs, N.J.: Prentice Hall, 1994).
5. Michael Wiseman, "How Workfare Really Works," Public Interest (Fall 1987), pp. 36-47.
6. Edward N. Wolff, Poverty, Inequality and Discrimination, (Mason, OH: South‑Western, 1996)
Outline
I. THE SCOPE OF THE PROBLEM
A. Measuring Poverty
1. The official poverty measure is one possible measure of poverty.
a. According to this measure, a person is poor who lives in a family whose gross money income is below the official poverty threshold.
1. Gross money income includes earnings before taxes, interest, dividends, and private and government cash transfers.
2. The official poverty threshold is the cost of a nutritionally adequate diet multiplied by three. The official poverty line is based on the idea that the poor should not have to spend more than one-third of their income on food.
b. The official poverty measure is adjusted for inflation and family size.
B. The Number of People in Poverty
1. From 1959 to 1969 there was a significant decrease in poverty.
2. From 1979 to 1993 there has been a general increase in poverty.
3. After 1993 the poverty plummeted, however, it increased again in 2001.
4. The poverty rate for people age 65 and older has declined dramatically since 1967. Since 1982 the poverty rate for the aged had fallen below the all‑ages poverty rate.
5. There has been a significant reduction in the poverty rate for persons living in female‑headed families.
6. Although the poverty rates for people living in black and Hispanic households are much higher than the poverty rates for people living in white, non-Hispanic families, they fell both absolutely and relative to the poverty rate of the latter group in the 1990s.
II. ANTI-POVERTY EFFECTIVENESS OF GOVERNMENT TRANSFERS
A. Official versus Pre-Transfer Poverty Rates
1. The official poverty rate reflects the number of people who are poor after they receive various government cash transfers. Government cash transfers reduce the number of people who are poor according to the official measure of poverty.
2. The pre‑transfer poverty rate is an estimate by the Census Bureau of what the poverty rate would be without the income provided by the cash transfers except the Earned Income Tax Credit (EITC).
3. Government cash transfers reduced the average poverty rate by 7.5 percent, or nearly 36 percent of the pre‑transfer level.
4. Taxes, increase the poverty rate, the EITC and non‑cash transfers reduce it. The net effect of the adjustment for taxes, the EITC, and non‑cash transfers has been to reduce the poverty rate below the official poverty rate throughout the period 1979‑2001 by an average of 2.8 percent per year.
III. MEANS-TESTED TRANSFERS AND WORK INCENTIVES
A. The means‑tested transfers are those in which the transfer falls as a recipient's means or income increases. They provide incentives to the poor to do less to earn their own way out of poverty. Means‑tested transfers include temporary assistance for needy families (TANF), food stamps, the EITC, Medicaid, and federal housing assistance.
1. Food Stamps
a. Under the food stamp program, households are given ATM-like debit cards that are accepted as payment by grocery stores for food purchased.
b. Monthly food stamp benefits vary with gross income. The basic benefit is the amount received when gross income is equal to or less than the deduction for essential needs: $134.0 in 2002.
c. The ratio of the decrease in benefits to the increase in income is called the benefit reduction rate. The level of gross income where benefits are equal to zero is called the break‑even gross income.
d. The break‑even gross income is an indicator of the target efficiency of a transfer program‑the degree to which program benefits are confined to the poor. In general, the lower the break‑even gross income relative to the poverty threshold, the greater the target efficiency.
2. Earned Income Tax Credit (EITC)
a. The federal tax code has provided an earned income tax credit (EITC) since 1975. This is a credit against income tax liability for taxpayers with dependents and a relatively low adjusted gross income (AGI). The credit is refundable; taxpayers may receive a credit even if their tax liability is less than the credit.
b. Nine states have also adopted EITCs in the last 5 years.
3. Temporary Assistance for Needy Families (TANF)
a. TANF is the nation's safety net program for low‑income families. TANF is financed by the federal government through bloc grants to the states. The amount given to each state is based on how much the state received from the federal Aid to Families with Dependent Children (AFDC) program in the middle 1990's, just before TANF was established as a replacement for AFDC.
b. Each state is allowed to design and implement its own TANF program, including benefit levels and criteria for eligibility.
c. TANF households are limited to 5 years of support in a lifetime, but states may impose shorter lifetime limits. TANF recipients are required to engage in work or "work activities," such as job training, looking for work, or schooling. States may refuse to provide additional benefits to families who have additional children while on TANF assistance.
4. TANF + Food Stamps + EITC
a. The core anti‑poverty programs probably do not discourage heads of low‑income households from working ‑ at least, not at minimum wage jobs. They may, however, discourage them from seeking work at higher pay. Whether the net effect of these incentives increases or decreases poverty in the United States has not yet been determined by empirical studies.
IV. MAKING WORK PAY
A. AFDC was transformed into TANF in an attempt to increase the degree to which the poor work their way out of poverty by gainful employment. TANF does this by requiring single mothers to find a job and by establishing a lifetime limit on the duration of TANF benefits. This strategy is a necessary but not sufficient condition for reducing poverty because:
1. The economy must generate enough jobs for TANF clients
2. TANF clients appear to need help in order to successfully transition from welfare to work, especially with childcare and medical expenses.
3. The jobs that TANF clients get must pay an adequate wage. Data suggest that poverty, to some extent, may be caused by discrimination.
B. Unemployment Policy
1. Since the establishment of TANF there has been more than a 25 percent increase in the percentage of single mothers who are working. TANF was established in the midst of the longest peacetime economic expansion in the last century so it is arguable whether the precipitating factor behind the rise in employment rates of single mothers was TANF or the economy.
2. Empirical data shows that:
a. The variations in the pre‑transfer poverty rate virtually mimic the unemployment rate over time. This relationship strongly suggests that the ability of the economy to generate jobs is an important determinant of the poverty rate.
b. The persistence of the pre‑transfer rate also suggests that the market can solve only part of the poverty problem by generating jobs.
C. Childcare Assistance
1. The lack of affordable childcare can significantly hinder the labor market participation of adults in poor families. Both the federal government and state governments have programs that provide some form of childcare assistance. The most prominent of these are
a. The Child and Dependent Care Tax Credit
b. The Child Care and Development Fund
c. The Dependent Care Assistance Program
d. The Child Tax Credit
D. Medical Protection
1. The potential loss of Medicaid benefits may deter families from leaving welfare for work. Congress, under the Family Support Act of 1988, required states to expand Medicaid coverage for up to 12 months for families leaving AFDC for work. Under waivers, some states have expanded coverage for up to 24 months.
E. Minimum Wage
1. Poverty among the working poor is partly due to very low wages. Interest exists, then, in policies that increase the rewards that workers realize from their efforts. The three most‑discussed policies are:
a. Expanding the EITC
b. Raising the minimum wage
c. providing wage subsidies
2. Some economists argue that raising the minimum wage increases the unemployment rate. A further difficulty with a higher minimum wage is its target inefficiency.