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“The Economics, Policy, and Politics of Poverty Reduction”
Summary of Remarks by
Jared Bernstein
Director of the Living Standards Program
Economic Policy Institute
And by
Mark Greenberg
Executive Director, Poverty Task Force
Center for American Progress
June 26, 2007
Dr. Bernstein discussed the measurement of poverty in the U.S. and trends over the past generation, in order to understand better why poverty rates have showed little change even though per capita GDP has increased strongly.
Each year the Census Bureau determines the number of people living in poverty based on pre-tax family income, including wages, salaries, interest, dividends, self-employment income, welfare payments (TANF), unemployment insurance, and social security payments. Non-cash government benefits, such as public housing, Medicaid, and food stamps, are excluded, as are capital gains. Tax liabilities and credits are not considered.
Poverty levels in the U.S. have remained relatively constant over the past 35 years. Conclusions about poverty are sensitive to how poverty is measured. While Gross Domestic Product (GDP) per capita has increased by eighty percent since the late 1950s, poverty rates are essentially at the same level that they were at in the early 1970s.
The relationship between poverty rates and GDP growth can be studied using regression analysis with the poverty rate as a function of the growth in GDP per capita. Dr. Bernstein showed a chart illustrating that, while the poverty rate tracked the rate of change in GDP per capita rate from the late 1950s through the early 1970s, the relationship broke down in subsequent years. Dr. Bernstein argued that, based on the historical evidence, if the relationship between GDP growth and poverty prior to 1970 had continued to exist, poverty would have been eliminated by 1985. Dr. Bernstein stated that, while other changes, such as the increase in single parent families, also played a role, the fact that the poverty rate did not continue to fall after 1970 is principally attributable to an increase in income inequality.
The inequality effect on poverty rates is equal to the growth in poverty level incomes that would have been achieved if these incomes had increased at the same rate as average incomes (adjusted for demographic changes), minus the actual average rate of growth of poverty level income over the same period. While economic growth should have lowered poverty by 5.7 percent over the 1969 to 2004 period, this was offset by policy changes resulting in increases in income inequality which Dr. Bernstein estimates contributed to a 5.1 percent increase in the poverty rate over the same period. The largest inequality offsets occurred in the 1980s.
Dr. Bernstein also showed the effect of demographic factors such as race, education, and family structure on family poverty rates from 1969 - 2004. The impacts were generally smaller than that from growth and inequality. Education had the largest effect (i.e., more education implying less poverty), with a much smaller impact after 2000. While changes in family structure (e.g., more one parent families, implying more poverty) had the second largest impact on poverty rates, their effect was most pronounced from 1969 - 1979 and much smaller in subsequent years. Dr. Bernstein explained that the impact of family structure on poverty has been muted since 1979 because the rate of increase in one parent families has been small relative to earlier years, while the income of these families has risen more quickly, especially in the 1990s.
Dr. Bernstein believes that, in order to reduce poverty, the job market needs to tighten to bid up wages of workers in lower wage groups. Dr. Bernstein noted that between 1984 and 1989, real wages for workers in the lowest twenty percent income group declined slightly, productivity increases were low, and the unemployment rate was high. Between 1995 and 2000, the wages of low income workers and productivity grew more rapidly than between 1984 and 1989, and the average unemployment rate fell. Between 2000 and 2006, the wages of low income workers stagnated as unemployment and productivity increased.
Dr. Bernstein noted that, while immigration does not reduce poverty, increases in immigration have been associated with poverty reduction. This is an area in which further study is needed. While the percentage of foreign born workers at the poverty level is always above the share of native born low income workers, the two poverty rates move together. The poverty rates for both groups declined from 1993 to 2000, with the poverty rate of immigrants declining more rapidly; the poverty rates for both groups increased modestly from 2000 to 2005.
