August 11, 2013
Education and the Growth of Poverty in United States
Education and the Growth of Poverty in United States-Becker
Inequality in the US has grown substantially since 1980. As a result, "poverty", often defined as the fraction of families with incomes less than half the average income, has increased greatly. Similarly, "near poverty", defined say as families with incomes between a half and three quarters of average income, has also grown by a lot. It is no surprise that greater income and wealth inequality has a big effect on the degree of poverty since it is a property of all distributions that more variability especially raises the fraction of observations at the tails of the distribution. In the income and wealth case, this means particularly rapid increases in the fractions of the poor and very wealthy as inequality increases.
The main causes of the growth in US earnings inequality are in order of importance: the large increase in returns to education and other skills, the rapid growth in households headed by unmarried mothers, the financial crisis and the resulting large expansion of unemployment, especially of lower income workers, and the big growth in some income maintenance programs that have induced some workers to leave the labor force.
Previous discussions on our blog and elsewhere have documented the rapid growth during past 40 years in the returns to college education, and to a lesser extent to high school graduation. The large expansion in the fraction of children living in households headed by a single parent increased to about 28% due to the boom in divorce rates and in the tendency of women to have children without being married. The recession that accompanied the financial crisis raised unemployment rates of high school dropouts from 7% in 2007 to more than 13% at its peak. This is still at a highly elevated rate. Finally, the recession lowered eligibility requirements for food stamps, Medicaid, mortgage reduction, and other welfare programs. This led to a decline in labor force participation among lower income workers in order to increase their prospects of qualifying for these benefits (see the evidence and discussion in Casey Mulligan's "The Redistribution Recession").
Many separate approaches are available to attack each of these causes of greater poverty rates, but improved education would significantly reduce the incidence of each one. The crucial education improvement would be in much lower dropout rates from high school and from four-year college programs. Lower dropout rates starting soon would take years to affect a large fraction of labor force, but the benefits would be enormous. First of all, the fraction of persons with very low incomes would decline greatly since high school dropouts and some high school graduates make up the bulk of the low-income population, although a boost in the fraction of the labor force who graduated high school and finished college would also lower the returns to education.
Educated persons have more stable marriages and are less likely to have children out of wedlock or out of stable non-married relations. This means that reducing high school and college dropouts would also reduce the incidence of the family structures that lead to low household incomes. Greater education may not reduce the incidence of serious recessions, but it would reduce the vulnerability of the labor force to these recessions. Finally, a more educated population would be less tempted to leave the labor force to take advantage of food stamps and other welfare programs because they would then have to give up too much in the way of earnings.
There is no magic way to improve the education of younger persons, especially given the vicious cycle between less educated and low-income parents, broken households, and low education and other poor performance of children. However, as argued in more detail in earlier blogs (see for example Sept. 2012 on "Good and Bad Teachers"), more charter schools and a greater use of school vouchers, teacher evaluations based on objective measures of their performance, much better pay for good teachers (such as teachers whose students perform better), and weaker tenure for bad teachers would go a considerable way toward reducing school dropouts and improving the overall education performance of American students.
Poverty and Near-Poverty in the United States--Posner
Two recent articles—Hope Yen, "80 Percent of U.S. Adults Face Near Poverty, Unemployment: Survey," July 2, 2013, www.huffingtonpost.com/2013/07/28/poverty-unemployment-rates_n_3666594.html, and Ron Nixon, "House Plan on Food Stamps Would Cut 5 Million From Program," NY Times, July 31, 2013www.nytimes.com/2013/07/31/us/politics/house-plan-on-food-stamps-would-cut-5-million-from-program.html?_r=013----invite attention to the problem of poverty in the United States today.
Yen's article points out that while "only" 15 percent of American households have annual incomes below the poverty line (actually the figure is 16 percent)—$23,000 for a family of four—a much larger number can expect to be poor at some time during their lives; many fear sinking into poverty; and many people above the poverty level struggle to make ends meet.
