Viking Economics

June 25, 2017

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George Lakey. Viking Economics. Brooklyn: Melville House Publishing, 2016.

This is a book about the economies of four Nordic countries whose peoples have Viking ancestry–Norway, Sweden, Denmark and Iceland. It focuses especially on Norway, where the author, who was born in the US, has spent the most time. Lakey himself is a sociologist, not an economist. Although he draws on the work of economists, the book is not very technical. Lakey supplements his own reading and observations with many interviews and anecdotes.

For people who feel that US economic policy has been moving in the wrong direction, the Nordic countries are a good place to look for alternatives. They have been accomplishing something we have not been lately–a high level of national income without an extreme degree of economic inequality.

According to rankings by international agencies like the IMF and World Bank, the Nordic countries are among the richest in GDP per capita. Norway ranks higher than the US and the others a little lower. According to a Gallup international survey, Norway, Sweden and Denmark are all ahead of the US in median household income. So much of the income from America’s national production is concentrated at the top that households in the middle do not do as well. The Nordic countries have done a better job of maintaining a thriving middle class at a time when the American middle class has been shrinking.

Among 32 developed countries in the OECD, the four Nordic countries studied in this book rank in the top ten for economic equality. The US and the UK rank near the bottom. The OECD has also surveyed the populations of these countries on their life satisfaction. The same Nordic countries are consistently near the top of the rankings, while the United States is only a little better than average. Lakey also draws on research by Richard Wilkinson and Kate Picket on other social indicators that tend to be associated with wide disparities in income: “They find that inequality highly correlates with negative statistics in physical health, mental health, drug abuse, education, imprisonment, obesity, social mobility, violence, teenage pregnancy, and child well-being.”

Equality, productivity and innovation

Lakey acknowledges the widespread belief that differences in economic reward motivate people to do their best, and especially to devise better ways of doing things that the marketplace can reward. “The belief is that inequality motivates, by increasing both the risk and potential reward, attracting talented people who love adventure. The bold ones make the breakthroughs that propel invention and innovation. It sounds reasonable.”

Yes it does. No modern society pays all economic contributors the same. It hardly follows, however, that the extremes of wealth and poverty we see in the United States are optimal for encouraging productivity and innovation. Lakey reports, “Rates of start-up creation in Norway are among the highest in the developed world, and Norway has more entrepreneurs per capita than the United States….” He suggests a couple of ways that economic equality supports potential entrepreneurs: giving them access to education without burdening them with debt, and providing a stronger safety net so they can afford to take risks. People can leave a job to try something new without worrying about losing their health insurance, since coverage is universal. More equal societies do a better job of developing talent across the economic spectrum, and they have higher rates of social mobility.

Lakey also cites research showing a positive association between high productivity and strong unions. This may be counterintuitive, at least for Americans, since “U.S. unions sometimes defend inefficient labor practices and outmoded organization of work, even though undermining productivity–whatever it takes to keep workers in jobs.” However, Lakey argues that this is because the American system leaves workers so insecure. When union membership is higher, high wages are more universal, and the social safety net is stronger, workers have less to fear from productivity-enhancing innovation. In addition, companies may have to boost profits by increasing productivity, since it is harder for them to do it by cutting wages.

Another feature of social organization that contributes to both productivity and equality is the Nordic tradition of cooperatives. They have industrial co-ops, farm co-ops, consumer co-ops, housing co-ops, even parent co-ops providing child care. People are motivated to contribute because they know they will share in the benefits.

Nordic countries are also noted for developing the talents and productivity of women. Their rates of female employment exceed that of the United States, although women are still underrepresented in the highest managerial positions. Rates of employment for men are also higher than they are here. The Nordic countries do more to support employed parents, by subsidizing child care and providing paid family leaves for parents of both sexes. And although more adults are employed, annual work hours per worker are lower, for example 1,418 in Norway vs. 1,791 in the US in 2012. That’s 373 more hours off the job, or about 10 weeks. National production does not seem to suffer, since productivity per hour is higher in Norway.

