Poverty in America

The United States produces more per capita than any other industrialized country, and in recent years governments at various levels have spent about $350 billion per year, or about 3.5 percent of gross domestic product, on programs serving low-income families.1 Despite this, measured poverty is more prevalent in the United States than in most of the rest of the industrialized world. In the mid-1990s, the U.S. poverty rate was twice as high as in Scandinavian countries, and one-third higher than in other European countries and Japan.2 Poverty is also as prevalent now as it was in 1973, when the incidence of poverty in America reached a postwar low of 11.1 percent. According to the Census Bureau, 37 million Americans were poor in 2005, just over 12.5 percent of the population.3

These official figures represent the number of people whose annual family income is less than an absolute “poverty line” developed by the federal government in the mid-1960s. The poverty line is roughly three times the annual cost of a nutritionally adequate diet. It varies by family size and is updated every year to reflect changes in the consumer price index. In 2005, the poverty line for a family of four was $19,971.4

Many researchers believe that the official method of measuring poverty is flawed. Some argue that poverty is a state of relative economic deprivation, that it depends not on whether income is lower than some arbitrary level but on whether it falls far below the incomes of others in the same society. But if we define poverty to mean relative economic deprivation, then no matter how wealthy everyone is, there will always be poverty. Others point out that the official measure errs by omission. For example, official poverty figures take no account of refundable tax credits or the value of noncash transfers such as food stamps and housing vouchers, which serve as income for certain purchases. Incorporating these factors into family income would have reduced the measured poverty rate by an estimated 1.9 percentage points (or by approximately 16 percent) in 2002.5

Official poverty figures also ignore work-related expenses that affect families’ disposable incomes. Child care is a case in point. Isabel Sawhill and Adam Thomas estimated that deducting this expense from family incomes would have increased the measured poverty rate by up to one percentage point (or 8 percent) in 1998.6 Also, smaller, more fragmented households are more common today than a few decades ago, suggesting that some poor households were formed for the privacy and autonomy of their members. To the extent that some people have willingly sacrificed their access to the economic resources of parents, spouses, or adult children, some of the increase in poverty may actually represent an improvement in well-being.

Another problem with the official measure arises from the dynamic nature of poverty. Most Americans who experience poverty do so only temporarily. In the four years from 1996 through 1999, only 2 percent of the population was poor for two years or more.7 During the same period, 34 percent of the population was poor for at least two months.8 In short, persistent poverty is relatively uncommon.

In recent years, income mobility has fallen slightly. According to one estimate, 40 percent of families occupied the same position in the income distribution at the beginning and end of the 1990s, compared with 36 percent in the 1970s.9

Another criticism of the poverty measures is that they are based on income rather than on consumption. Consumption spending may be a better measure of well-being than reported income is, although data from the consumer expenditure survey have their own limitations. Daniel Slesnick found, using consumption spending, that the poverty rate fell from 31 percent in 1949 to 13 percent in 1965 and to 2 percent at the end of the 1980s. One rough indicator of the decline in poverty is the range of items that most poor homes now contain—from color TVs to VCRs to washing machines to microwaves—compared with the relative lack of these items in poor homes in the early 1970s.10

Despite their flaws, the official figures are widely used to measure poverty. According to the Census Bureau, the poverty rate declined from 22.2 percent in 1960 to 12.6 percent in 2005. Most of this decline occurred in the 1960s. By 1970, the poverty rate had fallen to the current level of 12.6 percent. It then hovered between 11 and 13 percent in the 1970s, fluctuating primarily with the state of the economy.11 A longer-term perspective leaves a more positive impression. For example, according to one estimate by Christine Ross, Sheldon Danziger, and Eugene Smolensky, more than two-thirds of the population in 1939 was poor by today’s standards.12

The trend in poverty masks the divergent experiences of poverty among various demographic groups. The poverty rate among the elderly, for example, declined dramatically from 35.2 percent in 1959 to 10.1 percent in 2005 and is now lower than for any other age group. The poverty rate among children declined between 1959 and 1970, increased to 22.7 percent in 1993, and then fell steadily to 17.6 percent in 2005; it remains higher than poverty rates among other age groups. The poverty rate among black households has also declined over the last forty years, but at 24.9 percent in 2005 remains more than twice as high as the rate among white households.

The poverty rate for households headed by women declined from 49.4 percent in 1959 to 28.7 percent in 2005, but is still much higher than for other types of house-holds. This higher incidence of reported poverty, together with the rising share of households headed by women, has led to what researchers call the “feminization of poverty.” Between 1959 and 2005, the proportion of the poor in female-headed households rose from 17.8 percent to 31.1 percent.13 Some of these women (about 13 percent) live with unrelated men or have unreported income from casual jobs that enable them to cope, but there is little doubt that the growth of single-parent families has contributed importantly to the rise in poverty.