I believe the poverty line is a useless statistic. For one thing it omits government benefits such as food stamps, social security retirement and disability benefits, Medicare, and Medicaid, along with private charity. For another, "poverty" is not well defined. And for another, the notion of a "line" that separates poverty from non-poverty is ridiculous. If $23,000 is the line for a family of four, does that mean that a family of four with an income of $23,500 is not poor?
A very small percentage of Americans is actually destitute; but a very large percentage do not have a sufficient income to be comfortable. In fact I am guessing that half the population is in that fix. The median household income in the United States is only $50,000. That is, half the households have less. These households have very little in the way of savings, often cannot afford to live in school districts that have good schools, and cannot afford health insurance (for which Medicaid is a poor substitute). Because of their meager savings, they are highly subject to economic vicissitudes, and are often dependent on usurious loans and often on—or over—the brink of bankruptcy. Partly as a consequence and partly as a cause of low income, they often are in poor health. They cannot pay for their children's college tuition; the children must go deeply into debt to attend college.
The number of Americans in households with income below the median must be close to 150 million (the exact number would depend on the average number of persons per household having less than the median household income). Obviously the significance of the number depends on the median income. But that income is modest, an important fact that has to be assessed. One question that needs to be examined is the cause; another is the effect; and a third is what if anything could be done to raise the median income significantly.
I accept that the main cause of economic inequality in the United States, and thus of poverty and near poverty, is that the United States uses a more or less free market to allocate resources, and hence household income is mainly the result of the demand for and supply of labor. In recent decades, rapid advances in technology have increased the demand for highly educated, high IQ persons and (along with increased imports of manufactured goods from low-wage countries) reduced the demand for persons who do manual labor, notably in factories, or more generally for persons whose jobs can be done more cheaply by machines. At the top of the income distribution, the growth of global markets, notably in finance, has enabled successful entrepreneurs and investors to obtain unprecedently large profits. Low tax rates have been a factor as well.
There is nothing, or very little, that is sinister or pernicious in the growth of inequality of income and wealth under pressure of market forces. But the consequences are not altogether desirable. They include reduced upward mobility (upward mobility has declined in the United States and is now below that in most European and English-speaking countries; see Vasia Panousi et al., "Rising Inequality," Brookings, March 13, 2013, www.brookings.edu/~/media/Projects/BPEA/Spring%202013/2013a_panousi.pdf; Scott Winship, "Mobility Impaired," National Review Online, Nov. 14, 2011, http://www.nationalreview.com/articles/282292/mobility-impaired-scott-winship), as the wealthy use their wealth to assure the prosperity of their children and grandchildren, in part by buying the best education for them; greater distance between the income classes, so that the wealthy have diminished contact with lower-income people (some of Mitt Romney's comments during the 2008 Presidential election campaign suggested little familiarity with the lives and problems of lower-income people); and increased dependence of politicians on campaign donations by wealthy companies and individuals.
Americans seem singularly lacking in envy, and to be uniquely imbued with a culture of self-reliance, and as a result the growing inequality of income does not portend political instability. But it seems wasteful. Those 150 million or so members of households that have incomes below the median include a very large actual and potential labor force that is not being utilized very productively. People who are poorly educated, unhealthy, brought up in broken families, exploited by unscrupulous sellers of goods and services, preoccupied with making ends meet, unable to afford labor-saving devices, in and out of bankruptcy, and constantly worrying about the household budget are unlikely to be productive workers; and the entire society suffers. They are also unlikely to be competent participants in the political process, as voters, because they lack both the leisure and the education to become even minimally informed about public matters.
But what is to be done? Some conservatives believe that the social safety net—the food stamps, Medicaid, etc.—should be removed (see, for example, Ron Nixon's article that I cited at the beginning of this post) in order to increase the incentives of the poor to work hard and improve themselves, and that the near poor, ineligible for the safety net, should simply be left to struggle. Neither seems a realistic suggestion for improving the productivity and political sophistication of either group.
More promising I think would be a large investment in early childhood education and nutrition, a shift in medical resources from the diseases of old people to the medical needs of children and pregnant women, a substantial expansion in Medicaid, and a modest expansion in public work projects involving services. A restructuring of the federal tax code and a modest increase in income tax rates in the higher brackets could finance such programs.