Chapter 9: The Problem of Poverty

Why is Poverty examined by Urban Economists (among others)?

1. Poverty has a spatial dimension. It is concentrated in urban centers, although it exists in other parts of the country as well (Appalacian Mountain region).

2. The appropriate solution depends to a large degree upon its economic cause and effect. For example, slum housing may be caused by poverty or it may be caused by market failure.

Measures of Poverty

1. Poverty means both a lack of money income and no prospect of substantially greater income in, at least, the near future. (College students have little income but a greater opportunity for future income.)

2. Money income is also only one means to a high living standard. In-kind income in the form of commodities and services are provided directly. Major in-kind commodities or services are food, housing, and health care.

3. Wealth or assets must also be considered, since benefits from existing assets may be relatively large when income is small. Do you own your own house?

4. Poverty is based upon lowest segment of the entire distribution of income. It is measured in absolute terms based upon three times the nutritious diet food budget of low income families. It is adjusted for inflation and family size. In 1990 it amounted to $13,359 for a family of four. The amount in the year 2000 is $17,050.

5. The poverty gap is the total amount of additional income that the poor would need to escape poverty. In 1990 the average poverty gap was $1,401 for a family of four.

6. In the United States poverty income is about 20 percent of the country's median income. Of course, this percentage depends upon the distribution of income. If income is more equally distributed the percentage rises, ie. less disparity exists (as in Northern Europe).

Demography of Poverty

1. The percentage of U.S. people in poverty was 13.6% in 1990. All of the success in lowering the percentage of poor people occurred before 1980 until just recently when the improvement in the economy since the 1991 recession has reduced the estimated average percentage to 12.7% in 1998.

2. Structural and cyclical forces affect the poverty rate. Cyclically the poverty rate worsens during recession as the poor are the last in and first out of the labor force.

3. The 1980s witnessed a steady increase in income inequality that had virtually nothing to do with two major tax changes, i.e. the change was pre-tax and was true regardless of gender, race, or age. It represented a large increase in the returns to investment in human capital or education and experience.

4. Earnings of the educated increased substantially while earning of the uneducated fell in real terms. The information age and increased international competition are two forces increasing the demand for educated workers.

5. The poor are more likely to be female headed households and minorities. 20 percent of children were in poor families in 1990, many of which were headed by a single and/or divorced female. Black persons are three times as likely to be poor as white persons. Central city poverty rates are over two-and one-half times higher than suburban poverty rates.

6. Poverty is almost as high in non-MSA cities (smaller cities) as it is in MSA cities (larger cities).

7. Concentrations of poverty in larger cities causes many problems which we will examine in subsequent chapters. Visible city slums, poorer job opportunities, higher crime rates, racial segregation, etc. are problems generated by the concentration of urban poor.

Race and Poverty

1. Black urbanization has made racial disparities much more visible. While it has resulted in tension between racial groups it has also increased the economic and political status of blacks.

2. Living standards of blacks are higher in metropolitan areas than elsewhere, but blacks have an incidence of poverty of over three times that of whites in metropolitan areas.

3. Hence, urban migration from southern rural areas has helped blacks reduce their incidence of poverty. But, the poverty rate is still too high, especially in central cities.

4. Blacks have increased their relative income position from 45 percent to 60 percent since World War II, and there has been dramatic improvement in high-school completion rates of blacks since WWII.

5. We are neither encouraged nor discouraged by the progress toward racial equality because despite improvements there are many blacks that have hardly been touched by the progress (especially the elderly and uneducated)

Public Programs for Reducing Poverty

1. Progress may be attributed to a reduction in discriminatory attitudes by whites, efforts by blacks to break down barriers to education, employment, and political representation, and the Federal Civil Rights Act of 1964 and Equal Employment Opportunity Act of 1972. Court decisions have played a large role, especially with regard to affirmative action programs.

2. Macroeconomic polities that stimulate real economic growth are by far the most important factor in the gradual reduction of poverty in the United States.

3. Income maintenance (negative income tax) proposals have often been made. But, in order to maintain work incentives and remove poverty, they would be very expensive. In local experiments in Denver and Seattle it was found that with a guaranteed payment of 50 percent of the poverty level and a tax rate of 70 percent the program would reduce current welfare programs. With a 100 percent guarantee and 50 percent take-back rate, the welfare budget would increase threefold.

4. Aid to family with dependent children was criticized for its adverse effect on the incentive to work, the incentive for marriages to dissolve, and the geographic disparity among states. Transfer payments by the government have reduced income disparity.

5. In 1996, Congress passed the Personal Responsibility and Work Opportunity Reconciliation Act.  This legislation ended the program known as Aid to Families with Dependent Children (AFDC) and replaced it with a program called Temporary Assistance for Needy Families (TANF). Under TANF, welfare assistance is no longer an entitlement program.  Welfare benefits are time limited and are closely tied to work requirements which are intended to move welfare recipients off welfare and into the labor force.

Other Government Programs

1. How can we create jobs in the inner city? What about child-care for welfare mothers willing to work? How do we increase the incentive for education and lower the incentive for crime?