Keeping poverty low

International comparisons of poverty rates often use a relative definition of poverty. They determine what percentage of a population lives on less than the national median income. That could be misleading if two countries have very different medians; a very poor country could appear to have little poverty if it had little variation around its very low median. For countries that are all pretty affluent, the relative definition makes for pretty fair comparisons. UNICEF calculated child poverty rates for the Nordic countries in the range of 4.7% to 7.3%. The rate for the US was 23.1%, the second worst among OECD countries. We should all think about the damage to human potential that figure represents, and its impact on our national productivity and well-being.

Lakey wants to correct the impression that Nordic states are just generous “welfare states,” since their strategy for fighting poverty involves much more than just handing out cash and other benefits to poor people. It is, first of all, a strategy emphasizing full employment and good wages. Norway has a pretty good record for holding unemployment down, keeping wages up, and preparing people for jobs with educational and training opportunities. “Free post-secondary schooling is available for technical fields like seafaring, business, engineering, and agriculture; for arts fields like performance and visual arts; and for professions like medicine and law.” Adult education is so common that one-sixth of the population is taking courses in any given year.

When jobs are available and wages are fairly high, the government can provide some cash assistance to families with children without worrying that the payments will destroy people’s motivation to work. That’s especially true when such benefits are universal rather than provided only to the very poor and unemployed. You have everything to gain and nothing to lose by taking a job.

Universal services and taxation

Programs designed just for the poor don’t have a very good track record for actually eliminating poverty. They tend to be inefficient because a lot of administrative effort has to go into determining eligibility, and potential recipients may try to cheat. They tend to be under-funded because popular support for them is limited (especially when there is a longstanding racial divide between the affluent and the needy). They tend to be stigmatizing for the people who participate in them. They tend to be too individualistic, helping one person at a time instead of changing social conditions more generally. “The twentieth-century descendants of the Vikings figured out that the individualistic charity model of the nineteenth century simply could not alleviate poverty. In each country, the designers turned against programs for the poor and created universal systems instead.”

Among the publicly-funded services available to Norwegians are tuition-free higher education, paid maternity and paternity leave, affordable child care, subsidized public transportation, subsidies for family farms, vocational counseling and job training, free health care and universal public pensions.

To pay for such benefits, Nordic countries tax their citizens at high rates, both through individual income taxes and corporate taxes. (In contrast, although US rates may look high on paper, the tax code has so many loopholes that revenue as a percentage of GDP is among the lowest for OECD countries.) Lakey describes the general Nordic attitude toward taxes as “To get a lot, we pay a lot.” The “lot” they get includes not only the benefits they receive personally, but the general benefits of living in a more egalitarian and less divided society.

Do high taxes inhibit economic growth, as is so often claimed by economic neoliberals in the United States? Lakey cites the work of economist Jeffrey D. Sachs, who modified his own neoliberal views after examining the evidence. He compared the Nordic countries with the Anglo-Saxon countries of Australia, Canada, Ireland, New Zealand, UK and United States, countries he characterized as “low-tax, high-income countries that share a historical lineage with nineteenth-century Britain and its theories of laissez-faire.” He concluded, “On average, the Nordic countries outperform the Anglo-Saxon ones on most measures of economic performance.”

Relevance to the United States

Maybe the culture and traditions of the Anglo-Saxon countries are so different from those of the Nordic countries that we are unable to learn much from them. On the other hand, maybe the problem isn’t as much culture and traditions as vested interests standing in the way of the public good. Lakey cites research showing that most Americans want more economic equality than they now have. “In one of the studies, participants were shown two different income distributions, in the form of pie charts. Without saying so, one chart reflected the distribution in Sweden and the second chart that of the United States. 92 percent said they preferred the first.”

Lakey also cites research by political scientists showing that in the US, the wealthy get what they want in political decision-making much more often than any other economic segment of society. He believes that politicians are so dependent on powerful financial interests that voting alone will not move a country in a more egalitarian direction. Only broad social movements featuring nonviolent direct action can bring about the desired changes.



Hillbilly Elegy (part 3)

September 7, 2016

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Subcultures as adaptations

J. D. Vance has vividly described the “hillbilly” culture into which he was born, but which he outgrew. He has also offered a critique of that culture, showing how its attitudes and behavioral norms can become obstacles to personal health, happiness and achievement.

