Archive for the 'Poverty' Category

America’s social democratic future

December 19, 2013

That’s the title of my essay in the January-February 2014 issue of Foreign Affairs. You can read it at foreignaffairs.com. It’s free; you simply have to register. Here’s the opening:

Since March 2010, when U.S. President Barack Obama signed the Affordable Care Act into law, the ACA has been at the center of American politics. Tea Party activists and their allies in the Republican Party have tried to stymie the law at nearly every turn. The Republican-controlled House of Representatives has voted more than 40 times in favor of repealing or defunding it, and last October the House allowed a partial shutdown of the federal government in an attempt to block or delay the law. The controversy surrounding the ACA shows no sign of ending anytime soon.

Obamacare, as the law is commonly known, is the most significant reform of the U.S. health-care system in half a century. It aims to increase the share of Americans who have health insurance, improve the quality of health insurance plans, and slow the growth of health-care spending. But the fight over the law is about more than just health-care policy, and the bitterness of the conflict is driven by more than just partisan polarization. Obamacare has become the central battleground in an ongoing war between liberals and conservatives over the size and scope of the U.S. government, a fight whose origins stretch back to the Great Depression and the New Deal….

The ACA represents another step on a long, slow, but steady journey away from the classical liberal capitalist state and toward a peculiarly American version of social democracy. Unlike in, say, northern Europe, where social democracy has been enacted deliberately and comprehensively over the years by ideologically self-aware political movements, in the United States, a more modest and patchy social safety net has been pieced together by pragmatic politicians and technocrats tackling individual problems. Powerful forces will continue to fight those efforts, and the resulting social insurance policies will emerge more gradually and be less universal, less efficient, and less effective than they would otherwise have been. But the opponents are fighting a losing battle and can only slow down and distort the final outcome rather than stop it. Thanks to a combination of popular demand, technocratic supply, and gradually increasing national wealth, social democracy is the future of the United States.

Improving poverty reduction

November 26, 2013

The “Improving Poverty Reduction in Europe” (ImPRovE) project, funded by the EU, aims to enhance understanding of what works in reducing poverty and increasing social cohesion. Information about the project and slides from the presentations at its first conference, held a short while ago in Brussels, are available here.

Seven links

August 4, 2012

Three recent short pieces of mine:

“America’s struggling lower half,” Roosevelt Institute

“Five myths about the middle class,” Washington Post

“How to make sure a growing U.S. economy helps the poor,” Scholars Strategy Network

Four longer ones not by me:

From Parents to Children, edited by John Ermisch, Markus Jantti, and Tim Smeeding

“Inequality of Income and Consumption,” by Jonathan Fisher, David Johnson, and Tim Smeeding

Affluence and Influence, by Martin Gilens (more here)

“Prosperity Economics,” by Jacob Hacker and John Loewentheil

How rich countries lift up the poor

December 11, 2011

That’s the title of a short article of mine in the current Pathways magazine. Pathways ought to be on the reading list of anyone interested in living standards, poverty, inequality, and mobility. And it’s free.

A few other worthwhile recent reads on these topics:

Jared Bernstein’s blog

CBO, Trends in the distribution of household income

Center on Budget and Policy Priorities, A guide to statistics on historical trends in income inequality

OECD, Divided we stand: why inequality keeps rising

Scott Winship, Mobility impaired

Miles Corak, The decline of the American dream

Reihan Salam, Understanding America’s income mobility problem

Mike Brewer and Liam Wren-Lewis, Why did Britain’s households get richer?

James Plunkett, The potential for female employment to raise living standards in low to middle income Britain

Progress for the poor

October 1, 2011

That’s the title of my new book. In it I try to answer the following questions:

How much does economic growth benefit the poor? When and why does growth fail to trickle down?

How can social policy help? Is more social spending better for the poor?

Can a country have a sizeable low-wage sector yet few poor households?

Are universal programs better than targeted ones?

What role can public services play in antipoverty efforts?

What is the best tax mix?

Does improvement in the living standards of the least well-off require a sacrifice of other desirable outcomes?

