The Distribution of Income: The Economics of Poverty

The Economics of Poverty The most unpleasant social consequence of income inequality is poverty. In 1988 there were 31.9 million Americans—a number corresponding to 13.1 percent of the entire populationofficially listed as living in poverty! The human misery endured by poor families is a source of concern to all of us. However, in designing policies to improve circumstances for the poor, we need to make sure that we don't remove the incentives for work, training, and education. In discussing the social issues relating to poverty, we must look into both the causes and consequences of poverty. We must also come to grips with the inevitable trade-off between equity and efficiency involved in aiding the poor. Defining Poverty and Measuring Its Extent What is poverty? The standards for defining who is poor vary from one society to another and vary over time. The standard of living of even the poorest U.S. citizens is much higher than that of average citizens of some Asian and African nations. Also, the standard of living of the poorest people in the United States today is much higher than that of the poorest Americans living 100 years ago. Many poor Americans today enjoy electricity, central heating, television, radio, and a diversified diet, all of which would have been inconceivable to poor, and even nonpoor, Americans during the 1890s! The federal government classifies a person as poor if his or her income is lower than three times the annual cost of a diet that is considered minimally acceptable. Based on prices for food prevailing in 1988, the cost of this minimal diet for a family with two adults and two school-age children was $2.76 per person per day. If you multiply the cost of this diet by 3, you obtain the poverty income threshold that prevailed in 1988. The poverty income threshold, adjusted each year for inflation, is the income level below which a person or family is classified as being poor. For example, the poverty income threshold was $2.76 x 3, or about $8.23 per person per day for a typical family in 1988. The total daily income required by this family to avoid being considered poor was $33.13 per day. Based on 1988 prices, therefore, the family needed an annual income of $33.13 x 365, which equals $12,092. In 1988 a single person under age 65 was considered poor if his or her annual income was less than $6,155. In computing the number of people living in poverty only cash income is used, including government cash assistance to the poor. The cash value of special services available to the poor, such as food stamps, free medical assistance, and government-financed rent reductions, is not included. The table in Box 4 shows that there was a sharp drop in the number of people classified as poor from 1959 to 1988. In 1959 nearly 40 million Americans, amounting to 22.4 percent of the population, were classified as poor. In 1988 there were 31.9 million poor Americans, or 13.1 percent of the population. However, a disturbing increase in the number and percentage of the population classified as poor has occurred since 1980. In part this trend reflects cutbacks in government cash assistance programs since 1980. Although they indicate considerable progress in reducing poverty since 1959, the official statistics understate the actual progress. This is because, as observed earlier, the official statistics don't include noncash benefits that many poor people receive from the federal government. If an estimate of the cash value of food stamps, medical services, and subsidized housing were included in income, a Census Bureau study has indicated that the poverty rate in the United States would fall to as low as 10 percent of the population. Who Are the Poor? The incidence of poverty in the United States is higher among blacks and people of Spanish origin than among whites. In 1988, 10.1 percent of all white people were classified as poor. However, in that year 31.6 percent of all black people and 26.8 percent of all Hispanics were classified as poor. In the 1980s the incidence of poverty among these minority groups was nearly three times as high as among whites. The incidence of poverty for people living in families headed by a female with no husband present is also much higher than average. In 1987, 33.6 percent of the people living in such households were classified as poor. The incidence of poverty among children is also higher than the average for the entire population. In 1988 slightly over 20 percent of the children in the United States were classified as poor. The population group that has shown the greatest advances in reducing its rate of poverty in recent years is the elderly. In 1959 more than 35 percent of all people over age 65 were classified as poor. In 1988 only 12 percent of the people in this age group were poor. The great strides against poverty made by the elderly are mainly the result of improved pension benefits, particularly those enjoyed under Social Security. Finally, the incidence of poverty declines with increases in the head of household's years of schooling. In 1988 more than 25 percent of people with fewer than 8 years of schooling were classified as poor. However, only 8.9 percent of those with 12 years of schooling were poor, and only 3.5 percent of people with at least 1 year of college were poor. To sum up, on average in the United States, whites are less likely to be poor than blacks and Hispanics. Women with children but no husband are much more likely to be poor. Children are more likely to be poor, and the elderly are slightly less likely to be poor. A person with more education is less likely to be poor than is a person with less education.