As with much of the writing in the “culture of poverty” tradition, the critique can exaggerate how much the poor are responsible for their own way of life and all its problems. I fear that Vance is falling into this trap when he says that “these problems were not created by governments or corporations or anyone else. We created them, and only we can fix them.” But the cultures of “hillbillies” or inner-city blacks or Latino farmworkers are not self-contained worlds independent of the larger social environment. They are American subcultures that have always been shaped by the institutions of the dominant culture.

One does not have to be a strict social determinist to argue that subcultures adapt to the institutional realities of the surrounding society. People do create their own culture, often in surprisingly innovative ways. But they cannot do it in a social vacuum. People interact all the time with institutions like work organizations, schools, churches and governments, which provide both challenges and opportunities.  The lack of agency Vance complains about–the feeling that one lacks control over one’s life–arises especially because the poor and uneducated are in such a weak position in relation to such institutions. The poor don’t just need new attitudes and behaviors; they need empowerment.

At one point in his childhood, Vance was called upon to testify in court against his own mother, who had physically attacked him. That was when he noticed that “the social workers and the judge and the lawyer all had TV accents. None of us did. The people who ran the courthouse were different from us. The people subjected to it were not.” On that occasion, Vance lied in order to protect his mother and keep those strange-talking outsiders from hurting his family. Vance describes his people as preferring their own form of justice. “My people were extreme, but extreme in the service of something— defending a sister’s honor or ensuring that a criminal paid for his crimes. The Blanton men, like the tomboy Blanton sister whom I called Mamaw, were enforcers of hillbilly justice, and to me, that was the very best kind.” He does not analyze this further, but an informal, homemade system of justice is a predictable adaptation for people who see the official justice system as not serving their class of people very well.

When Vance is exploring the psychology of work, he says, “When groups perceive that it’s in their interest to work hard and achieve things, members of that group outperform other similarly situated individuals. It’s obvious why: If you believe that hard work pays off, then you work hard; if you think it’s hard to get ahead even when you try, then why try at all?” I would add the sociological point that such beliefs are shaped over time by social experience. When opportunities are opening up, as they were in the heyday of manufacturing expansion, people become more optimistic. But when opportunities are shrinking, families with few generations of success to remember are easily discouraged.  Subcultures do change, but they change slowly, and mostly in response to changing conditions. Vance mentions that the emigrants from coal country who found manufacturing jobs “had largely caught up to the native population in terms of income and poverty level” within two generations. But the postwar economic progress was not sustained long enough to eradicate the culture of poverty. Generations of restricted opportunity had created it, and generations of expanded opportunity were required to repair it.

Women’s agency

Another example of how American social institutions help account for subcultural adaptations involves women and sexuality. One of the best examples of the lack of agency Vance deplores is unplanned teenage pregnancies. They figure prominently in his story, since his mother became pregnant at 18 and his grandmother at 14. If sociologists have learned anything about gender in the past half-century of intensive study, it is that the institutions of patriarchal society are largely responsible for limiting women’s agency in general, and women’s control over their own bodies specifically. A lot of early pregnancies and shaky marriages are what you get when the dominant culture glamorizes sexuality and portrays women primarily as sex objects; when schools fail to provide sex education or limit it to preaching abstinence; when churches teach that sex is too shameful to discuss and contraception is sinful; when the local economy provides few career opportunities for women, so they see no life for themselves except as mothers; when good jobs for men are also in short supply, so they express their masculinity by obtaining and controlling women, sometimes by force, but not so much by supporting their families. This is also a vicious circle, since early motherhood can offer an escape from the troubled homes created by the previous generation of young mothers.

Blaming families for their own problems is easy. No one denies that what girls and boys learn at home can shape their gender roles for a lifetime and affect whether they express their own sexuality responsibly. Parents are primary carriers of culture, to be sure, but they cannot be expected to transform their received culture singlehandedly. Expecting families to change the culture without supportive changes in other social institutions is not realistic.

