Years of Poverty, Years of Plenty, The Changing Economic Fortunes of American Workers and Families

Years of Poverty, Years of Plenty,
The Changing Economic Fortunes of American Workers and Families
by Greg J. Duncan with Richard D. Coe, Mary E. Corcoran, Martha S. Hill, Saul D. Hoffman and James N. Morgan

Institute for Social Research, The University of Michigan, Ann Arbor MI 1984
Cost and standard of living - United States - Longitudinal Studies.
Income distribution - United States - Longitudinal studies. Labor and laboring lasses - United States - Longitudinal studies.
ISBN 0-87944-285-9 clothbound
ISBN 0-87944-289-0 paperbound

If I told you that "the poverty rate in America is 13%", you should think that the problems of poverty are quite enormous. On the other hand if I said "only .7% of the population are persistently poor every year", your reaction should be quite different. The fact that both statistics are correct, shows the need to distinguish between "longitudinal studies" and "cross sectional studies." A census or cross sectional study tells you that "x" percent of the people are poor but tells me nothing about whether they are poor for a week, a month, a year or 10 years. A longitudinal study follows the same people year after year. We can have our debate over the appropriate remedy only after we know more accurately what we are talking about. If you don’t know the difference between bouts of poverty and persistent poverty you are not in the conversation.

Greg J. Duncan’s book Years of Poverty - Years of Plenty is an analysis of a longitudinal study called the Panel Study of Income Dynamics that started in 1968 and examined the lives of 5000 American families/individuals over the course of a decade. The outcomes of longitudinal studies changes your perspective about conventional wisdom because "helping the poor" becomes a moving target. Another statistical lesson to be learned is watch out for people spouting "family" data. It is no surprise that the makeup of families change substantially over time. Marriage, children, death, divorce, promotions, layoffs, emancipation, retirement, etc all mean that a statistical analysis of "a family" is virtually impossible. Keep your eye on the individual. By using the Panel Study data, Duncan reviews economic mobility, poverty, welfare, work, black men and women’s income. The importance of this book, is to examine, in a non-technical fashion, people’s lives over time to reveal the nature of poverty.

Although the book is packed with many different facts and topics, I found five main lessons concerning poverty: 1) economic mobility is alive and well; 2) many people experience short spells of poverty; 3) the persistently poor are few in number and different demographically from the general population; 4) the absence of persistently elderly poor raise interesting policy questions, and 5) persistent welfare use was very rare from 1968 to 1978.

Economic mobility is alive and well. Those who are poor today are, as a general proposition, not likely to be poor over time. People grow up, gain work experience, receive on the job training and over time, their incomes go up. One third to one half of all who are poor this year are NOT POOR THE NEXT. This is an amazing statistic all by itself. This is not India. We do not have an untouchable class. If someone says we must "help the poor," who are they going to help? Here today, gone tomorrow. The study noted that "... less than one in a hundred (0.7 percent) was poor all ten years." (P41)

The second lesson is that the experience of poverty is actually widespread. 25% of the population have at least one experience with poverty during the 10 year period. Bad stuff happens to lots of people. For the most part, they handle it and move on.

The third lesson is that persistent poverty, that is, people who are poor year after year is quite small. You can pick your own favorite statistic. Only .7% of the population were poor absolutely every year for the 10 year study. 2.6% of the population were poor in 8 of the 10 years. (Duncan settled on this statistic as his definition of persistent poverty.) 5.4% of the population were poor in 5 or more of the 10 years. The main point is that these numbers are quite different from the 13% poverty rate publicized from the cross sectional census statistics. The characteristics of those who are persistently poor are also very different from the general population. Those who experience an occasional bout of poverty are virtually identical to the general population. "Persistent poverty is heavily concentrated among blacks, and particularly among families headed by a black woman." (P50) Blacks are 12% of the population and 62% of the persistently poor. Only 19 percent of families are headed by black women but they constitute 61% of the persistently poor families. Only 30% of the population live in the South, yet 68% of those who are persistently poor live there. 4 out of 5 persistently poor people live in a towns smaller than 500,000 people.

