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Chapter 26

Poverty and Welfare

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Chapter Outline

• MEASURING POVERTY

• PROGRAMS FOR THE POOR

• INCENTIVES, DISINCENTIVES MYTHS AND TRUTHS

• WELFARE REFORM

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Welfare

• “Relief” programs to help the poor began in the 1930s during the Great Depression.

• Many programs were created and others greatly expanded in the 1960s and 1970s.

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What is Poverty?• Is it an absolute concept that is the same across

the world or• Is it a relative concept that depends on the

incomes of others in the area?• Can we say an American is poor if they have a

living standard that is higher than the average person in the rest or the world?

• A poor person today has a higher living standard than an average person had 100 years ago. Does that mean that today’s poor person is not really poor?

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Measuring Poverty• Poverty Line: that level of income sufficient to

provide a family with a minimally adequate standard of living– The poverty line was originally established in the 1960s.– Surveys indicated that poor families of four spent an

average of one-third of their income on food. – A survey established the cost of a minimally adequate diet

and that figure was multiplied by 3 to get the poverty line. – Similar surveys established the poverty line for other

family sizes.– The figure is updated annually for inflation using the CPI.

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Poverty Lines1999

• Family of – 4 the poverty line is $17,029– 3 the poverty line is $13,290– 2 the poverty line is $10,869– 1 the poverty line is $8,501

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Measuring Poverty (continued)

• Poverty Rate: the percentage of people in households whose incomes were under the poverty line. In 1999 it was 11.8%

• Poverty Gap: the amount of money that would have to be transferred to households below the poverty line to get them out of poverty. In 1999 it was $62 billion.

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Who’s Poor

• Those under the poverty line are disproportionately– Women

• A poverty rate 3 points higher than that of men

– Children• a poverty rate twice that of adults

– Minorities • a poverty rate 3 times higher than that or whites

– High School Dropouts• a poverty rate 2.5 times higher than people who

graduated high school and did not attend college.

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10

15

20

25

30

35

40

percentage in

poverty

millions in

poverty

19591962196519681971197419771980198319861989199219951998year

Poverty Rate People in families in Poverty (Million

People in Poverty (Millions)

Poverty Rate and Millions in Poverty

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Problems with our Measures of Poverty

• Concerns that suggest the poverty rate is understated– Child care costs are a bigger issue with

today’s poor than those who were poor when the original poverty line was established.

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Problems with our Measure of Poverty (continued)

• Concerns that suggest the poverty rate is overstated– Americans under the poverty line consume more protein, have

more living space, are more likely to have air conditioning than the average European.

– Updates are based on the CPI which has consistently overstated the increase in the cost of living.

– The measure only counts income and not wealth. There are nearly a million “poor” who own homes worth more than $150,000.

– The measure only counts cash income and does not count the non-cash amounts people get from programs such as food stamps and Medicaid.

– The method of calculation misses a large proportion of income that we know exists.

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The CPI point

2000 4000 6000 8000

10000 12000 14000 16000 18000

$

19591962196519681971197419771980198319861989199219951998Year

Poverty Line Poverty Line (with CPI adjusted)

Poverty LineWith and Without CPI Adjustment

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• Concerns that suggest the poverty rate is overstated for some and understated for others– The measure treats as equal the incomes of

residents of high cost cities and low costs towns. This overstates rural poverty and understates urban poverty.

– The measure uses the overall CPI, which includes goods the poor cannot afford. In some years, the prices of goods bought by the poor rise more than the CPI and in other years it rises less.

Problems with our Measure of Poverty (continued)

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Programs for the Poor(Cash)

• Temporary Aid to Needy Families– A program that gives money to states for them to

work with the poor. If there is a “welfare check,” this is the program that grants it.

• Supplemental Security Income– A program that gives money to widows, orphans

and the disabled.

• Earned Income Tax Credit– A program that gives to recipients money in the

form of a tax refund that is much greater than the taxes they had withheld.

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Programs for the Poor(In-Kind)

• In-Kind transfers : provisions of goods and services in forms other than cash– Women, Infants and Children (WIC): vouchers allow

people to get basic food products for pregnant women, new mothers and their children.

– Food Stamps: vouchers that enhance the recipients ability to buy food

– Medicaid: free health insurance– Section 8 or Housing Authority housing: subsidized

housing.– Head Start: subsidized day care and preschool– School Lunch: free breakfasts and lunches at school

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Relative Costs of Cash and In-Kind Programs

• Total Costs of the programs $340 billion– Cash programs $90 billion– In-Kind programs $250 billion

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Why Spend $340 Billion on a $62 Billion Problem

• Cash transfers would cost the government less to administer.

• Much of the benefit of the Medicaid goes to children in households just above the poverty line.

• Giving cash does not serve the goals of those helping the poor because Americans generally– believe the poor would waste the money.– believe the poor would not spend the money on their

children.– feel better giving people what they need rather that

what they like.

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Myths, Incentives and Disincentives

• Fact: Having a child can make someone who is ineligible for a welfare program eligible for that program.

• Fact: Having an additional child increases the amount of aid recipients are eligible for.

• Myth: People have (more) children to get (more) welfare.– Though economists recognize an incentive to have,

or to have more children, they have generally found little evidence to support that conclusion.

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Welfare Reform

• An optimal a welfare program would– be sufficiently funded to solve the problem of poverty– provide an incentive to leave the program– be politically sustainable by not putting an excessive burden on

taxpayers.

• The three can not be simultaneously met in the U.S. and the second has typically been the aspect sacrificed. – Prior to 1996 reform a person who worked part-time would have most

of the benefit of working taken away because their benefits would be reduced.

– After 1996 reform a person must show they are working or seeking work. Those who work part-time generally get to keep many of their welfare benefits. They must leave many programs within 2 years.