The politics of pessimism

Vance concludes his book by saying, “I don’t know what the answer is, precisely, but I know it starts when we stop blaming Obama or Bush or faceless companies and ask ourselves what we can do to make things better.” I imagine that few people will disagree with his call for more personal responsibility. I do note, however, that this is essentially the Ronald Reagan philosophy of government, “Ask not what your country can do for you; ask what you can do for yourselves.” Vance does not see much for government to do about the plight of the struggling working class, since “the fault lies almost entirely with factors outside the government’s control.”

In truth, neither of the major political parties has been offering much hope to the white working class lately. Hillary Clinton does not seem to be connecting with them very well at all. Donald Trump is speaking to them directly, but appealing to their prejudices and false hopes. He encourages them to blame their problems on foreigners and immigrants, reject climate change as a hoax, and hope for a return of coal mining jobs.

But I think something is lost if citizens of a democracy become too pessimistic about their own government. Vance doesn’t want people to blame government for their problems, but he doesn’t want them to look to government for solutions either. In that respect, he can be accused of reinforcing the alienation from mainstream institutions that is a familiar trait of “hillbilly” culture. By focusing on agency as a psychological characteristic, he overlooks the value of the social agency that arises when citizens cooperate together in a common political cause.

One thing that government is going to have to do is increase support for higher education, so that students can go to college without accumulating massive debt. States have been cutting spending on education at the same time that the educational requirements of good jobs have been rising. (Vance should appreciate that need, since his own success story depended on a state-supported university and generous financial aid from a private law school.) Another thing for government to do is to promote industries that have realistic hopes of creating good jobs. The solar industry already employs a lot more people than the coal industry. Ironically, Hillary Clinton is the one calling for these things (when she can be heard over the clamor for her emails), but she is getting her least support from working-class whites who might benefit from them.

Assuming the Trump candidacy fails, as I hope it does, I would like to see the white working class join other disadvantaged groups in a progressive coalition for realistic socioeconomic change. If that seems improbable, we should remember that that’s what they did during the Roosevelt era.



Hillbilly Elegy (part 2)

September 6, 2016

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J. D. Vance describes himself as a “cultural emigrant” from the “hillbilly” culture of his youth to the upper-middle-class world of educated professionals. That puts him in a somewhat detached position, from which he can see his former world as not just a collection of individual characters, but as a common culture with typical beliefs, values and patterns of behavior.

One major theme of the book is that “social class in America isn’t just about money.” It’s also about lifestyle, and upward mobility is unlikely without changes in lifestyle. The attitudes and behaviors people acquire in their early socialization can get in their own way.

William H. Whyte classically defined the “Protestant ethic” as an ethic of hard work, thrift and self-reliance. Vance sees too much of the opposite: laziness, overspending and blaming others for one’s problems. To be fair, he doesn’t actually use the world “lazy,” but he does say, “We choose not to work when we should be looking for jobs. Sometimes we’ll get a job, but it won’t last. We’ll get fired for tardiness, or for stealing merchandise and selling it on eBay, or for having a customer complain about the smell of alcohol on our breath, or for taking five thirty-minute restroom breaks per shift.” Without denying the reality of these problems, I will note that Whyte, writing in the 1950s, was questioning how much of a work ethic American society really wanted anymore. Prosperous, corporate American seemed to be placing increasing value on leisure, spending, and reliance on big organizations. Sometimes I wonder how long many higher-class people would last in some of the grueling jobs that poor people have to do. But I digress.

Vance’s number one complaint is that too many “hillbillies” lack a strong sense of personal agency, a belief that their choices matter and that they can take control of their own lives. That puts them in a strange relationship with their own government. On the one hand, “a large minority are content to live off the dole.” On the other hand, many like to blame the government for their problems. And those who are trying to uphold the traditional work ethic, at least in theory, may blame government for spending too much on public assistance.  Vance suggests that this is a bigger reason why so many low-income whites have abandoned the Democratic Party than the Party’s support for the Civil Rights Movement. I’m not so sure that those two issues can be separated, since white resentment of government spending is probably strengthened by the perception that people of color are getting more help than white people are. In any case, Appalachian whites have shifted their allegiance to the party of limited government even as their economic vulnerability and potential dependency have been increasing.