The National Academy of Sciences has calculated poverty rates between 1999 and 2005 using a range of methods which its researchers feel reflect poverty more accurately than the official Census Bureau rate. The average of these alternative measures of poverty rates has been approximately 1.0 to 0.5 percent higher than the Census Bureau’s official poverty rates over the same period. These alternative rates subtract tax liabilities, add tax credits, and include non-cash government benefits. The alternative poverty rates estimated that in 2005, 14.1 percent of the population, or 41.3 million persons, were living at or below the poverty level compared with the official Census estimate of 12.6 percent of the population, or 35.9 million persons.
Dr. Bernstein turned the session over to Mark Greenberg for an overview of the study by the Center for America Progress, From Poverty to Prosperity, A National Strategy to Cut Poverty in Half (April 2007). The Task Force producing the report was charged with presenting a case for reducing poverty and making recommendations for its reduction. The task force commissioned a study, available at http://www.americanprogress.org/issues/2007/01/poverty_report.html, which examined the economic costs to the U.S. economy associated with persistent childhood poverty. These are estimated to be about $500 billion annually, or approximately four percent of GDP, and are about evenly divided between lost adult productivity and wages, increased crime, and higher health expenditures.
The Task Force recommends that the U.S. set a national goal of reducing poverty by 50 percent over the next ten years and of ending poverty in a generation. The Task Force believes this is an ambitious but achievable goal. Poverty fell by 42 percent between 1964 and 1973 and by 25 percent between 1993 and 2000. Mr. Greenberg noted that the United Kingdom has made dramatic progress in reducing childhood poverty after setting a national goal to end poverty in 2020. From 1998/99 to 2005/06 child poverty in the U.K. has fallen by more than half in absolute terms, and by about eighteen percent on a relative measure (calculating poverty rates based on having income below sixty percent of median income.).
The Task Force recommendation for reducing poverty covered a broad range of areas supporting both employment and economic security goals. Using the National Academy of Sciences definition of poverty, the Urban Institute modeled the effects of four selected Task Force recommendations:
1) increasing the minimum wage to 50 percent of the average wage;
2) expanding the earned income tax credit in several ways, including a substantial increase for workers not living with children;
3) making the child tax credit fully refundable;
4) making the childcare subsidy assistance available to all working families with incomes below 200 percent of the poverty line and making the Child and Dependent Care Tax Credit larger and refundable.
The Urban Institute modeled the effects using the TRIM micro-simulation model. Urban researchers began using the official measure of poverty, and then, consistent with National Academy of Sciences recommendations, make adjustments by counting tax, food stamps and housing subsidies, and considering child care expenses. Poverty thresholds were adjusted so that the analysis began with the same number of people in poverty as under official measures.
The Urban Institute estimated that these four policies combined would reduce the number of people living in poverty by nine million, reduce the poverty rate to 9.1 percent, and reduce the number of people living in extreme poverty (fifty percent below the poverty line) by two million persons. Overall poverty would be reduced by 26 percent and child poverty by 41 percent. Poverty would be reduced for all races. Making the child tax credit fully refundable would have the largest effect on poverty, followed by, in declining order of effect, increasing the childcare subsidy, increasing the earned income tax credit, and increasing the minimum wage.
Dr. Bernstein joined the Economic Policy Institute in 1992. He recently authored "All Together Now: Common Sense for a Fair Economy.” His areas of research include income inequality and mobility, trends in employment and earnings, low-wage labor markets and poverty, international comparisons, and the analysis of federal and state economic policies. Dr. Bernstein served as deputy chief economist at the U.S. Department of Labor. He has co-authored eight editions of the book The State of Working America and has published extensively in the popular and academic press. He has a PhD from Columbia University.
Mark Greenberg is the Executive Director of the Task Force on Poverty for the Center for American Progress, while on leave from the Center for Law and Social Policy (CLASP), where he is the Director of Policy. Mr. Greenberg has written extensively on issues relating to federal and state welfare reform efforts; workforce policy issues affecting low-income families; child care and early education policy; and other poverty-related issues. He provides technical assistance to state and local governments on issues related to U.S. welfare, workforce, and child care legislation. Mr. Greenberg is a graduate of Harvard College and Harvard Law School.
Rapporteur: Nancy Enikeieff Ody
