Friday, July 13, 2012

Pondering poverty

Writing at Ezra Klein's Wonkblog earlier this week, Dylan Matthews argues that the War on Poverty has been a success:

There are two things to note here. First, there was a huge fall in the poverty rate throughout the 1960s, and in particular after LBJ announced the War on Poverty in 1964 and followed up with Medicaid, Medicare, greater federal housing spending, and other programs to fight that war. In 1964, the poverty rate was 19 percent. Ten years later, it was 11.2 percent, and it has not gone above 15.2 percent any year since then. Contrary to what you may have heard, the best evidence indicates that the War on Poverty made a real and lasting difference. 
Second, since the permanent decline achieved during the 1960s, most of the variation in the poverty rate has been cyclical: it goes up in recessions and down during booms. During the early 1980s recession, the rate spiked, only to fall again when the labor market recovered later in the decade. Same thing with the early 1990s recessions and late ’90s boom. And the current recession has spurred an increase again. The most recent numbers we have are for 2010, and that year’s rate – 15.1 percent – is about as high as it’s gotten since the 1960s.
Note the second link provided is to a blog post from the Center for Budget and Policy Priorities which has already been addressed by this blog. In any case, the thrust of Matthews' argument is that we can tell the War on Poverty succeeded because, while poverty has spiked during recessions, it has not reached levels seen prior to the War on Poverty (officially begun in August 1964, although likely not in earnest until some time later).

That's plausible, but impossible to verify because we lack poverty data prior to 1959. If poverty rates had regularly steeply plummeted during economic recoveries -- as it did as the economy emerged from the 1958 recession -- only to spike back up again to 20+ percent levels when the economy slowed, that would seem to confirm Matthews' thesis. As it is, such thinking remains entirely speculative.

There is, however, another interpretation that would also seem to be supported by the data. Given the increasing wealth of the US in the post-war era, one would expect this to translate into reduced poverty. Indeed, based on this chart of US per capita GDP in chained dollars, per capita GDP increased from roughly $13,000 in 1947 to $20,000 twenty years later.

Thus, it stands to reason that the pronounced decline in poverty rates from 1959-1965/66, before the War on Poverty had begun, was due not only to the post-1958 economy recovery but also the continuation of a longer-term trend of poverty reduction owing to a steady increase in US prosperity. In short, capitalism to the rescue.

While it is true that the poverty rate has not since continued to zero percent, such expectations are entirely unrealistic as a certain percentage of the population will languish in poverty regardless of the macroeconomic circumstances. A young, single mother with multiple children from multiple fathers, for example, is likely to at least flit with poverty, as is someone with a poor work ethic or history of criminal behavior.

Further, if one subscribes to the belief that the welfare state has encouraged or subsidized such poor behavior patterns, thus generating more of it, it stands to reason that government intervention has actually raised the poverty rate to a higher level than if the War on Poverty had never been launched. Such thinking is supported by the fact that welfare reform in the mid-1990s, which limited benefits and introduced work requirements, corresponded with improved economic metrics on the part of previous welfare recipients (notably, Robert Rector of the Heritage Foundation claimed yesterday that the Obama administration has issued new directives which have effectively gutted the provisions of welfare reform).

Rather praising government for reducing poverty to a new permanent low, there is every reason to suspect that it has actually served to raise it to an artificial high.

Update: Related news from Greg Mankiw.

Update: Here is a different perspective on the new welfare changes implemented by the Obama administration.

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