Vance describes his people as uniquely pessimistic and cynical, much more so than Latinos or blacks. They are patriotic in a vague sort of way, but do not currently have any heroes as they once had Franklin Roosevelt. Largely detached from the wider society, they can be intensely loyal to kin and react violently to perceived threats from outsiders. They pride themselves on their toughness, which they rely on to compensate for other weaknesses. As a child, Vance had a lot of opportunities to learn about drinking, yelling and fighting, but not much else about being a man.

Reacting strongly against the idea of blaming others for one’s problems, Vance concludes that “these problems were not created by governments or corporations or anyone else. We created them, and only we can fix them.”

I have a concern about this perspective that I will elaborate in my next post. I think that Vance’s discussion of “hillbilly” culture is strong on personal observation but weak on analysis. He is, after all, a young lawyer, not a sociologist, anthropologist or economist. He makes the world he describes sound too much like a standalone culture, as if we had just discovered it in some remote jungle. It is, rather, an American subculture shaped and reshaped by the institutions of American society. Those institutions include churches and schools, and yes, government and corporations. American institutions, from coal companies to Bible Belt churches, have been a demonstrable part of the problem, and institutional change as well as personal change will have to be part of the solution.


A Measure of Fairness (part 2)

February 26, 2015

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In A Measure of Fairness, Pollin, Brenner, Wicks-Lim and Luce report their research on two kinds of wage laws: state minimum wage laws, and municipal laws that set a living wage higher than the federal and state minimums.

In 2007, Congress mandated that the federal minimum wage rise to $7.25 an hour by 2009. Twenty-nine states and the District of Columbia have raised their minimum wages higher than that; seven states and D.C. have a minimum of at least $9.00 (see map and data)

Municipal laws that set a wage higher than both the federal and state minimums are usually narrow in scope, applying only to businesses with municipal contracts. San Francisco and Santa Fe are two cities with broader living-wage laws.

The authors identify two different ways of defining a reasonable living wage, one focusing more on benefits and the other on costs:

First, what is a wage rate that is minimally adequate in various communities, in the sense that it enables workers earning that minimum wage and the family members depending on the income produced by this worker to lead lives that are at least minimally secure in a material sense? What wage rate, correspondingly, can allow for a minimally decent level of dignity for such workers and their families?
The second, equally legitimate, question…asks, How high can a minimum wage threshold be set before it creates excessive cost burdens for businesses, such that the “law of unintended consequences” becomes operative?

High on the list of unintended consequences would be job losses if businesses chose to lay off workers or leave a city or state rather than accept higher wage costs.

The authors also identify two ways of studying these issues: prospective research that tries to anticipate the consequences of proposed laws, and retrospective research assessing the actual consequences of existing laws. Except for the last section, the findings described below are from prospective studies.

Benefits to workers and families

Who benefits from wage laws? The answer might seem to be obvious, but some critics have questioned the need for such laws on the grounds that the lowest-wage workers are rarely major breadwinners, but are often younger workers whose wages will probably go up before long anyway. The authors find that the laws primarily benefit the people they are intended to benefit: low-income workers who are “well into their long-term employment trajectories,” with a high proportion of primary breadwinners and other major contributors to family income. In addition, the laws have important ripple effects, tending to raise the wages of workers who are already a little above the legal minimum. For example, the authors estimated that 20% of the people of Arizona would receive some income benefit from a proposed minimum-wage increase, including workers and members of their families.

Several of the research reports are from studies of a proposed city-wide minimum of $10.75 for Santa Monica. It was passed by the city council in 2001 but repealed by the voters in 2002. In order to evaluate its probable effect on incomes, the authors gave careful consideration to poverty thresholds and basic economic needs. First, they drew on research by the National Research Council on more realistic poverty thresholds than those established by the federal government. “The commission’s report…presented eight separate studies using different methodologies for coming up with alternative poverty measures. If we simply calculate the average of these eight alternative poverty lines, this average is 42 percent above the official poverty line.” Considering that the cost of living in the Los Angeles area is about 25% above the national average, they decided to use 160% of the federal poverty line as the poverty threshold for their research.