Researchers have suggested a number of plausible explanations for both positive and negative trends in poverty. These explanations include changes in the composition of households, economic growth, immigration, efforts to increase the education and skills of the poor, and the structure and generosity of the welfare system.

The rapid growth of households headed by women and unrelated individuals, who typically cannot earn as much as married-couple families, has left a larger share of the population in poverty. This demographic trend has increased poverty rates among children. The proportion of children living in female-headed households doubled between 1970 and 2003, rising from 11.6 percent in 1970 to 23.6 in 2003.14 Had that proportion remained constant since 1970, the child poverty rate would have been about 4.4 percentage points lower in 1998.15

The ebb and flow of the economy also influences the incidence of poverty. Researchers have found that recessions have a disproportionate impact on the poor because they cause rising unemployment, a reduction in work hours, and stagnant family incomes. The relationship between the changes in the unemployment rate and the poverty rate was stronger during the 1960s and 1990s than during the 1970s and 1980s.16 But economic downturns have been accompanied by rising poverty rates during each of the six recessions in the past thirty years.17

Increased immigration and the characteristics of immigrants also affect poverty. Immigration increases the poverty rate because newly arrived immigrants are, on average, poorer than native-born citizens. Of the foreign-born population in 1999, 16.8 percent were poor, compared with 11.2 percent of native-born citizens.18 After declining during the 1930s and 1940s, the foreign-born population surged from 4.7 percent of the American population in 1970 to 10.4 percent in 2000.19 Immigration may also indirectly influence the incidence of poverty, because a surge in immigrants with minimal training tends to depress incomes among native workers at the bottom. For example, George Borjas attributed half of the drop in the relative wage of high school dropouts between 1980 and 1995 to immigration.20

Training and compensatory education programs such as the Job Corps and Head Start, designed as part of the War on Poverty to increase the skills of the poor, may also have reduced poverty. Many of these programs have not been carefully evaluated, but some of those that have are modestly successful. For example, some early education programs have had a positive effect on poor children, helping them to complete school, avoid crime, and achieve higher test scores.21 Some employment and training programs have raised earnings for adult women, although these programs have been less helpful to adult men and young people.22

Finally, safety-net programs have contributed to the decline. These are typically divided into two categories: public assistance programs, such as Temporary Assistance for Needy Families, food stamps, and Medicaid, which were designed to help people who are already poor; and social insurance programs such as Social Security, unemployment insurance, and Medicare, which were designed to prevent poverty when events such as layoff or retirement threaten a household’s well-being. Expenditures on these programs totaled roughly $1,279 billion in 2002, up 160 percent in real terms since 1975.23 However, much of this spending was for noncash assistance (especially health care) that improves the well-being of the poor but has no effect on measured poverty.

The antipoverty effectiveness of these programs is typically measured by counting the number of people with pretransfer incomes below the poverty line whose incomes are raised above the poverty line by income transfers. According to government estimates, social insurance and public assistance programs moved nearly half of the pretransfer poor above the poverty line in 2002. This implies that these programs reduce the poverty rate by ten percentage points.24

By ignoring the incentive effects these programs have on recipients, however, the above analysis overstates the success of safety-net programs. Specifically, means-tested cash transfers such as Aid to Families with Dependent Children (AFDC), which decline as the welfare recipient earns more reported income, have long been understood to be antiwork and antifamily. This criticism of the program led to its reform in 1996. Under the revised law, called Temporary Assistance for Needy Families (TANF), welfare mothers are required to work and federal benefits are limited to five years. Aided by a strong economy and more generous assistance for the working poor in the form of an expanded Earned Income Tax Credit and other measures, welfare reform led to a sharp fall in caseloads in the late 1990s. Employment rates among single mothers rose and child poverty fell. In addition, after increasing for decades, the share of births to unmarried mothers has leveled off and teen birth rates have declined. (The reasons for these changes in fertility are not well understood and may or may not be related to welfare reform.) Although some families are worse off as a result of welfare reform, the majority of former welfare mothers have been able to earn enough to improve their economic situation. The longer-term effects of welfare reform, especially those that might be expected in a less robust economy, are more uncertain and are likely to depend, to some extent, on the provision of additional supports such as child care for low-income working families.

U.S. poverty, measured by income, ebbs and flows with the state of the economy and with demographic shifts, especially immigration and the growth of single-parent families. Policy measures—whether in the form of direct income support or education and skills training of the poor—have swum against these strong tides and have had a mixed record of success. Since the mid-1990s, policies that have both required and supported work as the best strategy for reducing poverty have had considerable success.