Fourth, I wish the book had distinguished between how many elderly would have been persistently poor with and without social security. It does mention that social security "does not cover all of the elderly" and that there is low participation in Supplemental Security Income programs (only half of those eligible). What we saw above is that approximately 2.6% of the whole population are persistently poor but only one-third of those are elderly, i.e. .866%. Milton Freedman in Capitalism and Freedom asked whether mandatory social security was justified. He correctly noted that some people, if given the option, would choose to live for the moment and spend all of their money. Those people might later become burdens to the rest of us if their families did not take care of them. Freedman suggested that the argument be resolved by statistical analysis. If 90% of the elderly actually became a burden to society, then the mandatory aspects of social security would be justified. If, on the on the other hand, only 1% of the population became a burden, how can we justify depriving 99% of the population the freedom to manage their own retirement funds. I am not suggesting that Freedman’s statistical question has been answered by Years of Poverty, but the fact that less than one percent of the population is both elderly and persistently poor is certainly cause for further study.
Lastly, welfare is always a hot topic of discussion. Welfare programs provided assistance to 25% of the population at least once during the 10 year study. Very few of those people stayed on welfare very long and very few were completely dependent upon welfare for their support. About 2% of the entire population were persistently dependent upon welfare. They were "disproportionately female, black, and have children in the home." (P92) From these welfare statistics, Duncan concludes that the program is not guilty of creating wide spread dependency. While it may be true that welfare is not a deadly disease that once touched becomes permanent, it does appear to be having a serious impact upon a small group of citizens. It is amazing how different people respond to the same statistical analysis. Duncan sees the widespread mobility and concludes that welfare isn’t so bad, because it didn’t cause large numbers of people to remain persistently poor and dependent. I look at the same mobility statistics and ask whether we need welfare if most people are able to move up and out of poverty so quickly. What is wrong with private or charitable safety nets for those who experience a short bout of poverty? Why can’t people save money or fall back on family for brief periods of time? Obviously when you are poor, you can’t save, but remember that for most people, poverty bouts are very brief. For most of the time, people are fairly capable of normal monthly saving. As Edgar K. Browning points out in Stealing From Each Other, 46 per cent of the poor are in the process of purchasing their own home. This issue reveals one of the inadequacies of this Panel Study. They did not inquire about private safety nets such as saving, investment, home ownership and association with charitable institutions.

During the Great Depression this country was sold on the proposition that our problems were too big for a system of voluntary charitable assistance to the poor. As a result we now have a large welfare system and a nearly universal Social Security Administration. It would appear that we should have these debates over again based upon facts from longitudinal studies. Persistent welfare use at 2% of the population may have been actually been reduced by the Clinton era reforms. The tail of the Great Depression is wagging a very large dog.

Stealing From Each Other

Stealing From Each Other. How The Welfare State Robs Americans of Money and Spirit
by Edgar K. Browning 2008

Public Welfare, Social Policy, References and Index
ISBN 978-0-313-34822-8
(Alk. Paper)
Praeger Publishers

A single mom without a job in Philadelphia (1996) was eligible to receive the equivalent of $19,217 (equivalent value) from Medicaid, food stamps, housing assistance, AFDC and the Earned Income Tax Credit. With a $5,000 per year job she added only $1,500. With a $10,000 per year job she ended up with $18,253, less than no job at all. Incentives work.

While Edgar Browning very effectively discusses welfare disincentives, he has a much bigger objective in Stealing From Each Other. His goal is to calculate where the country would have been without more than 50 years of government intervention into income redistribution. He estimates that without our egalitarian policies, everyone’s income would have been 25% higher and income taxes would have been 75% lower. But because Browning is very careful and cautious with the numbers and the analysis, he leaves out of his book any visceral description of life with disposable income 1/3 higher. Workers would have been able to afford to save before buying a home or a car. The financial reward for work, supporting yourself, staying in school, and delaying parenting until marriage would have been absolutely irresistible. Poverty itself would have been reduced to a rarity. That’s what Browning thinks we have "stolen" from one another.

In order to arrive at his conclusion that all Federal egalitarian policies should be terminated he covers, the morality of market based compensation, an accurate assessment of the magnitude of poverty, the impact of welfare type programs on the poor and a calculation of the financial impact of egalitarian policies on the economy as a whole.

Generally the free exchange of labor for a paycheck results in fair compensation. Earnings really are related to your productivity. Those who study harder, get more experience, develop more skills, and work harder are paid more. Contrary to popular mythology people who make lots of money work harder; a lot harder. The top 1/5th work 700% more hours than the bottom 1/5th. Productivity, supply and demand are not just abstract concepts from an economics book but affect real people’s incomes. For example, men are paid more for doing dangerous jobs (they sustain 92% of all work related deaths) because so few people are willing to do them. This book destroys many other popular mythologies about the impacts of racism or sexism on employment and compensation. For example, as long as some employers are not racist, salaries are bid up to each individual’s productivity. Statistics show little or no differential between the incomes of similarly situated people. Likewise we have persistent myths about income extremes. Many groups blindly parrot government statistics that the top 1/5th of households earn incomes 12 times the bottom 1/5th. The problem is consumption studies show only a 2:1 ratio and lifetime longitudinal studies show income differentials of only 3.2 to 1. After reading these statistics you come away with a real understanding that actual market compensation is, for the most part, both just and fair. Governments can alter the results but it does so at the risk of making compensation unfair.

Even though compensation may be fair, poverty is certainly with us. How big is the problem? Start with the history. From 1939 to 1970 the official level of poverty declined steadily to 12.6%. From then on it has remained fairly constant. However, those official statistics are remarkably incorrect and misleading. On the surface, there are currently about 37 million people living below the poverty line. But they are not the same people over time. After only 3 years 70% have moved up. Others have taken their place. Many people experience bouts of poverty. Young people join the workforce at the bottom. New immigrants arrive and look for work. Injured, sick and others rejoin the workforce. The official statistics are like looking at a single snap shot, while a better view would be looking at a family album.