By that standard, a family consisting of one adult and two children would need an income over $21,475 to escape poverty, which corresponds to a full-time hourly wage of $10.32. A family with two adults and two children would need an income of $27,030, corresponding to a full-time hourly wage of $13.00 with only one adult employed. (All figures were in 1999 dollars, so would have to be somewhat higher today.)

The authors also drew on research by the California Budget Project, which constructed a “basic needs” budget for Los Angeles and other California regions. The CBP described this as “more than a ‘bare bones’ existence, yet covers only basic expenses, allowing little room for ‘extras’ such as college savings or vacations.” By that standard, a family with one adult and two children would need an income of $37,589, or a wage of $18.07 an hour. A family with two adults and two children would need a little less, $31,298, or a wage of $15.05, if one adult stayed home and provided child care. With both adults employed full-time, however, they would need $45,683 because of child care and other costs, but each job would only have to pay $10.98 an hour to generate that income.

To assess the impact of the proposed $10.75 hourly wage, the authors construct two very specific “prototypical family types.” The first is a three-person family whose primary breadwinner earns $8.00 an hour and contributes 70% of the family income. A raise to $10.75 increases the family income from $19,430 to $24,105, an increase of 24.1%. This takes the family from 10% below the adjusted Los Angeles poverty line to 12% above it. It also takes the family from 48% below the CBP “basic needs” budget to only 36% below it.

The second prototypical family is a four-person family with a low-wage worker earning $8.30 an hour and contributing 50% of the family income. A raise to $10.75 increases the family income from $29,880 to $34,290, an increase of 14.8%. (The other adult earner is not assumed to have an hourly rate low enough to be covered by the minimum-wage increase.) This takes the family from 12% above the adjusted Los Angeles poverty line to 29% above it. It also takes the family from 35% below the CBP “basic needs” budget to only 25% below it.

However, some of the increased income from higher wages would be offset by higher taxes and lost tax credits. (It wouldn’t be offset by loss of food stamps or medical benefits, since neither prototypical family was poor enough to qualify for those in the first place.) The authors calculate that the offsets amount to 40% of the income gains for the first family and 27% of the income gains for the second family.

Costs to business

Most legally mandated wage increases are not dramatic, and their impact is limited by the number of workers whose wages are already at or near the new minimum. Typical of the research reported here is the authors’ finding that a Santa Fe living-wage ordinance would increase average costs relative to business revenue by about 1%. The impact is often two or three times greater for businesses with more low-wage workers, especially in the food service and hotel industries.

Affected businesses can handle the added labor cost in many different ways. Perhaps the most obvious is to raise prices. Although that poses some risk of lost business, the damage is limited if the price increases are small, competitors are also raising their prices, consumers are interested in quality more than price, and possibly that consumers prefer to patronize businesses that treat their employees well, as some research indicates. In addition, some businesses, especially retail businesses operating in poor neighborhoods, may gain business because better-paid workers have more money to spend.

Another way that businesses absorb higher labor costs is through increased productivity. Higher wages tend to reduce turnover, which reduces the costs incurred in recruiting, selecting, hiring and training new workers. Based on their research in Santa Fe, the authors suggest that 40% of the cost of higher wages can be recovered in higher productivity.

Businesses can also absorb higher labor costs by redistributing income within the firm. This can be done in a rather subtle fashion, simply by letting low-wage workers have a larger share of productivity gains, while holding higher incomes steadier. Perhaps that is only fair, considering that the country has been doing the opposite for some time: “The fact that the minimum wage has been falling in inflation-adjusted collars while productivity has been rising means that profit opportunities have soared while low-wage workers have gotten nothing from the country’s productivity bounty.” If paying a higher wage forces a business to accept slightly lower profits, the damage to its competitive position is limited by the fact that its competitors may be facing the same problem.

Two more drastic responses to increased costs are to lay off workers or relocate to another city or state. The businesses most likely to relocate are those with a customer base that is not tied to a specific location, and with a substantial increase in labor costs. But many of the businesses that rely on low-income labor also have strong ties to a particular place, such as many restaurants and hotels.

