Chapter 33
Poverty and Welfare
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
• MEASURING POVERTY
• PROGRAMS FOR THE POOR
• INCENTIVES, DISINCENTIVES
MYTHS AND TRUTHS
• WELFARE REFORM
33-2
You Are Here
33-3
Welfare
• “Relief” programs to help the poor began
in the 1930s during the Great Depression.
• Many programs were created and others
greatly expanded in the 1960s and 1970s.
33-4
What is Poverty?
• Is it an absolute concept that is the same across the
world or
• Is it a relative concept that depends on the incomes
of others in the area?
• Can we say an American is poor if they have a living
standard that is higher than the average person in
the rest or the world?
• A poor person today has a higher living standard
than an average person had 100 years ago. Does
that mean that today’s poor person is not really
poor?
33-5
Measuring Poverty
• Poverty Line: that level of income sufficient to
provide a family with a minimally adequate
standard of living
– The poverty line was originally established in the
1960s.
– Surveys indicated that poor families of four spent an
average of one-third of their income on food.
– A survey established the cost of a minimally adequate
diet and that figure was multiplied by 3 to get the
poverty line.
– Similar surveys established the poverty line for other
family sizes.
– The figure is updated annually for inflation using the
CPI.
33-6
Poverty Lines
2007
• Family of
–
–
–
–
4 the poverty line is $21,230
3 the poverty line is $16,530
2 the poverty line is $13,540
1 the poverty line is $10,590
33-7
Measuring Poverty
(continued)
• Poverty Rate: the percentage of people in
households whose incomes were under the
poverty line. In 2007 it was 12.5%
• Poverty Gap: the amount of money that would
have to be transferred to households below
the poverty line to get them out of poverty. In
2007 it was $65 billion.
33-8
Who’s Poor
• Those under the poverty line are
disproportionately
– Women
• A poverty rate 2.7 points higher than that of men
– Children
• a poverty rate 9% higher than that of adults
– Minorities
• a poverty rate 2.5 times higher than that or whites
– High School Dropouts
• a poverty rate 2 times higher than people who
graduated high school and did not attend college.
33-9
Poverty Statistics
Darkened bars indicate recessions
33-10
Problems with our Measures of
Poverty
• Concerns that suggest the poverty rate
is understated
– Child care costs are a bigger issue with
today’s poor than those who were poor
when the original poverty line was
established.
33-11
Problems with our Measure of
Poverty (continued)
• Concerns that suggest the poverty rate is
overstated
– Americans under the poverty line consume more protein, have more
living space, are more likely to have air conditioning than the average
European.
– Updates are based on the CPI which has consistently overstated the
increase in the cost of living.
– The measure only counts income and not wealth. There are nearly a
million “poor” who own homes worth more than $150,000.
– The measure only counts cash income and does not count the noncash amounts people get from programs such as food stamps and
Medicaid.
– The method of calculation misses a large proportion of income that
we know exists.
33-12
The CPI point
33-13
Problems with our Measure of
Poverty (continued)
• Concerns that suggest the poverty rate is
overstated for some and understated for others
– The measure treats as equal the incomes of residents
of high cost cities and low costs towns. This overstates
rural poverty and understates urban poverty.
– The measure uses the overall CPI, which includes
goods the poor cannot afford. In some years, the prices
of goods bought by the poor rise more than the CPI
and in other years it rises less.
33-14
Poverty in the
United States vs Europe
• Timothy Smeeding used a variety of measures
of poverty to compare poverty in the United
States and Europe.
• Adjusting for currency values and prices he
noted that poverty rates are higher in the
U.S. than Europe.
33-15
In Cash Programs for the Poor
• Temporary Aid to Needy Families
– A program that gives money to states for them to
work with the poor. If there is a “welfare check,” this is
the program that grants it.
• Supplemental Security Income
– A program that gives money to widows, orphans and
the disabled.
• Earned Income Tax Credit
– A program that gives to recipients money in the form
of a tax refund that is much greater than the taxes they
had withheld.
33-16
In Kind Programs for the Poor
• In-Kind transfers : provisions of goods and services
in forms other than cash
– Women, Infants and Children (WIC): vouchers allow
people to get basic food products for pregnant women,
new mothers and their children.
– Food Stamps: vouchers that enhance the recipients ability
to buy food
– Medicaid: free health insurance
– Section 8 or Housing Authority housing: subsidized
housing.
– Head Start: subsidized day care and preschool
– School Lunch: free breakfasts and lunches at school
33-17
Relative Costs of
Cash and In-Kind Programs
• Total Costs of the programs $522 billion
– Cash programs $100 billion
– In-Kind programs $422 billion
33-18
Why Spend $522 Billion on a
$65 Billion Problem
• Cash transfers would cost the government less to
administer.
• Much of the benefit of the Medicaid goes to
children in households just above the poverty line.
• Giving cash does not serve the goals of those
helping the poor because Americans generally
– believe the poor would waste the money.
– believe the poor would not spend the money on their
children.
– feel better giving people what they need rather that what
they like.
33-19
Is $522 Billion Even A Lot?
• Compared to European spending on poverty
programs, $522 Billion is not that much.
• The US system of taxes and programs
reduces poverty by only 26% whereas
European programs reduce poverty by 60%
33-20
Myths, Incentives and Disincentives
• Fact: Having a child can make someone who is
ineligible for a welfare program eligible for
that program.
• Fact: Having an additional child increases the
amount of aid recipients are eligible for.
• Myth: People have (more) children to get
(more) welfare.
– Though economists recognize an incentive to
have, or to have more children, they have generally
found little evidence to support that conclusion.
33-21
Welfare Cheat or Saint?
• An oft-told story
– You are standing in line behind someone buying steak,
shrimp, etc. with a food stamp card.
– They get into a new car.
• Could be evidence of welfare fraud
• Or
• The actions of a foster parent (legally entitled to
food stamps and other welfare benefits for the
welfare-eligible child in their care.)
33-22
Welfare Reform
• An optimal a welfare program would
– be sufficiently funded to solve the problem of poverty
– provide an incentive to leave the program
– be politically sustainable by not putting an excessive
burden on taxpayers.
• The three can not be simultaneously met in
the U.S. and the second has typically been
the aspect sacrificed.
– Prior to 1996 reform a person who worked part-time
would have most of the benefit of working taken away
because their benefits would be reduced.
– After 1996 reform a person must show they are working
or seeking work. Those who work part-time generally get
to keep many of their welfare benefits. They must leave
many programs within 2 years.
33-23
Evidence on 1996 Welfare Reform
• 1996 Welfare reform included
– Work requirements and incentives
• Work activity by the welfare eligible has
increased substantially since 1996.
33-24