Chapter 9 Supplement: Poverty and Antipoverty Programs

Definitions of Poverty

1. Absolute (official) definition is three time the cost of food for a family of four, adjusted for inflation and family size.

2. Relative income position. Based upon degree of social deprivation that will not change without a change in the distribution of income. Not used by economists but has merit based upon relative utility among comparison groups.

3. Poverty gap. The amount of additional income needed to escape poverty. In 1990 the average poverty gap was $1,140 for a family of four.

4. Criticism of official definition. Does not include in kind transfers, such as food stamps, housing vouchers, or medical benefits.

Causes of Poverty

1. Aggregate economic fluctuations affect those families around the threshold of poverty. Hence, they affect the income of the poor more than the entire population. A 1 percent increase in the unemployment rate is estimated to result in a 1.5 percent increase in welfare dependency.

2. Low productivity. The benefits of productivity are higher wages, direct recognition by employers, easier job change within the same class, and improvement in the job queue. Improvement may rest in the job as well as in the person.

3. Market barriers and imperfections. Lack of knowledge, geographic immobility, arbitrary discrimination, and wage rigidities constitute market imperfections that affect the poor more than the general population.

4. Cultural and behavioral traits. Cultural patterns may complement labor market influences as the poor contribute to their problem through their behavior (dependability, etc.) Living in the present governed by impulse affects long-run decisions for education. Self-destructive behavior may reflect a feeling of low self-esteem that gives rise to dysfunctional behavior, especially when families are unstable. Welfare dependency perpetuates poverty as children view public support as the norm. Critics view these arguments as either nonexistent or a necessary adaptation to poverty. Poor use the system like the rich use the tax system. If this is true then there is hope that a change in the system will be more effective.

5. Structuralist attribute poverty to the structure of the economy (Karl Marx). They also argue that some middle class bureaucrats depend upon its existence to support their position.

Does Poverty Increase with City Size? Offsetting arguments

1. The skill’s gap increases with the size and central place activities of cities.

2. Monopoly power may increase with city size for some functions, but more functions exist which are competitive. (Note competitive firms cannot afford to discriminate among employees.)

3. Larger average income in larger cities reduces inequality.

4. Investment in human capital may increase with city size.

5. The underclass my be more attracted to benefits associated with larger cites (transportation, housing, etc.) Also the "beaten path effect" on migration increases.

Antipoverty Policies

1. Effectiveness may depend upon the characteristics of the poor. The underclass poor are socially detached from the mainstream of the economy includes the passive poor who are welfare dependent, street criminals and hustlers, and the uprooted and traumatized from job loss without prospects for employment.

2. Macroeconomic policies lower the poverty rate of those that are employable and near the poverty line. Higher tax revenue also provides basis for income support.

3. Direct job creation through public sector subsidies and public employment. CETA has been criticized as make-work jobs that also replace private jobs.

4. Education and training (Job Training Partnership Act) is concerned with structural unemployment. What about the use of a voucher system in education (GI Bill after WWII)

5. Elimination of labor market imperfections such as "good old boy" networks. Increase labor mobility through relocation programs and provide childcare for working mothers. (And enforce child support payments)

6. Private charities provide goods and services to the poor. Tax exempt status amounts to some public support.

7. Guaranteed income plans: After tax income = fixed guarantee + (1-t) x before tax income. The take-back rate affects work incentives and the cost of the program, as does the amount of the guaranteed minimum. Tradeoffs occur between poverty, the incentive to work, and budget costs.

Tradeoffs of Negative Income Tax:

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Break even income is equal to the guaranteed minimum divided by the take-back rate. A minimum of $3000 and a take-back rate of 50% would result in a break-even income of $6000. The higher the minimum and the lower the take-back rate the higher the total subsidy (budget) requirement.

Evaluation of Welfare Programs

1. Do they reduce the productivity of the economy? Training and education increase productivity, but transfers may adversely affect work incentives.

2. What about empowerment zones? They increase incentive for investment to support rebuilding of infrastructure of cities. This increases job opportunities, improves the social environment, reduces crime, and adds to aggregate demand.

3. Higher budget costs may add to inflation and "crowd out" private investment if it leads to higher interest rates. Do interest rate subsidies add enough to social benefits to warrant higher cost to taxpayers?

4. Reducing welfare roles may increase the supply of labor. If the demand for labor is inelastic then more supply will reduce the wage bill of lower income groups.

Welfare Reform

1. AFDC requires work application for welfare recipients.

2. Question of who receives benefits and how long? What about the illegitimacy ratio and benefits to illegal immigrants? What about public funds to support abortion?

The Supreme Court ruled on March 22, 1995 that states have broad latitude to limit welfare payments to households with children under AFDC programs.