The authors’ summary of their New Orleans research is typical of their conclusions:

Our results suggest that the New Orleans firms should be able to absorb most, if not all, of the increased costs of the proposed minimum wage ordinance through some combination of price and productivity increases or redistribution within the firm. This result flows most basically from the main finding of our survey research–that minimum wage cost increases will amount to about 0.9 percent of operating budgets for average firms in New Orleans and no more than 2.2 percent of operating budgets for the city’s restaurant industry, which is the industry with the highest cost increase.  This also suggests that the incentive for covered firms to lay off low-wage employees or relocate outside the New Orleans city limits should be correspondingly weak.

 Retrospective studies

In a few cases, the researchers were able to evaluate the effects of wage increases that had already been in effect for some time. Mark Brenner and Stephanie Luce studied the effects of wage ordinances in Boston, Hartford and New Haven covering businesses with city contracts. Critics had predicted that fewer companies would bid on city contracts, and the reduction in competition would result in higher costs for the city. In fact, there wasn’t much difference: The number of bidders went down in New Haven, but went up in Hartford and stayed the same in Boston. Businesses did not lay off workers, but adjusted to the higher wages mainly by accepting lower profit margins.

Brenner, Wicks-Lim and Pollin did a study comparing states with and without minimum-wage laws higher than the federal minimum. They found no adverse effects of higher minimum wages on employment.

Wicks-Lim and Pollin studied the effects of Santa Fe’s citywide minimum wage on job opportunities for low-wage workers. Aaron Yelowitz had reported that unemployment rose once other factors were statistically controlled. Wicks-Lim and Pollin found that employment actually held steady, but that the rate of unemployment was higher than expected only because more people came into the labor market looking for work. They came “precisely because there were more jobs and better jobs in Santa Fe than elsewhere.” Pollin also reminds us that the United States used to have a higher minimum wage (in inflation-adjusted dollars) in the 1960s than it has today, with no apparent damage to employment or productivity.

In general, this book supports the conclusion that raising wages for low-income workers brings at least modest benefits to workers, while imposing modest costs on employers and consumers. For workers, the benefits are partly offset by higher taxes and reduced benefits for the poor. For employers, the costs are partly offset by price increases, higher productivity, and redistribution of compensation among different levels of workers. Living-wage initiatives are one effective way of addressing extreme income inequality and poverty. They are not a cure-all, however, and other measures like progressive taxation and direct public assistance remain important as well.

Fifty Years of the War on Poverty

December 30, 2013

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Liana Fox, Irv Garfinkel, Neeraj Kaushal, Jane Waldfogel, and Chrisopher Wimer, “Waging War on Poverty: Historical Trends in Poverty Using the Supplemental Poverty Measure.” Paper presented at the Association for Public Policy and Management Conference, Washington, DC, Nov. 8, 2013.

Fifty years ago next week, President Lyndon Johnson declared the “war on poverty.” Obviously, poverty remains undefeated even in a country as wealthy as the United States, let alone around the world. Have we made any progress at all, and if so, have the government programs intended to combat poverty contributed very much to that progress?

Measuring poverty

Recently, the Census Bureau developed a more refined measure of poverty, following a number of recommendations from the National Academy of Sciences. This Supplemental Poverty Measure (SPM) takes better account of the different kinds of households, the variety of spending needs, and the range of government benefits households may be receiving. For example, it includes child care expenses in the assessment of needs, and includes food stamps as a form of income. The authors of this paper use the SPM not only to estimate the current rate of poverty, but also to estimate what the rate would have been if the same measure had been used ever since poverty rates were first published in 1967.

Revising the poverty measure does not change the recent overall poverty rate very much. In 2012 it was 15.1% with the old measure and 16.0% with the SPM. Changing the measure does make poverty rates more similar across age groups, lowering the rate for children from 22.3% to 18.0%, but raising the rate for seniors from 9.1% to 14.8%.

How much progress?