Low wages in Germany

August 26, 2011

This New York Times story has it right: the German labor market now includes a sizable low-wage segment. This book has a very helpful comparison of developments in Germany with those in Denmark, France, the Netherlands, the United Kingdom, and the United States. My take on what this implies for incomes, poverty, and policy is here.

How should we measure the poverty rate?

August 14, 2011

Perhaps we shouldn’t.

The idea behind a poverty rate is that we set an income line below which people’s resources are deemed insufficient for a minimally decent standard of living. The poverty rate is the share of people in households with income below that line.

Because it’s a binary measure, it’s a crude one. Suppose a lot of the poor at time 1 have incomes just below the poverty line. The economy then improves, or the benefit amount for a government transfer program is increased, so at time 2 a number of those people have moved above the line. It will appear that poverty has been sharply reduced, even though the amount of genuine progress is small. Similarly, suppose a number of people who formerly had very low incomes move into the work force and experience an income rise, but that rise doesn’t quite get them above the poverty line. This is a significant improvement, but it won’t show up at all in the poverty rate.

This problem is well known among social scientists. Some therefore also calculate the “poverty gap” — the distance between the poverty line and the average income of those below the line. To that we can add inequality among the poor. Measures exist to incorporate either or both of these. But they are complicated and thus difficult to communicate to a nontechnical audience. One common measure, for instance, is the poverty rate multiplied by the poverty gap. This is better than the poverty rate by itself, but the numbers yielded by the measure don’t have an intuitive feel.

Another problem with poverty rates is that much hinges on where the line is drawn, so we end up mired in interminable debates about exactly where that should be (here, here).

Is there a useful alternative? I think so.

Instead of a relative poverty rate, such as the official measure used by the European Union, I recommend the p50/p10 income ratio. Relative poverty is essentially a measure of inequality within the lower half of the distribution, so why not use a measure that more clearly conveys that? The 50/10 ratio is an inequality measure already familiar to social scientists, and it’s fairly simple to explain and understand. And as the first of the following two charts shows, the 50/10 ratio is very similar to the poverty rate multiplied by the poverty gap (the correlation is .96). The second chart shows that the poverty rate is a less effective proxy for the rate x gap.

Instead of an absolute poverty rate, such as the official poverty measure in the United States, we can use absolute household income at the tenth percentile (p10) of the distribution. Across countries and over time, this measure is very similar to the absolute poverty rate multiplied by the absolute poverty gap. But it’s much simpler and easier to comprehend. Also, it’s a low-end analogue to median (p50) household income, a common indicator of the living standards of the middle class.

Why the tenth percentile rather than the fifth or the fifteenth? Actually, I’d prefer the fifth, but there sometimes is reason to worry about data quality as we get close to the very bottom of the distribution. The tenth is reasonably close but not too close to the bottom, it’s a nice round number, and it already is commonly used in inequality measures such as the 50/10 ratio and the 90/10 ratio. But in truth, the choice of the tenth is arbitrary; it’s no more representative than the seventh or the twelfth or any other point at the low end of the distribution.

So we have good alternatives to the two most common poverty rate measures. But what about political impact? Isn’t the poverty rate a helpful tool in pressing policy makers to keep their eye on the least well-off? Maybe. Yet hardly any of Europe’s rich nations had an official poverty rate measure prior to the EU’s introduction of one a decade ago, while here in the U.S. we’ve had an official poverty rate for nearly half a century. The absence of an official poverty rate doesn’t seem to have impeded government commitment to the poor in Europe. And I’m not sure the presence of one has helped a whole lot here.

I don’t expect policy makers or social scientists to stop using poverty rates any time soon. And it won’t be disastrous if they don’t. But we could do better.

Relative poverty rates can mislead

June 19, 2011

Many researchers and policy makers favor a “relative” measure of poverty. That’s because our notion of what constitutes a minimally acceptable standard of living tends to be shaped by what’s typical in our own society. This approach dates back at least to Adam Smith. Its contemporary popularity owes much to Peter Townsend and Amartya Sen, and to the fact that the European Union’s official poverty measure is a relative one.

