So if transfers reduce poverty but those on the programs never become self-sufficient is that a win? Bob Murphy says no, but I’d say yes. Social Security has been most successful in reducing poverty, but those on the program are unlikely to become young and rich. The program is not a failure. What say you?
To pick just one prominent example, the White House’s Council of Economic Advisers issued a report that contained the following chart:
…
Yet hang on a second: Surely to actually “win” the War on Poverty would mean that the government could stop spending money, because every household were self-sufficient. The criterion can’t be, “After you account for how much money we’re still throwing at it, the net result is better.”
Switch to an actual military context to see my point. Suppose after Pearl Harbor, the federal government declared war on Japan. Further suppose that 50 years later, U.S. and Japanese forces were still engaged in massive naval battles in the Pacific, and in fact the Japanese had more ships and aircraft than at the start, though they had been pushed back about a third of the distance toward Japan and away from Hawaii. Wouldn’t it be time to declare, “This is not at all working” and sue for peace?
The main gripe I have with the wave of complaint about inequality is that it seems to focus on just how rich the rich are, or are becoming. I’d argue that I don’t care as long as everyone is becoming better off at a very perceptible rate, and maybe they are. I’ve added some emphasis below:
I get criticism from liberals when I claim that the poor are doing much better than in 1973, despite figures showing flat medium incomes and rising inequality. Floccina directed me to a Timothy Taylor post that discusses a study by the Brookings Institute. Yes, the liberal Brookings Institute, I presume there is only one:
However, in a paper published in the Fall 2012 issue of the Brookings Papers on Economic Activity, Bruce D. Meyer and James X. Sullivan present some alternative interpretations and more cheerful conclusions in “Winning the War: Poverty from the Great Society to the Great Recession.” They conclude: “Despite repeated claims of a failed war on poverty, our results show that the combination of targeted economic policies and policies that support growth has had a significant impact on poverty. … Noticeable improvements have been made in the last decade; although not as big as the improvements in some earlier decades, they are comparable to or better than the progress made in the 1980s. We may not yet have won the war on poverty, but we are certainly winning.”
. . .
Here’s one of their illustrative calculations. The official poverty line is in blue. They then calculated income in a way that included taxes and the value of noncash benefits. They set up the calculation so that the two measures would have the same poverty rate in 1980, and then adjusted the poverty rate over time using the inflation rate. But when after-tax income is used in the calculation, the poverty rate falls more sharply over time, including during the last 30 years.
But perhaps their most striking result uses data on consumption, rather than data on income, to calculate the change in poverty rates over time. Consumption data comes from a different national survey than does income data (the Current Expenditure Survey rather than the Current Population Survey). Meyer and Sullivan point out that at the bottom of the income distribution, the answers about income on the Current Population Survey clearly understate the amount of income received. For example, only about half of welfare payments seem to be reported in the Current Population Survey. The proportion of economic activity that goes unreported to the tax authorities–and to the government survey–is probably higher at the bottom of the income distribution, too. In addition, when we talk about poverty what we are really worried about is more accurately captured by consumption rather than by income.
Meyer and Sullivan used consumption data, and again they set up the calculation so that the poverty rate for consumption data is the same as the poverty rate for income data as of 1980. Again, the blue line shows trhe official poverty rate. The red line shows the poverty rate with a broader definition of income, adjusted for after-tax income. The green line shows the change in the poverty rate if consumption is used to measure poverty. By this measure, the poverty rate almost reaches zero percent in 2007, before the Great Recession.
Thus, they write: “The results in this paper contradict the claim that poverty has shown little improvement over time and that antipoverty efforts have been ineffective. We show that moving from traditional income-based measures of poverty to a consumption-based measure, which is arguably superior on both theoretical and practical grounds—and, crucially, accounting for bias in the cost-of-living adjustment—leads to the conclusion that the poverty rate declined by 26.4 percentage points between 1960 and 2010, with 8.5 percentage points of that decline occurring since 1980.”
Just to be clear, the notion that the consumption-based poverty rate nearly reached zero percent does not mean that the war on poverty is won. After all, the poverty rate was originally set back in the early 1960s, and although the poverty line has been adjusted upward by the rate of inflation over time, it has not been adjusted for the amount of economic growth that has occurred. All poverty lines are set in the context of the society’s overall level of income: thus, a very low-income country the poverty rate per person might be set at $1.25/day or $2/day, while in the United States, the poverty rate for a family of 3 is around $16-$17 per person per day. One can argue that because the U.S. economy has grown dramatically in the half-century since the poverty level was set, the poverty line should be higher. But still, it’s worth knowing that the U.S. has made progress in terms of the existing poverty line–when using more appropriate standards of well-being like consumption or broader definitions of income
After-tax and transfer data is better than income, and consumption data is still better. Liberals are focusing on “inequality” when they should be focusing on poverty level consumption (as they were in 1973.) That’s the real problem.
