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Actually, We Won the War on Poverty

Scott Winship | 01/24/2014

This week, Republicans opened their annual winter meeting in Washington—a strategy confab sandwiched between the much-talked-about 50th anniversary of the War on Poverty and President Obama’s State of the Union address on Tuesday, which will again highlight liberal concerns over income inequality.

These issues—poverty and inequality—permeate the political discussion and indeed are historically tricky ones for the GOP. Lately though, conservatives (who largely reject the idea that income inequality merits much policy attention) are finding a different way to address the problems of the poor, and they’re realizing that the issue is perhaps more congenial to Republican politics than it might seem. After all, despite the alarm of the current debate about America’s poor, the country has actually reduced poverty more than we often appreciate—and that decline in poverty has been less about the liberal programs of the New Deal and Great Society and more about economic growth and center-right welfare reforms than is widely recognized. The truth is the liberal programs that have managed to succeed—Social Security chief among them—are today largely unsustainable. Republicans now have an opportunity to put forth their own agenda, one that promises economic opportunity by moving the poor to the middle class, which is something the War on Poverty has never done.

Indeed, much of the data that informs the current discussion about poverty is misleading, which is no help when plotting a path forward that addresses the problems that the poor face. The official numbers suggest that poverty was as prevalent in 2012 as in 1966; in both years, 15 percent of Americans were below the poverty line. But the impression given by the Census Bureau statistics is too dour. The Census Bureau compares family income to a threshold—the so-called poverty line—that varies according to family size and composition. If its income is less than the threshold, a family is considered poor (the threshold has historically been set based on estimating what families need to spend on food to avoid hardship). However, as the federal safety net has expanded over time and become more generous, the Census Bureau’s practice of counting public assistance as income only if it takes the form of a check to be cashed ensures that the number of families living below the poverty line is actually overstated. The official figures fail to account for food stamps, Medicaid, Medicare and public housing subsidies, and they do not account for refundable tax credits that promote work.

The Census Bureau’s numbers distort the picture of the poor in another way. The poverty line rises every year to represent a constant standard of living as prices rise. But the estimates of inflation that the Census Bureau is statutorily required to use in order to update the poverty line are known to overstate the increase in the cost of living—thus leading to a measure of the nation’s poor that is also overstated. For the purposes of trend analyses, the Census Bureau, Bureau of Labor Statistics and Congressional Budget Office all rejected the statutorily mandated inflation measure over 20 years ago.

According to the economists Bruce Meyer and James Sullivan, from the University of Chicago and Notre Dame, who use figures that correct these issues, poverty fell significantly. Their poverty rate fell from an astonishing 32 percent in 1963 to 12 percent in 1979, and then to 7 percent in 2000. In 2010, 8 percent of Americans were living in poverty, according to their figures. My own estimates show economic gains can be glimpsed in other ways, too. The disposable income of an American at the 20th percentile—richer than just 20 percent of Americans, poorer than 80 percent—has risen somewhere between 24 and 41 percent since 1979, depending on how health benefits are valued. Why, if we have made such great strides reducing poverty, is there such widespread belief that, to quote Ronald Reagan, “We fought a war on poverty, and poverty won”?

While more optimistic than Democrats about economic conditions by nature, many conservatives are uncomfortable with the suggestion that poverty has declined. Much of the War on Poverty President Lyndon Johnson launched in 1964 and its kindred extensions in the 1970s—and even child health coverage expansions in the 1980s and 1990s—amounted to straight-up redistribution. Checks were cut, entitlements awarded and reciprocal demands kept minimal. We spent a lot of money over the past 50 years trying to help the poor, and the results were not always positive. Conservatives are wary of abetting a policy program riven with inefficiencies, which takes the distribution of incomes as largely arbitrary and manipulable, and which often seems to promote values contrary to the work ethic and personal responsibility.

And on first glance, there is suggestive evidence that no-strings-attached redistribution has worked. Last month, researchers at Columbia University issued a report offering a revised poverty measure (they correct many of the official figure’s shortcomings, but still overstate the cost of living). Their findings illustrate the impact government programs have on the poor. They discovered that if not for changes in tax policy and swelling federal benefits, poverty would have been more pronounced in 2012 than at any time in the previous 45 years. Thanks to the safety net, it was actually at a near low. President Obama’s Council of Economic Advisors (CEA) cited the study in its own 50th anniversary report on the War on Poverty.

And it’s not merely the poor being boosted by government spending. Mike Konczal of the Roosevelt Institute has argued that middle-class incomes have been propped up largely by the federal safety net. Last April, Konczal used income data from the Congressional Budget Office to show that “cash wages” for the middle fifth of American households rose by less than $2,000 between 1979 and 2007—and even after fringe benefits are taken into consideration, the increase in pay was smaller than the growth in government benefits among households in the middle fifth. As he put it, the federal safety net is “doing serious work to keep median wages from stagnating.”

