Journal Issue: The Next Generation of Antipoverty Policies Volume 17 Number 2 Fall 2007
Poverty and Its Causes
A surprising fact about poverty in the United States is that it declined steeply throughout the 1960s and then increased in an uneven pattern thereafter, never again equaling its low point during the early 1970s. Children’s poverty has followed this pattern, with increases in many years after the early 1970s. By contrast, the poverty rate among the elderly continued to fall throughout the period, from nearly 25 percent in 1970 to 10 percent by 2005. The decline in poverty among the elderly has a straightforward explanation— Social Security.2 Congress increased Social Security benefits several times during the 1970s and indexed benefits to inflation, boosting millions of low-income elderly Americans above the poverty line. The case of the elderly shows that if government gives people enough money, their poverty rate will drop. But Americans generally do not support taxing one group of Americans, only to give the money away to another group, especially if the receiving group is able-bodied but not working.
Poverty and the Economy
As background for proposing new ways to attack poverty, we briefly explore three forces that are widely thought to shape poverty rates: the economy, changes in family composition, and changes in government spending. Perhaps surprisingly, the overall performance of the American economy does not explain the nation’s inability to make substantial gains against poverty since the 1970s. Although the 1960s saw the highest economic growth rate of the last half of the twentieth century, the following three decades all enjoyed growth of more than 20 percent in per capita gross domestic product (GDP). Yet between the early 1970s and the mid-1990s, poverty increased. Why, with the economy growing, was the nation not able to continue the progress it made against poverty during the 1960s? To paraphrase President Kennedy’s famous aphorism, why didn’t a rising tide lift more boats?
One reason was wage stagnation at the bottom of the income distribution, which led to growing wage inequality. Between 1979 and 1996, inflation-adjusted wages at the tenth percentile of the distribution fell in most years, ending up about 12 percent below where they started. Wages recovered during the vibrant economy of the second half of the 1990s as poverty fell once again, but even so wound up in 2003 almost exactly where they were in 1979.3 If the impressive reductions in poverty during the 1960s and the second half of the 1990s were caused in part by increasing wages, wages in turn were responding to tight labor markets, as signaled by low unemployment rates. During the 1960s unemployment averaged 4.8 percent and fell as low as 3.5 percent. By contrast, during the 1970s and 1980s, when wages were falling and poverty rising, unemployment averaged 6.2 percent and 7.3 percent, respectively. Only when tight labor markets returned, after the mid-1990s, and unemployment fell to an average of 4.8 percent between 1995 and 2000, did wages once again rise and poverty fall. Economic growth itself will not necessarily lower poverty rates. A better formula for fighting poverty effectively is tight labor markets accompanied by rising wages.
Poverty and Family Dissolution
Changes in family composition have been a major force driving Americans into poverty. The story of family composition and poverty is straightforward. In most years, poverty in female- headed families is four or five times greater than poverty in married-couple families. High divorce rates, falling marriage rates, and rising nonmarital birthrates over the past three decades have more than doubled the share of children living with single mothers. Even if everything else had stayed the same, having a higher share of people in femaleheaded families would have increased the poverty rate because of the high poverty rate of this family form. One group of prominent scholars estimated that changes in family structure alone would have raised the poverty rate from 13.3 percent in 1967 to 17 percent by 2003.4 Offsetting forces slowed the rise of poverty, but there is no doubt that one major factor underlying the nation’s difficulty in cutting poverty rates is the dramatic increase in female-headed families. If a greater share of American children were living with their married parents, poverty would decline. In fact, according to a recent Brookings analysis, if the marriage rate were the same today as it was in 1970, holding all other population characteristics constant, the child poverty rate would fall more than 25 percent.5
Poverty and Government Spending
Government spending also affects poverty rates. After all, with the exception of the large insurance programs like Social Security, Medicare, and unemployment compensation, most of the nation’s social programs have their roots in the War on Poverty declared by Lyndon Johnson in 1965. Since the mid- 1960s, when relatively few government programs were directed at the poor, programs intended to reduce poverty or soften its effect have proliferated. Total federal and state spending on these programs has increased almost every year, on average at rates much greater than inflation and even greater than GDP growth. According to the Congressional Research Service, means-tested spending increased in inflation-adjusted dollars in all but four of the thirty-six years between 1968 and 2004. Over nearly three decades, real spending grew from about $89 billion to nearly $585 billion, driven in large part by exploding health care costs. If spending had grown at the rate of inflation and in proportion to the rise in GDP, in 2004 spending would have been about $220 billion, less than 40 percent of the actual rate. Yet poverty was higher in 2004 than it was in 1968.6 In part this is because the way the federal government computes poverty rates ignores many meanstested benefits,7 in part because health care costs have risen so rapidly, and in part because substantial sums are spent on families without bringing them quite to the poverty line, while additional billions are spent on people above the poverty line.
We conclude that although the American economy has enjoyed a healthy growth rate over the past four decades, stagnant wages among the least skilled have made it hard for people holding low-wage jobs to escape poverty. This problem has been exacerbated by changes in family composition. And government spending, which has grown rapidly, has reduced poverty less than had been hoped and in some cases may even have been counterproductive, by reducing incentives to work and supporting young women who have births outside marriage.