PS. One of my earliest memories of college was when I took intermediate micro as a sophomore at Wisconsin. My professor once showed some data on what the US distribution of income would look like without transfer programs. He derived the estimates by looking at market income. I raised my hand and pointed out that if there were no transfer programs then surely the market income figures would be different. For instance, those on welfare might be forced to work in order to stay alive.
This Brookings study reminds me of another problem, the underground economy. Transfers to the poor don’t just discourage people from working, they also encourage people to work in the underground economy. Thus transfer programs have two effects. First, they make market income less equal than it would otherwise be. And second, they make reported market income less equal than actual market income. Both factors contribute to the much better performance of consumption than reported market income at the lower end of the spectrum. Which is obvious to anyone who travels around America and observes how the poor actually live.
PPS. I will be traveling the next few days–not much time for blogging.
So the house has chopped (supposedly) $40,000,000 out of foodstamps or SNAP over the next ten years. It’s not a huge reduction compared to the budget of the program ($462,000,000 over the last ten years, likely more in the next ten).
Nonetheless, is this good policy, and why did it come about?
Apparently the Surfer Dude is the main reason. Fox this summer ran a special on the expansion of the food stamp program. The star was Jason the lay about who tells you unapologetically he’s living off your tax dollars.
But is this guy really the face of foodstamps
This is a sad story for all kinds of reasons.
IS THIS CASE A FLUKE?
I found it harder than I expected to get data on who is on the foodstamp program, so I don’t have a lot hard data on who is getting assistance. This Fox story however, is just about ONE GUY. Why do people assume this typical?
IS THIS OUR BIGGEST CONCERN ABOUT FOOD STAMPS?
Even if this case is maddening, is that what we should be concerned about? I think it as big a problem when people who don’t get the help as when someone like the surfer dude has his laziness subsidized – worse in fact.
SOME OF THE FACTS IN THE STORY DIDN’T APPEAR TO ADD UP
The Surfer Dude claims to be on the program year round with out working. This is not, at least, in many or most jurisdictions the case. Here’s the eligibility requirements found here for SNAP:
Generally ABAWDS between 18 and 50 who do not have any dependent children can get SNAP benefits only for 3 months in a 36-month period if they do not work or participate in a workfare or employment and training program other than job search. This requirement is waived in some locations.
With some exceptions, able-bodied adults between 16 and 60 must register for work, accept suitable employment, and take part in an employment and training program to which they are referred by the local office. Failure to comply with these requirements can result in disqualification from the Program.
The Fox story may be more of a comment on California requirements (or the lack thereof than anything else).
WHAT ELSE IS GOING ON?
The underlying narrative in the story is also, that again here’s Obama the welfare president. In fact though, SNAP has been growing for quite some time:
most of the last ten years, much of that growth coming during the 2001 and 2008-2009 recessions. It’s certainly not clear to me that Obama is the food stand president, but here’s a contrasting view.
WHAT WILL BE EFFECT OF THIS CUT IN BENEFITS?
I’m not clear on what exactly what has been done to ‘cut’ food stamps spending. The program is basically an entitlement – that is it a benefit people may claim subject to meeting eligibility criteria. The cost is not a budget but depend on how many claim. My assumption is that the top level income required to qualify has been reduced, and maybe eligibility for employed people has been reduced.
We don’t know how people will react to the changed criteria. If one can no longer work without losing their benefits, then might they not decide not to work? We don’t know how that will affect costs of the program, see this previous post.
IS THIS THE WELFARE WE SHOULD BE CUTTING?
How can the same house pass farm subsidies, and then cut benefits (even if not always deserved) to people will far less money than agribusiness that benefits from the farm bill?
A nice balanced discussion from someone likely not inclined to like redistribution.
Greg Mankiw (among others) points to new NBER working papers by Casey Mulligan that point out that marginal tax rates go up under Obamacare. I have not read the papers, but I assume that he counts as an increase in the marginal tax rate the fact that you lose out on subsidies as your incomes goes up. That is legitimate economic analysis, but try to do satisfy the following:
1. Use “means testing” in order to provide a significant benefit that is aimed at the poor.
2. Keep the marginal tax rate low.
3. Keep the budget cost low.
Those of us on the right tend to argue separately for all three. But collectively, they are not so easy to satisfy. (My undergraduate economics professor, Bernie Saffran, pointed this out, and I have not forgotten it.)
If you want to offer a means-tested benefit at low cost, then you have to scale-back the benefit rapidly as income rises, meaning a high marginal tax rate.
If you want to keep the marginal tax rate low and and the budget cost low, then you cannot offer a sizable benefit to the poor. So you can’t do much in terms of means-testing.
If you want to provide a significant benefit to the poor with a low marginal tax rate, then you have to phase the benefit out very slowly as incomes rise. So the budget cost is high.
