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.

Continued

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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.

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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.

Conclusions

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.

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Our Politically Independent Poor

September 24, 2012

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The Democratic Party has traditionally tried to do more for poor people. So one might well assume that poor people strongly support the Democratic Party. This turns out not to be true, according to research by Gallup. Gallup finds that the percentage of poor people identifying themselves as Democrats is only 32%, only slightly above the 30% of non-poor with that identification. This is not because the poor are Republicans; it’s mainly because 50% of them don’t identify with any party. Either they describe themselves as Independents, or they just don’t have strong opinions one way or the other. Maybe they have more pressing concerns than following politics, or they don’t believe that election outcomes make much difference in their lives anyway. As for the non-poor, Gallup classifies 40% of them as Independents, with the remainder split fairly evenly between the two major parties. Note that they are using “independent” as a broad term to include all those without a particular party, not just those who haven’t made up their minds in this particular election.

This is further evidence that Obama supporters cannot be equated with people who are dependent on government, or with people whose incomes are too low to be subject to federal income taxes. These are three different groups that only partly overlap, and that together make up well over half the population. Governor Romney displayed a serious misunderstanding of the electorate when he said that he should concern himself with independents instead of people who don’t pay income taxes, since they will vote for Obama “no matter what.” A large portion of the poor are independents whose votes are normally up for grabs, and they shouldn’t be either written off by Republicans or taken for granted by Democrats.  Even the smaller number of voters who haven’t yet made up their minds in this election are probably spread across many income groups and tax categories. Gallup is finding that many of the poor are less likely to vote for Romney as a result of his dismissive remarks.

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