Myth: Welfare increases poverty.



Fact: The more welfare, the less poverty -- both historically and internationally.







Summary



The historical evidence is clear: welfare reduces poverty, and the lack of it increases it. In the 1920s, fully half of all Americans could not make ends meet. Roosevelt's New Deal programs had reduced poverty to about 20 percent in the 50s. Johnson's Great Society reduced this to 11.1 percent by 1973. Since the rise of the corporate special interest system in 1975, individual welfare benefits have been shrinking, and poverty has been steadily rising, to over 15 percent today.







Argument



Many conservatives believe that welfare does not accomplish what it sets out to do; that, despite decades of massive anti-poverty spending, poverty is still with us, and perhaps even worse than before. In fact, some conservatives make even more ambitious claims: poverty was not a problem in America until President Johnson declared war on it. Some hearken back to a golden age that never was, claiming that charity was sufficient to solve what little poverty there was.



Neither history nor the statistics bear out these myths. Poverty was greater in the U.S. before Roosevelt established the New Deal. Since then, welfare has been an important tool in alleviating poverty, not just in America but abroad as well.



Before 1964, official statistics on poverty did not exist, and it was not the focus of government attention. However, mainstream scholars disagree little over the broad generalizations of decades prior. By one estimate, 56 percent of all American families lived in poverty in the year 1900. (1) The so-called "Roaring 20s" were a period of economic polarization, with less than 1 percent of the population earning a "rich" salary of $100,000 a year, about 15 percent earning a "middle class" income, and about half of all Americans struggling to make ends meet. (2) While investors and stock brokers were enjoying boom times on Wall Street, entire sectors of the economy were depressed: agriculture, coal, railroads, shipyards, textiles and shoes were all in decline. In fact, between 1923 and 1929, the lower 93 percent of the nonfarm population experienced a 4 percent decline in real disposable per capita income. (3) For farmers, it was even worse. During this era, "laissez-faire" philosophies dominated government policy, and welfare programs were virtually nonexistent.



The Great Depression brought much deeper poverty, of course, but almost all the damage was done on Hoover's watch. Under Hoover, the economy shrank an average of -8.4 percent a year; under Roosevelt, it grew an average of 6.4 percent a year until 1940, the year it finally returned to its 1929 level. During this recovery, Roosevelt launched the New Deal, essentially creating the modern American welfare state. Dozens of programs were instituted that redistributed wealth from the rich to the poor. Perhaps the greatest of these was Social Security, which Congress passed in 1935. Prior to Social Security, it was common to see old people starving in the streets after they retired. Social Security largely eliminated this shameful sight. Furthermore, the Social Security Act created Aid to Families with Dependent Children (AFDC), the program popularly known today as "welfare."



The U.S. emerged from World War II with a supercharged economy. If ever the middle class experienced a Golden Age, this was it; prosperity had never been spread across so much of the population. The poverty rate for the 50s is estimated to have been about 20 percent, still high by today's standards, but a major improvement over the 1920s. Still, with a booming economy, it was easy to forget the bottom 20 percent. Michael Harrington had to write a bestseller entitled The Other America to remind the middle class that not all Americans were enjoying the good times. This book caught the attention of President Kennedy, who was already alarmed by the poverty he had witnessed firsthand on the campaign trail in West Virginia. Consequently, he instructed his Council of Economic Advisors to study the problem and recommend policies.



After Kennedy's assassination, President Johnson greatly accelerated the Council's work. In his first State of the Union address, Johnson declared war on poverty, and launched his "Great Society" program. Between 1964 and 1975, total real outlays for means-tested assistance (medical, housing, food and cash) rose nearly 400 percent. Between 1960 and 1973, real spending on federal, state and local AFDC soared over 400 percent. (4)



In the mid-70s, however, a sea-change in federal government occurred. The 1975 SUN-PAC decision legalized corporate political action committees, and corporate activism in Washington soared. Corporate lobbyists wasted no time scaling back the New Deal and the Great Society. Total real spending on cash assistance -- including the Earned Income Tax Credit -- peaked in 1976, but fell 14 percent over the next eight years. (5) It would eventually surpass its 1976 level, but by then the population had grown, and individual benefits had been sharply reduced. By 1991, the typical AFDC family had seen the purchasing power of their benefits fall 42 percent from their 1970 level, primarily as a result of state and federal cuts. (6)



There was one type of welfare that did not suffer under the corporate special interest system, however -- and that was public health care. Medicare, Medicaid and other health care programs represented windfall profits for hospitals, doctors and health care providers, and their lobbyists made sure that these welfare programs were well-funded. Since 1975, this has been the only type of welfare that has enjoyed dramatic growth. Between 1975 and 1992, Medicare and Medicaid outlays more than tripled in real dollars -- growth that no other welfare program even remotely approached.(7)



The following chart shows how this history of welfare affected the poverty rate. Keep in mind that welfare is not the only factor that affects poverty; the unemployment rate is also an important influence. Typically, unemployment spikes during a recession, and takes several years to gradually fall back to its pre-recession level. For example, the 1979 unemployment rate was 5.9 percent; the recessions of 1980-82 briefly sent it above 10 percent, and it wasn't until 1988 that the unemployment rate fell back to 5.5 percent. Generally, poverty trends follow these unemployment trends. This will become apparent in the following chart, but if you look at the general trends between recessions, you can see that poverty rates were lower in the 70s than in the 80s. This is largely due to deepening cuts in individual welfare benefits.