A relative poverty measure is essentially a measure of inequality within the bottom half of the income distribution. As long as this is made clear, such a measure can serve a purpose. But it’s fairly common for commentators to refer to a relative poverty rate as though it’s an indicator of absolute well-being. A journalist or opinion writer or researcher may say something like “We’ve failed to make things better for the poor; the poverty rate is the same now as a decade ago.” When hearing this, some (many?) of us will assume it reflects stagnant incomes for households at the bottom. But low-end incomes may actually have increased; that can happen without yielding any reduction in the relative poverty rate if incomes in the middle rise too.

Consider the experiences of six rich nations from the late 1970s to the mid-2000s. The following charts show trends in relative poverty and in absolute inflation-adjusted household income at the tenth percentile (a good proxy for “the poor”) in three of the six: the United States, Canada, and Germany. In each of these three countries the relative poverty rate increased slightly over the period. And in each of them absolute incomes of low-end households were flat or increased only minimally. Relative poverty rates and absolute incomes tell a consistent tale.

The story is quite different in Sweden, Norway, and Ireland. Here too relative poverty rates were flat or slightly rising. But in these three countries the absolute incomes of low-end households increased by a substantial amount. The reason the relative poverty rate in these countries didn’t fall is that household incomes at the median increased just as rapidly.

Relative poverty is of some interest, to be sure. But to avoid confusion, we might do well to sometimes refer to it as “lower-half inequality.”

Reducing relative poverty

June 5, 2011

Reducing poverty is widely viewed as a key objective of a good society. The U.K.’s Labour government set a formal poverty reduction target in the late 1990s, and the European Union recently did so as well. In the United States, public opinion surveys consistently find a solid majority saying government spends too little money on assistance to the poor.

The standard poverty measure in comparisons of rich nations is a “relative” one. The poverty line for each country is set at a percentage, usually 60% or 50%, of that country’s median household income.

Which countries have been most successful in reducing relative poverty in recent decades? And how have they done it? Here’s what the picture looks like for twenty affluent nontiny longstanding democracies. The data are from three sources: the Luxembourg Income Study (LIS), considered the most reliable for comparative purposes; the European Union’s Statistics on Income and Living Conditions (EU SILC), which covers recent years for EU countries; and the OECD.

As it turns out, there is hardly any success to explain. In almost every one of these nations the relative poverty rate was no lower in 2007, the peak year of the pre-crash business cycle, than at the end of the 1970s. The only clear exception is Ireland. Denmark also reduced poverty according to the LIS data, but the OECD data suggest little or no change. Portugal is another possibility. A few countries succeeded in reducing relative poverty during certain portions of this period, such as the U.K. in the early 2000s.

What accounts for this near-universal failure?

A relative measure of poverty is essentially a measure of inequality in the lower half of the income distribution. A nation’s relative poverty rate is determined largely by three things: wage inequality among individuals in the bottom half of the distribution, employment inequality among households in the bottom half, and the generosity of the public safety net. The wage distribution has become more unequal in many countries, though by no means all. This owes to a host of developments, including globalization, deregulation of product and labor markets, manufacturing decline, weakening of collective bargaining, and increased immigration of people with language barriers and/or limited job skills. The trend in employment likewise has tended to be inegalitarian, depending on the magnitude and character of the rise in single-adult households, the movement of women into jobs, and government efforts to promote employment. Government transfers have increased in a number of countries, but often only enough to offset the rise in market inequality. And in a few nations transfers have stagnated or decreased. (More discussion here, here, here, here, and here.)

I prefer a focus on absolute incomes and living standards rather than on relative poverty, and that approach yields a very different conclusion about progress in recent decades. Still, the widespread failure of rich countries to make any headway in reducing relative poverty rates is striking.

Can we get to below-4% unemployment? Do we need to?

January 26, 2011

Robert Pollin has a piece in Boston Review arguing for a return to full employment in the United States. The following is my comment, cross-posted from the Boston Review forum.

I share Robert Pollin’s view that the U.S. should strive for full employment — by which I mean, following his lead, an unemployment rate below 4%.

Can we do it? Pollin points to two historical precedents as grounds for optimism. The first is Sweden from 1960 to 1989. Sweden succeeded in keeping unemployment below 4% throughout those three decades by coupling employment-oriented monetary and fiscal policy with wage restraint. But Sweden’s central bank at that time was subordinate to the government. Ours, the Federal Reserve, is independent. Since the late 1970s, independent central banks such as the Fed almost always have prioritized low inflation, rendering low unemployment difficult to achieve. If the Fed isn’t on board, even a workable plan for full employment supported by the American public and our elected officials probably won’t be enough.

