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January 15 2014

Why Is the Poverty Rate Still So High?

Rachel DiCarlo Currie

As we mark the 50th anniversary of Lyndon Johnson’s War on Poverty, there are many numbers that highlight the progress America has made since January 1964. Oddly, the official U.S. poverty rate is not one of them.

According to Census Bureau calculations, the poverty rate declined from 19 percent in 1964 to 11.3 percent in 2000, before rising to 15 percent in 2012. Yet the Census estimate does not include non-cash benefits provided by government programs such as Medicaid, food stamps, and federal housing assistance, nor does it include tax subsidies such as the Earned Income Tax Credit and the Child Tax Credit, nor does it include employer-sponsored health care. Instead, it focuses solely on pre-tax money income, which Princeton economist Angus Deaton (a former president of the American Economic Association) has called “a crippling defect.”

So how should we measure the poverty rate? For starters, we should distinguish material deprivation and living without opportunity from underclass behavior. The former is a much less serious problem in 2014 than it was half a century ago. The latter, sadly, has gotten progressively worse over time -- thanks in part to government policies. 

First, the good news: While pre-tax wages have been stagnating, more comprehensive measures of household income reveal substantial growth since the 1970s. For example: The Congressional Budget Office has reported that America’s inflation-adjusted median market income -- i.e., median income, including employer contributions to health-insurance premiums, before federal taxes and transfers -- grew by only 19 percent between 1979 and 2007. Yet real median income after federal taxes and transfers grew by nearly twice that amount (35 percent).

To be sure, the CBO data also show a big jump in income inequality. Minneapolis Fed economist Terry Fitzgerald has confirmed that inequality spiked between 1976 and 2006. But he has also demonstrated that, over the same period, “inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent.” Fitzgerald arrived at those figures after (1) controlling for the well-documented upward bias in the consumer price index (CPI), which is used to calculate inflation, (2) accounting for changes in household composition since the mid-1970s (e.g., there are relatively fewer married-coupled households and relatively more single-parent households), and (3) factoring in nonmonetary income such as government transfers and employer-provided health benefits.

In a separate study, economists Richard Burkhauser of Cornell, Jeff Larrimore of the U.S. Joint Committee on Taxation, and Kosali Simon of Indiana University concluded that when using our broadest measure of available resources -- post-tax, post-transfer, size-adjusted household income including the ex-ante value of in-kind health insurance benefits -- median income growth of individual Americans improves to 36.7 percent over the period from 1979–2007.”

The picture gets even more encouraging when we measure poverty in terms of consumption rather than income. “Consumption better reflects the material circumstances of disadvantaged families,” argue economists Bruce Meyer of the University of Chicago and James Sullivan of Notre Dame, “not only because it more closely captures permanent income but also because it is measured with less error than income among this group, and studies have shown that consumption is a better predictor of well-being than income.” After correcting for the CPI’s upward bias, Meyer and Sullivan reckon that overall consumption poverty “declined by 26.4 percentage points between 1960 and 2010, with 8.5 percentage points of that decline occurring since 1980.”

Of course, the Great Recession and its aftermath have contributed to a sharp rise in dependency on government transfer programs; the labor-force-participation rate was 2.9 percentage points lower in December 2013 than it was in June 2009, when the recession formally ended; and the long-term-unemployment problem remains at crisis levels. (“The number of people unemployed for less than 15 weeks is basically the same as it was before the recession,” writes Matthew Klein of Bloomberg View. “By contrast, the number of people employed for 15 weeks or more is about 2.6 times what it was at the end of 2007.”) Yet despite the severity of our post-2007 downturn, and despite the weakness of our recovery, the material resources available to America’s poor are still much greater today than they were in 1964. As Heritage Foundation scholar Robert Rector noted last week in the Wall Street Journal:

Current poverty has little resemblance to poverty 50 years ago. According to a variety of government sources, including census data and surveys by federal agencies, the typical American living        below the poverty level in 2013 lives in a house or apartment that is in good repair, equipped with air conditioning and cable TV. His home is larger than the home of the average nonpoor French, German or English man. He has a car, multiple color TVs and a DVD player. More than half the poor have computers and a third have wide, flat-screen TVs. The overwhelming majority of poor Americans are not undernourished and did not suffer from hunger for even one day of the previous year.

Unfortunately, as Rector is quick to remind us, none of that means the War on Poverty -- properly understood -- has been a success. While means-tested welfare programs have contributed to higher living standards among the poor, they have also fueled and exacerbated deleterious cultural trends, most notably nonmarital childbearing and family breakdown.

In 1964, fewer than 7 percent of births were outside marriage. Two decades later, the nonmarital-birth ratio was 21 percent. By 2004, it had climbed to 35.8 percent. In 2012, it was 40.7 percent. Those numbers represent a social catastrophe. Meanwhile, with their thresholds and phase-outs, means-tested welfare programs have imposed steep marginal tax rates that effectively function as a poverty trap. The net result has been to create perverse economic incentives and to foster a widespread underclass culture in which fatherlessness, failing schools, and high crime rates have limited upward mobility.

More on the downside of America’s existing anti-poverty system tomorrow.

Rachel DiCarlo Currie is a senior fellow at the Independent Women’s Forum.

 

 

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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