Poverty Rate (8) 1959 22.4% 1960 22.2 < recession year 1961 21.9 1962 21.0 1963 19.5 1964 19.0 < Johnson’s Great Society begins 1965 17.3 1966 14.7 1967 14.2 1968 12.8 1969 12.1 1970 12.6 < recession year 1971 12.5 1972 11.9 1973 11.1 1974 11.2 < recession year 1975 12.3 < recession year 1976 11.8 < individual benefits level off, decline 1977 11.6 1978 11.4 1979 11.7 1980 13.0 < recession year 1981 14.0 < Reagan-era cuts in individual benefits 1982 15.0 < recession year 1983 15.2 1984 14.4 1985 14.0 1986 13.6 1987 13.4 1988 13.0 1989 12.8 1990 13.5 < recession year 1991 14.2 < recession year 1992 14.8 1993 15.1

As you can see, after taking recessions into account, a history of welfare in America is also its history of poverty: the more, the less.



This correlation holds internationally as well. The following is a chart of how much welfare the following nations pay as a percentage of their GDP:

Social security and other transfers as a percentage of the GDP (1990) (9) Country % of GDP -------------------------- France 23.5 Sweden 21.2 West Germany 19.3 Italy 18.9 United Kingdom 13.7 Canada 12.8 United States 11.5 Japan 11.2

And here is the poverty level of several nations, taken from various years in the mid-80s:

Relative poverty rates for various age groups (mid-80s) (10) Country Child Adult Elderly Overall ---------------------------------------------------------- Sweden (1987) 1.6 6.6 0.7 4.3 West Germany (1984) 2.8 2.6 3.8 2.8 France (1984) 4.6 5.2 0.7 4.5 United Kingdom (1986) 7.4 5.3 1.0 5.2 Australia (1985) 9.0 6.1 4.0 6.7 Canada (1987) 9.3 7.0 2.2 7.0 United States (1986) 20.4 10.5 10.9 13.3

Poverty in the above chart is defined as 40 percent of that nation's median income. Conservatives object that the U.S. has the highest median income in the world, hence the "poor" by this definition live better than the poor in other countries. However, U.S. median income isn't that much higher than other rich nations -- about a fourth higher at most. As you can see, reducing the above American poverty figures by 25 percent still gives it the highest poverty levels in the First World.



The conservative response



In 1984, Charles Murray published a bestseller entitled Losing Ground. In it, he argued that the success of welfare in reducing poverty was really illusory. The official poverty statistics measured poverty only after welfare benefits had already been paid. Murray was much more interested in what he called "latent poverty," namely, the amount of poverty that would have existed without these transfers. It was his argument that the welfare state had increased latent poverty.



To support his argument, Murray noted that latent poverty decreased fastest in the 1950s and early 60s, when welfare outlays grew slowest. However, latent poverty leveled off and actually began rising again in the late 60s and 70s, when welfare outlays grew fastest. Murray argued that increased welfare outlays had caused latent poverty to grow, because the poor had been lured out of the workplace and into welfare dependency.



That was just an observation about latent poverty; another was possible about official poverty too. Despite increasing the amount of social spending in the 70s, official poverty remained stuck at about 11-12 percent. Murray therefore argued that poverty was intractable, and not worth wasting money on.



These arguments provided the Reagan administration with the intellectual cover needed to cut welfare spending in the 80s.



The problem with Murray's analysis is twofold: it seriously downplays the economic slowdown of 1973, and it completely ignores the dramatic success in poverty reduction caused by relatively minor welfare transfers. Let's review each one of these separately.