Applying the new measure as consistently as they can, the authors estimate the general poverty rate in 1967 as 19.2%. That means that the rate has declined by about three percentage points since then. The historical decline in poverty has been greatest for seniors, much smaller for children, and nonexistent for the working-age population.

There may be an additional historical change that is not detected by the official poverty measures, old or new. The official poverty thresholds take into account current spending patterns in the population. Consumer units are considered poor if their spending falls below the 30th percentile within the distribution of consumer spending on food, clothing, shelter and utilities. As living standards rise, so do the percentiles, so people need more money to rise above the poverty threshold. The authors estimate that today’s poverty rate would be an additional five points lower if the poverty thresholds had been adjusted only for inflation and not for rising living standards. By constant 1967 standards, poverty has been cut by eight points, from 19% to 11%.

Effects of government programs

Many of today’s households rely on some form of government “transfer” for at least a portion of their income. “These transfers include: food and nutrition programs (SNAP/Food Stamps, School Lunch, WIC); other means tested transfers (SSI, cash welfare…, Housing Subsidies, EITC, LIHEAP); and social insurance programs (Social Security, Unemployment Insurance, Worker’s Compensation, Veteran’s Payments, and government pensions).” Since these programs have expanded greatly since the 1960s, they have no doubt had some effect in lifting households out of poverty.

To estimate how large an effect, the authors recalculate the annual poverty rates with all government transfers excluded from income. They conclude that without these transfers, the official rate (using the SPM) would have gone from 24.8% in 1967 to 30.7% in 2011. Instead of dropping by three points, poverty would have increased by six points. At about 16%, today’s rate of poverty is only about half of what it might be without government transfers.

We do have to say “might be,” however, because we are discussing a counterfactual. We don’t really know what a world with a smaller government would be like. Defenders of government transfers can argue that they accomplished what the labor market couldn’t–lifting people out of poverty during an era when jobs with good wages became scarcer. Critics of government transfers can argue that the labor market could have lifted more people out of poverty, except that the government transfers had a different, more subtle and sinister effect–a disincentive for people to work. Theoretically, the apparent connection between rising transfers and falling poverty could hide a very different dynamic: A growing economy has been reducing poverty, and would have reduced it even more if government transfers hadn’t discouraged people from taking full advantage of job opportunities. According to this view, whatever success the antipoverty programs appear to have had is largely an illusion.

The authors acknowledge that this issue lies beyond the scope of the paper. “Because we do not model potential behavioral responses to the programs, these estimates cannot tell us what actual poverty rates would be in the absence of the programs.”

My own view is that the evidence is stronger for the anti-poverty effect of government transfers than for the work disincentive effect. For one thing, the government has strengthened work incentives by phasing out the old welfare program that provided cash assistance to non-employed single mothers, and replacing it with a system of temporary assistance, work requirements, and tax credits based on earned income. In addition, we know of many macroeconomic reasons for low incomes–increasing wage disparities between rich and poor, failure of the minimum wage to keep pace with inflation, proliferation of part-time jobs, and loss of good jobs due to new technologies and global competition. The spike in unemployment associated with the Great Recession has more to do with financial speculation and unsustainable debt than with any sudden desire to live on unemployment compensation and food stamps. Of course, some people are less ambitious and industrious than others, but it hardly follows that government assistance creates more poverty than it alleviates.

During economic recessions, government transfers provide a safety net, keeping poverty from rising as much as unemployment does. The authors of this paper observe that “government transfers seem to mute the effects of the business cycle, especially for deep poverty.” Both supporters and critics of government assistance programs might hope that a stronger economy would reduce the need for them. That leads to a different political-economic debate, over the role of government in maintaining full employment, as discussed recently by Dean Baker and Jared Bernstein.


What can we say after fifty years of the war on poverty?

  1. Poverty in the United States remains widespread, with about one-sixth of the population below the official poverty threshold.
  2. Poverty has declined since the 1960s through a combination of rising living standards and government transfer programs.
  3. On the face of it, government transfers appear to lift many people out of poverty who would be there because of macroeconomic conditions beyond their control. This anti-poverty effect could be somewhat offset by a work disincentive effect that leads some people to choose government income over employment opportunities.