But these analyses—which suggest that the federal safety net has been the driving force behind material progress for the poor and middle class—don’t tell the full story because they fail to distinguish between elderly Americans and working-age ones. When I reanalyzed Konczal’s argument, I found that he had likely understated the increase in earnings among middle-class working-age families by a factor of six. That’s because of the size of the growing, non-working elderly population in the middle class. What ends up looking like income from safety net programs for working-age families in Konczal’s data is therefore actually Social Security and Medicare payouts for the non-working elderly. In other words, social insurance programs—which return benefits to retirees who contributed into the system as workers—produced income gains among the elderly. It was rising earnings that accounted for the income gains among those families in still the workforce.

The poverty figures provided by the Columbia researchers can also obscure why poverty fell (all of the discussion below uses the version of the poverty measure in the Columbia report cited by CEA). Among the elderly, Social Security can be credited for driving down poverty, starting in the early 1970s (Medicare is not counted as income in this poverty measure). Among children, however, the federal safety net only starts to drive poverty declines in the 1990s—and since then it has grown steadily more important. What’s happened in that period? Welfare reform. Cash assistance to poor families without a worker became less generous, while programs that supported work—things like the Earned Income Tax Credit—grew more generous. The likely reason federal policies lowered child poverty more in the 1990s than would have occurred is that these reforms encouraged work and thereby allowed the poor to benefit from a growing economy in ways they did not in the past. The lesson is that the War on Poverty-style safety nets that make few demands of recipients become poverty traps in a growing economy, discouraging people from seeking work and denying them higher living standards.

The flip side is that during recessions, a safety net for less-skilled workers is even more important than in the past if we want to continue to promote work and independence during periods of job growth. For instance, since 2007, the traditional safety net—including unemployment benefits and food stamps—has done its job in the face of recession. Poverty did not rise much if at all, demonstrating a crucial role for aid to those who cannot find work.

A number of implications follow from a clearer understanding of poverty trends. First, poverty has declined—a lot. Most significantly, it has declined among the elderly, and in large measure that reflects the availability and increasing generosity of the Social Security and Medicare programs. (Of course, we’ve put the sustainability of these programs in doubt. Even if we make the most modest reforms to Social Security to put it on sound footing, the expenditures will largely crowd out any new spending on, for instance, improved education for poor children.)

Poverty has also declined among working-age families and children, though that may have less to do with Johnson’s War on Poverty (or Roosevelt’s New Deal) than with more modern approaches to antipoverty policy. The 1960s-vintage safety net that conservatives like Charles Murray have criticized did not appreciably reduce child poverty over time, according to the data issued by the Columbia researchers. Indeed, if those policies discouraged work and promoted single parenthood in the ways that Murray and others suspect they did, they may have boosted poverty rather than lowering it. The truth is, poverty fell among working-age families primarily after the early 1990s, when a robust economy, work-promoting reforms of welfare programs, and, yes, federal health benefits lifted the incomes of the poor. I estimate that household income before taking government programs and taxes into account rose at the 20th percentile of non-elderly Americans by 12 percent from 1989 to 2007. After fully accounting for taxes and benefits, the increase was 20 to 25 percent.

But something else is worth noting more for what hasn’t happened than for what has. Despite the impressive fall in poverty, there has been no corresponding increase in intergenerational mobility as we commonly think about it. In America, we like to think that children should end doing better than their parents. And while the vast majority of adults do end up better-off than their parents, it is still rare for someone to rise from the lower ranks in childhood to the upper ranks in adulthood. Today, just 30 percent of adults who started in the bottom fifth of household incomes have made it to the top three-fifths, and the evidence suggests that that fraction has not changed in at least three decades. These facts seem contradictory only if one thinks that the primary barrier to upward mobility is financial. While having more money takes families out of poverty, it’s no guarantee that their children will have more opportunity in adulthood.

Indeed, if mobility depends mostly on parental skills and values, community influences or individual abilities and personality traits, then there is little reason to think that a war on poverty should have promoted upward mobility. Indeed, to the extent that the 1960s-vintage safety net discourages work, marriage and savings, it may have impeded improvement in upward mobility rates.

The challenge now, after substantial progress reducing poverty, is expanding opportunities for children raised in poor families. And an “opportunity agenda” rooted in conservative ideas can do this. First, without broad and strong income growth, then the mobility gains of poor children will come at the expense of other children. It’s mathematics: Moving up the ranks requires that someone must move down. But if the economy is growing, even those moving down can be better off than their parents in terms of real income. As long as the economy is growing fast enough, greater fluidity can be achieved even while everyone experiences real income gains.

On the policy front, conservatives already have many good ideas for increasing economic growth, including lower taxes on corporate and investment income to encourage business creation and expansion and reforms of Social Security and Medicare to reduce future deficits. (Health care reform is another important priority here, given the strong likelihood that the Affordable Care Act will add to deficits because cuts in provider reimbursements are unlikely to happen.) Immigration reform remains controversial, but practically everyone favors greater quotas for high-skilled immigrants. Many conservatives are attracted to nominal GDP targeting—having the Federal Reserve worry less about inflation and more about staying on a growth trajectory— as a way of loosening monetary policy during recessions and recoveries while avoiding excessive inflation during expansions. And just as tax cuts to spur investment are likely to pay for themselves, so too will increased research-and-development spending pay off down the road by spurring innovation.

