Isues in economics today 6th by guell chapter35

Chapter 35
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?
• 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 Lines
2010
•

Family of

• 4 the poverty line is $22,162
• 3 the poverty line is $17,590
• 2 the poverty line is $14,634
• 1 the poverty line is $11,369

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Measuring Poverty
(continued)

•

Poverty Rate: the percentage of people in households
whose incomes were under the poverty line. In 2009 it was
14.3%

•

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 2009 it was $79 billion.

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Who’s Poor
• Those under the poverty line are
disproportionately
• Women
• A poverty rate 2.2 points higher than that of
men
• Children
• a poverty rate 10% higher than that of adults
• Minorities
• a poverty rate 2.5 times higher than that or
whites
• High School Dropouts
• a poverty rate 2 times higher than people who
graduated high school and did not attend
college.
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Poverty Statistics

Darkened bars indicate recessions
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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

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Problems with our Measure of
Poverty (continued)
• 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.

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Poverty in the
United States vs. Europe
•

Timothy Smeeding used a variety of measures of poverty
to compare poverty in the United States and Europe.

•

Adjusting for currency values and prices he noted that
poverty rates are higher in the U.S. than Europe.

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In Cash Programs for the Poor
• 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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In Kind Programs for the Poor
• 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 $646 billion

• Cash programs $116 billion
• In-Kind programs $530 billion

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Why Spend $646 Billion on a
$79 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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Is $646 Billion Even A Lot?
•

Compared to European spending on poverty programs,
$646 Billion is not that much.

•

The US system of taxes and programs reduces poverty by
only 26% whereas European programs reduce poverty by
60%

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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 Cheat or Saint?
• An oft-told story
• You are standing in line behind someone
buying steak, shrimp, etc. with a food stamp
card.
• They get into a new car.

• Could be evidence of welfare fraud or
• The actions of a foster parent (legally
entitled to food stamps and other welfare
benefits for the welfare-eligible child in
their care.)

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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.

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Evidence on 1996 Welfare Reform
•

1996 Welfare reform included

• Work requirements and incentives
•

Work activity by the welfare eligible has increased
substantially since 1996.

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