If we want to, we can play “gotcha!” with any proposal that is aimed at helping people who are poor. It is bound to fail (1), (2), or (3). But how can we be constructive?
My solution was offered in the essay Bleeding-Heart Libertarianism. The idea was to offer a significant benefit with a low marginal tax rate. To hold down the budget cost, I shift away from in-kind benefits (such as food stamps or Medicaid) toward a cash benefit.
That essay is worth re-reading.
Gotcha! Arnold Kling Sat, 07 Sep 2013 14:25:10 GMT
…, gather information to help figure out how to win. The folks at MarginalRevolution University have a nice set of short videos on poverty. My favorites are on the value of randomized control trials.
Mr. Romney created quite a stir with his remarks on the ‘47 percent’. His remarks were from last spring and focused on the 47 percent or so who don’t pay income tax – further suggesting they didn’t and wouldn’t take responsibility for their lives – would vote for Mr. Obama, no matter what, and by implication are on the dole. Finally this snap shot somehow suggests that President Obama has created this lay-about class in the last four years.
So many fallacies.
First, or course the 47 percent do pay many taxes, especially social security tax, and state and local.
The notion that someone doesn’t pay income tax because they are irresponsible seems absurd. Their have always been a number of folks with no US income tax liability in a particular year. The share has risen because: among other reason Republicans and Democrats added to the earned income tax credit that pushes folks off the rolls; and perhaps the biggest reason is the recession has reduced taxable income for many, due to lost job capital losses and so on.
A lot of things can affect ones success and ability to be a tax payer that are beyond their control. The Daily dish had some poignant stories of the setbacks a family or person experience
You can say that condemning those less successful that yourself is pretty arrogant. The whole question is: what accounts for success? Are you responsible for all the good things in your life? It seems plain to me and other that the answer is no. If your responsible its at least in part because you were trained to be by your family and community as a youth. You did choose that and you didn’t build it either. We all owe a lot to others and not necessarily the government. You don’t have to wax poetic about roads to know accomplishment is a combination of your effort build on a foundation that came from many others, and God.
The reluctance to acknowledge the effect of things not our own efforts in our success is more than arrogance. I think a lot of it is fear too.
It is comforting to think that your world is safe from being undone by forces beyond your control. It means you won’t end up on the street because you are responsible unlike the bums who panhandle you. If that isn’t true forces beyond your control can put you in a very bad place.
Contempt for the lower class, the ‘47 percent’ and respect for the successful for the responsibility is comforting because it means you won’t become one of them. It makes you feel good about yourself.
In the end though the ‘47 percent’ are a myth, a comforting lie. Romney would do well to disown these remarks. They aren’t just inelegant; they are wrong.
Copyright, The New York Times Company The war on drugs sends middle- and upper-class American problems to the residents of poor areas. Nevertheless, the federal government continues the war in earnest.
Almost 20 years ago, an infamous memo by Lawrence H. Summers, at the time the chief economist of the World Bank, stirred a debate as to whether it was appropriate for the United States and other developed countries to pay poor countries to accept dirty industries, toxic waste or other garbage from the developed world.
Both sides in the debate seemed to agree that it would be inappropriate to force poor countries to accept our garbage, without compensation. But that’s very much what the war on drugs does.
The war is an outright prohibition on the sale and consumption of contraband substances in the United States. That prohibition is enforced domestically by federal and local law enforcement and abroad by the United States military.
Some of the most violent battles are fought in Mexico, Guatemala and other countries poorer than the United States (see especially the comments of Gary Becker of the University of Chicago on this topic). The war also foments violence in our poorer inner cities. Yes, the war makes it more costly for Americans to obtain the prohibited substances. Yet plenty of people in the United States are willing to pay the higher prices – prices far in excess of what it costs to grow, harvest and manufacture the drugs.
The gap between the prices consumers pay and the production costs creates a profit opportunity for someone willing to break laws, battle law enforcement and deliver drugs to Americans.
Some of these contraband entrepreneurs – drug smugglers and dealers – are from poor countries or poor neighborhoods in the United States, so in this way some American consumer dollars make it to poor areas.
Of course, most people in poor areas are not in the contraband business and have no part of the drug industry’s revenue. Yet they suffer enormous harm from the violence and the drug activity.
The war on drugs thus pushes the “toxic waste” of America’s drug consumption into poor neighborhoods with no compensation.
Middle- and upper-class parents are unlikely to witness personally the war’s violence, and they want to discourage their own children from taking drugs. So many of them appreciate that the war makes it more difficult, or at least more expensive, for their children to obtain drugs.
And their appreciation is an important reason why our federal government has yet to legalize drugs and strongly discourages states from doing so.
Legalizing and taxing the use of what are now illegal substances would remove the profit motive for dealers and smugglers, and the revenue might be used to help the residents of poor neighborhoods, as Professor Becker notes. The great challenge to ending the war on drugs is finding a way to give American parents the protection they want for their children.
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