Second, the basic formulation of the bipartisan 1990s welfare reform—greater expectations of work from beneficiaries combined with supports to make work pay—appears to have worked in reducing poverty. That calls for a generalization of this approach to other safety net policies, and Sen. Marco Rubio (R-Fla.) and Rep. Paul Ryan (R-Wisc.) are already leading the way on this front. Rubio recently called for consolidating safety net programs into a “flex fund,” sending the money to the states with few strings attached, and supplementing the paychecks of less-skilled workers with wage subsidies. Ryan recently spoke favorably of Britain’s “universal credit,” which similarly consolidates a variety of safety net programs into a single payment and aims to promote work. The credit is structured so that recipients can keep more of their benefits as they transition to employment than under a system such as ours, where earning more pay can mean a relatively high loss of benefits.

In both the Rubio proposal and the universal credit approach, consolidation and simplification are intended partly as ways to increase work, by making the calculus clearer to recipients trying to assess whether it would pay to take a job. Rubio’s work supplement and the universal credit’s careful attention to phasing out benefits as recipients increase their hours further the work promotion embedded in these approaches. It is important to remember the lesson from the past 50 years, however, that an anti-poverty agenda is not necessarily a pro-mobility agenda. If more income will not expand mobility rates, then promoting work for poor families must change aspirations, values and norms if there’s any hope of increasing opportunities for children. It is too soon to tell whether the 1990s reforms had such an impact on mobility.

Welfare reforms and tax policy should also seek to reward couples who put marriage before childbearing. Programs to promote marriage among couples who become parents unexpectedly have not proven successful, and we should have little optimism that the family situations of children born to parents in unstable relationships will improve meaningfully. Better to reduce the frequency with which children are born into such circumstances by encouraging young men and women to delay childbearing until they are at a better point in their lives, with a better partner. Financial incentives for delay could even transform the culture of communities where childbearing precedes marriage as a matter of course, provided enough individuals are induced to behave differently.

Encouraging economic growth and reforming safety net programs are easy types of policies for conservatives to embrace. But encouraging economic growth will not help those parents with the worst jobs keep their kids from filling those bad jobs someday themselves. And both growth-promoting policies and welfare reforms are easily demagogued by the left as, respectively, only helping the rich and punishing the poor. What conservatives need, for political reasons but more importantly for substantive reasons, is a program to help poor parents invest in their young children. If parents are unable to ensure their children’s school-readiness and keep them on track academically, the federal government can empower them to find the help they need.

The problem is that we have astonishingly few early- and middle-childhood models that have been shown to work on a large scale. But we should nevertheless commit substantial resources to discovering successful models, even as we also commit to shuttering existing programs that have not proved effective. A system of opportunity grants for poor children would allow low-income parents to pay qualifying providers for any of a range of eligible child investment services—after-school programs, tutoring, summer enrichment programs or other strategies. Providers would have to agree to be evaluated, and consistently ineffective providers—and approaches—would be excluded from receiving grants as the evidence comes in.

This approach would be “market making” in the sense that it would incentivize the supply of child investment services and encourage parents to seek them out. Ideally, the circulation of opportunity grants in low-income communities would inspire competition among parents to ensure they are doing right by their children, potentially altering community norms and aspirations. To be sure, many—probably most—models initially would be revealed to be ineffective, but that will build consensus about the limits of what social policy can do and about the need not to waste money on approaches that do not work. And such a program would discover workable models and seed successful ventures like the KIPP schools, becoming much more obviously cost-effective in time. If the opportunity grant program succeeds, it would open up the conversation around K-12 reform as well and point to a new federal role in education.

We won the War on Poverty in the sense that the prevalence of material hardship has declined. According to Meyer and Sullivan, just 8 percent of Americans live at the low standard of living endured by a third of Americans in 1963. But it was a limited and costly victory. Elderly entitlements will bankrupt the country moving forward. Great Society-style no-strings-attached welfare may have had behavioral and cultural impacts that have hurt child opportunity at the bottom. Upward mobility has not expanded. The conservative turn toward welfare reform after 1980 and the limited embrace of a work-promoting safety net by New Democrats produced an important shift in anti-poverty policy, but historically conservatives have not been constructively engaged in formulating a positive opportunity agenda for children at the bottom. That this is changing is the most hopeful sign in domestic policy in some time.

As the GOP prepares for the latest anti-inequality salvo from the president and other Democrats, it faces an historic opportunity to embrace a war on immobility and write the next chapter of antipoverty policy. The stakes are high. As Paul Ryan recently put it, “just as government can increase opportunity, government can destroy it as well.”

 

Scott Winship is the Walter B. Wriston fellow at the Manhattan Institute for Policy Research. You can follow him on Twitter here.

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