Persistent poverty is a huge problem but the numbers are very different. Some studies show that 1.5% to 4.9% of the population are very poor and stay poor. Browning estimates that this group is 1-3%. Why are they poor? There are several reasons. Entry level wages have not kept up; the number of single moms have tripled between 1960 and 2003; workforce participation by those in the bottom quintile since 1960 has dropped in half, and our country has absorbed lots of immigrants. Statistically avoiding persistent poverty is rather straight forward: finish high school, marry before having kids, and stay employed. You may still experience bouts of poverty, but not long term.

Why are there now so many single moms and why has workforce participation dropped? Browning suggests that these can be explained, in large part, by the disincentives created by the government’s egalitarian policies. Therefore although these policies may have reduced overall poverty as evidenced by consumption studies, their effect has also been to leave us with a hard core of millions of very poor people. Isn’t our goal self-sufficiency? At what cost do we maintain these policies? Browning takes on the challenge of determining whether we would be better off without them.

Do the egalitarian policies actually help the poor? On the surface the answer must be yes. People would not sign up if they didn’t see the advantage. Statistically the bottom quintile consumes almost twice as much as their reported incomes. Some of the credit must then go to the 85 different federal, state and local anti-poverty programs. But here again this is a static view of poverty. If people stayed poor all the time then income redistribution would make sense. But that’s not the case. People move up and down all the time. They spend more of their time being "not poor." If we are taking more from them when they are not poor than what they receive when they are poor; are we helping them? Could they have saved more during good times? When you consider the impact of taxes, Social Security, minimum wage laws, the jobs never created and the technologies never invented, most of the poor are injured by the existence of our welfare programs.

Over the last half century, the diversion of our incomes to everything from Social Security to Medicare to welfare has decreased our savings, capital and productivity. Our incomes would therefore have been 10% higher. Each household in 2005 would have had an additional $12, 175 more income per year. By removing egalitarianism from our tax system and moving to a proportional income tax system, Browning concludes that GDP would have been 9% higher due to increased labor, capital and technology. Without the bloated egalitarian government budgets of $620 billion per year, our country could have avoided its addiction to deficit spending. GDP would have been another 3.5% higher just by eliminating the economic drag from deficit financing. Then Browning guesstimates that eliminating the myriad of other policies like minimum wage laws and unemployment insurance that GDP would have been yet another 2.5% higher.

Taken together that means that virtually everyone’s income would have been 25% higher. But that’s not all. Without $620 billion in annual spending, almost all income tax rates would be 75% lower. That means that everyone’s spendable income would have been one third higher.
All Browning asks is that the Federal Government (not the states) give up all egalitarian policies. As amazing as all this sounds he is no Pollyanna. He has done excellent research into exiting economic literature and where that is lacking he makes bold but realistic guesses as to the consequences of each of his suggestions.

Having given the book excellent marks on virtually every topic, I part company with him on the issue of immigration. He says that immigration increased the supply of labor, causing native incomes to be 3.2% lower. Citing George J. Borjas and the Congressional Budget Office he claims that immigration has increased the number of uneducated workers by 82% and estimates that unskilled wages are 10% below what they should be. Where do I start to respond? Immigration does not change the supply of labor. It changes only the location of labor. In this world of "in-sourcing" and "out-sourcing," can it be asserted that our labor force isn’t already competing with factories around the world? The real villain is the government’s prohibition on immigrant employment. Without the right of immigrants to work, there is no upward mobility. If you confine humans to bottom rung jobs, you will create a log jam. Millions of immigrants are confined to entry level jobs. This is the real cause of lower entry level wages. Please don’t tell me that people who came here risking life and limb aren’t ambitious to move up the employment ladder. Immigrants throughout history have always been great innovators even when they started out poor and uneducated. We have added millions of newborn children. Should we restrict childbirth to increase wages? But my central problem is with Browning’s statement that: " Putting more and more immigrants to work does not raise the average standard of living of natives..." I thought that everyone gains from every voluntary exchange; that transactions are not zero sum games, and that all of our productivity adds to the total GDP. I don’t understand how Browning argues that the efforts of those at the top income levels add to the economy but not those at the bottom. Immigration is not a cause of poverty nor a drain on our economy. (It may be a drain on government coffers but that is a different subject.)

Taking from one for the purpose of giving to another is the same as what a thief does. A thief is not justified by his needs. Nor does a democratic majority vote make it moral. Government’s redistribution of income cannot be morally justified as an organized charity. The reason is its inherent inefficiency. Think of a bucket brigade scooping water from the deep end of a swimming pool. The run along the sides, spilling most of the water, and then throwing the rest into the shallow end. Today the poor and all of us suffer the consequences of the leaky bucket we have used for the last half century in our effort to be charitable. Edgar Browning is convincing that real charitable efforts would be better.