What about Pollin’s second precedent, the United States in the late 1990s? During those years the Fed, under Alan Greenspan, did keep interest rates low enough for the unemployment rate to drop below 4%. But Greenspan held rates low despite opposition from other Fed board members, who were concerned about potential inflationary consequences — particularly given the internet-driven stock market bubble. Greenspan took this stance in part because his belief in the self-correcting nature of markets led him to worry less than others about the bubble. In light of the painful consequences of the 2000s real estate bubble, I doubt we’ll see the Fed take that approach again for some time.

Do we need below-4% unemployment? Here a cross-national perspective might shed some light. The following charts show indicators of Pollin’s desired outcomes — a healthy economy, decent pay, low poverty, good working conditions, absence of discrimination — in twenty rich democratic nations. Each outcome is plotted against the number of years from 1979 to 2007 in which each country had sub-4% unemployment.

These charts tell us that while full employment may contribute to good outcomes, it isn’t a necessary condition. In each case, some countries have done well despite seldom or never reaching sub–4% unemployment during the measurement period. In some instances this is a function of strong unions or “production regimes” (think German manufacturing) that are unlikely to be relevant in the American context. In others, though, successful outcomes have owed much to government action.

This is good news because Americans have more influence on the policy choices of the government than on those of the Fed. Whether or not we get back to full employment, we can reach important economic and social goals.

Yet I fear this conclusion is too optimistic. I’m confident that the United States could achieve satisfactory economic growth, a reasonably high employment rate, decent wages, poverty reduction, good working conditions, and less discrimination without full employment. I’m less certain that we can manage sustained wage growth for those in the bottom half of the distribution.

The post–World War II experiences of the rich democracies suggest three routes to rising working- and middle-class wages. One is an environment in which firms face only moderate competition in product markets and limited pressure from shareholders, allowing them to pass on a significant share of growth to their employees. This characterized the period from the late 1940s through the mid 1970s, but it’s now long gone. The second is strong unions. I see little hope of that in America’s future. The third is full employment.

Is there any alternative? One possibility might be to use the Earned Income Tax Credit to subsidize wages. We could extend it higher in the income distribution (currently it phases out at about $45,000), reduce its connection to children (currently it’s minuscule for households with no kids), and index it to average wages (it’s now indexed to inflation). I would prefer the full employment path that Pollin envisions, in which wage growth comes from firms rather than taxpayers. But we ought to have a backup plan.

Has rising inequality been bad for the poor?

December 14, 2010

Income inequality has risen sharply in the United States and some other affluent countries since late 1970s, with much of the increase consisting of growing separation between the top 1% and the rest of the population.

Has this been bad for the incomes of the poor?

In a relative sense, the answer is yes, at least in the United States. According to the best available U.S. data, from the Congressional Budget Office, the share of income going to households at the bottom has decreased.

What about in an absolute sense? Would the incomes of low-end households have grown more rapidly in the absence of the top-heavy rise in inequality? If we look across the rich nations, it turns out that there is no relationship between changes in income inequality and changes in the absolute incomes of low-end households. The reason is that income growth for poor households has come almost entirely via increases in net government transfers, and the degree to which governments have increased transfers seems to have been unaffected by changes in income inequality. (For more detail, see my piece in the November-December issue of Challenge.)

In some countries with little or no rise in income inequality, such as Sweden, government transfers increased and so did the incomes of poor households. In others, such as Germany, transfers and the incomes of low-end households did not increase.

Among nations with sharp increases in top-heavy inequality, we observe a similar disjunction. Here the U.S. and the U.K. offer an especially revealing contrast. The top 1%’s income share soared in both countries, and through the mid-1990s poor households made little progress, as the following chart shows. But over the next decade low-end American households advanced only slightly, whereas their British counterparts experienced sizable gains. The New Labour governments under Tony Blair and Gordon Brown increased benefits and/or reduced taxes for low earners, single parents, and pensioners. As Jane Waldfogel documents in her book Britain’s War on Poverty, these were big policy shifts, even if not always high-profile ones. They produced a significant rise in the real disposable incomes of poor households.

