Lecture Issues in economics today - Chapter 26

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 Lines

1999
• 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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m illio n s in p o v e r ty

p e r c e n ta g e in p o v e r t

Poverty Rate and M

40
35
30
25
20
15
10
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
year
Poverty Rate

People in families in

People in Poverty (Millions)

 

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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
Poverty Line

With and Without CPI Adj

$

18000
16000
14000
12000
10000
8000
6000
4000
2000
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
Year
Poverty Line

 

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Poverty Line (with C
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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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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
 
  like.
that what they
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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.

 

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