Rising income inequality has a number of potential consequences — some of them, perhaps many, undesirable. Its apparent lack of impact on the absolute incomes of the poor over the past generation ought not lead us to overlook this. Still, it is noteworthy that some affluent countries have managed to engineer income growth for low-end households despite a significant top-heavy rise in inequality. For American policy makers, that might serve as welcome inspiration.

A brief snapshot of hardship in America

December 12, 2010

Here, compiled by the Center on Budget and Policy Priorities.

Poverty and immigration in the U.S. and abroad

November 29, 2010

The incomes of American households at the low end of the distribution aren’t especially high, and haven’t increased much, when compared to those of their counterparts in other rich nations. But perhaps this is an unfair comparison. After all, hasn’t the United States absorbed a much larger flow of immigrants than any other affluent country?

Actually, as the following chart shows, we’re not exceptional in this regard.

Does the U.S. have more of the type of immigrants most likely to struggle in the labor market — those with limited education? Again no. As this next chart indicates, here too we’re in the middle of the pack.

When is economic growth good for the poor?

November 17, 2010

In a good society, the living standards of the least well-off rise over time.

One way to achieve that is rising redistribution: government steadily increases the share of the economy (the GDP) that it transfers to poor households. But there is a limit to this strategy. If the pie doesn’t increase in size, a country can redistribute until everyone has an equal slice but then no further improvement in incomes will be possible. For the absolute incomes of the poor to rise, we need economic growth.

We also need that growth to trickle down to the poor. Does it?

The following charts show what happened in the United States and Sweden from the late 1970s to the mid 2000s. On the vertical axes is the income of households at the tenth percentile of the distribution — near, though not quite at, the bottom. On the horizontal axes is GDP per capita. The data points are years for which there are cross-nationally comparable household income data.

Both countries enjoyed significant economic growth. But in the U.S. the incomes of low-end households didn’t improve much, apart from a brief period in the late 1990s. In Sweden growth was much more helpful to the poor.

In Austria, Belgium, Denmark, Finland, France, Ireland, the Netherlands, Norway, Spain, and the United Kingdom, the pattern during these years resembles Sweden’s. In Australia, Canada, Germany, Italy, and Switzerland it looks more like the American one. (More graphs here.)

What accounts for this difference in the degree to which economic growth has boosted the incomes of the poor? We usually think of trickle down as a process of rising earnings, via more work hours and higher wages. But in almost all of these countries (Ireland and the Netherlands are exceptions) the earnings of low-end households increased little, if at all, over time. Instead, as the next chart shows, it is increases in net government transfers — transfers received minus taxes paid — that tended to drive increases in incomes.

None of these countries significantly increased the share of GDP going to government transfers. What happened is that some nations did more than others to pass the fruits of economic growth on to the poor.

Trickle down via transfers occurs in various ways. In some countries pensions, unemployment compensation, and related benefits are indexed to average wages, so they tend to rise automatically as the economy grows. Increases in other transfers, such as social assistance, require periodic policy updates. The same is true of tax reductions for low-income households.

Should we bemoan the fact that employment and earnings aren’t the key trickle-down mechanism? No. At higher points in the income distribution they do play more of a role. But for the bottom ten percent there are limits to what employment can accomplish. Some people have psychological, cognitive, or physical conditions that limit their earnings capability. Others are constrained by family circumstances. At any given point in time some will be out of work due to structural or cyclical unemployment. And in all rich countries a large and growing number of households are headed by retirees.

Income isn’t a perfect measure of the material well-being of low-end households. We need to supplement it with information on actual living conditions, and researchers and governments now routinely collect such data. Unfortunately, they aren’t available far enough back in time to give us a reliable comparative picture of changes. For that, income remains our best guide. What the income data tell us is that the United States has done less well by its poor than many other affluent nations, because we have failed to keep government supports for the least well-off rising in sync with our GDP.

The politics of helping the poor

July 1, 2010

Slides from my talk at the Luxembourg Income Study conference on “Inequality and the Middle Class.”

The conference papers are available online.

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