The economic slowdown



As most people know, the economic juggernaut that was the U.S. economy shifted into low gear in 1973, where it has remained to this day -- a fact that not even the Reagan years changed. Economists still don't know what caused this slowdown, and there is a Nobel prize waiting for the first economist who answers this and other questions about the mystery of economic growth. However, several observations are possible:



When an economy is experiencing rapid growth, poverty tends to fall. When growth slows down, poverty tends to rise. We have seen this not only in American history, but the history of other rich nations as well. And this happens regardless of the amount of social benefits being handed out. As the chart above shows, other rich nations pay out significantly more welfare benefits than the U.S. But these nations are also growing faster than the U.S.:

Annual percent growth in GDP per capita (11) 1960- 1979- Country 1979 1989 ---------------------------- Japan 6.5 3.4 Italy 4.1 2.2 France 3.7 1.7 Canada 3.5 2.0 West Germany 3.2 1.6 Sweden 2.8 1.8 United Kingdom 2.3 2.0 United States 2.2 1.7

This chart raises several questions: Isn't the U.S. supposed to be the richest nation in the world? And why is everyone's growth slowing down? And why does Japan and the U.S. finish first and last on this chart, when they both have the same low tax rates and welfare benefits?



The U.S. does indeed have the highest productivity in the world. But the growth of that productivity is slower than almost all other rich nations. The other nations are catching up.



Everyone's growth is slowing down because developed economies grow at a slower pace than developing economies, much like a baby grows faster than a teenager. The criterion for development here appears to be productive technology. Consider the following example: a seamstress, working only with needle and thread, can finish only one shirt an hour. But with a sewing machine, her productivity jumps to five an hour; with practice and experience, she can eventually reach seven an hour. But there is an upper limit to this productive growth; seven shirts may be the inherent maximum level of possible productivity. (At least until an even better invention comes along.) The same principle works also in the economy. The introduction of the automobile greatly improved our productivity, but it took decades for its full potential to be realized. Roads had to be built, people had to be trained, supporting industries created. All this contributed to a growing economy -- until its limits were reached.



World War II was an important benchmark for productive technology. The war saw thousands of inventions created in a few short years, and the U.S. put them all into use at once. We would expect the growth from these technologies to play themselves out more or less simultaneously as well, which is probably what happened in 1973.



World War II also saw all the major industrial countries of the world destroyed, with the exception of the United States. The U.S. has enjoyed a huge lead in development ever since, and therefore a higher level of productivity. But because Europe and Japan started out from nothing, they have been growing faster; conceivably, they will catch up to us eventually.



The above chart shows that states with higher welfare benefits generally have higher growth rates. But Japan is the oddball in this chart. It should be noted that Japan's economy is unusually structured, and difficult to compare to others'. Although Japan's tax collections and welfare benefits are as low as the United States, Japan's government is far more involved in organizing the economy than the U.S. Indeed, some aspects resemble a command economy. Be that as it may, Japanese growth ended in the 90s, with the onset of a relentless recession.



What does all this have to do with Murray's arguments on poverty? If rapid economic growth diminishes latent poverty, then we should expect to see diminishing latent poverty even in the presence of modest welfare programs. But if slow economic growth increases latent poverty, then welfare spending will be fighting against a head wind, and much greater efforts will be needed to achieve the desired effect. To conservatives who object that it is welfare that is responsible for slowing down growth, we should point out the example of Europe, which is growing faster than the U.S. despite higher welfare benefits. And this paradox is far better explained by the theory of technological development outlined above, not the level of welfare benefits. In other words, there are far more powerful factors affecting growth than welfare.



The inexpensive success of anti-poverty programs



Conservatives often speak of welfare as a terrible monster burgeoning out of control. But the actual expenses have been surprisingly modest, especially when compared to the welfare programs of other nations. In 1960, U.S. welfare programs comprised 4.4 percent of the GDP. By 1992, that had grown to 12.9 percent. (12) But even this overstates the amount spent on relieving poverty, because a third of this latter figure is Medicare, Medicaid and other health care, which represents windfall profits for hospitals, doctors and other health care providers. So a more correct set of figures for anti-poverty spending would be from 4.4 percent to roughly 8-9 percent.



But consider what these modest outlays have accomplished: the poverty rate was cut in half between 1959 and 1973, from 22 to 11 percent. Between 1959 and 1969, welfare was largely responsible for cutting black poverty from 55 to 32 percent (where it has remained to this day).



Conservatives object that this has been accompanied by enormous social costs: rising crime, teenage motherhood, child poverty, the disintegration of families, the deterioration of the black community, etc. But there are more compelling explanations for these trends than the modest increases in welfare. As for the rise of crime, Dr. Brandon Centerwall has produced one of the most famous studies, which found that the mere introduction of television into a region causes its crime rate to double as soon as the first television generation comes of age. (13) As for teenage motherhood, many would be surprised to learn it was actually a greater problem in the 50s, not the 80s. (14) Child poverty can be tied to single motherhood, but the reasons why these mothers are poor is because women are still paid less than men, and half of all fathers who are supposed to pay child support don't honor their commitments. (15) The divorce rate has doubled since the 60s, but this is a sociological trend, not an economic one. Polls show that more marriages are happier today than in the 50s, largely because men and women are no longer trapped in bad marriages by the stigma of divorce. (16) As for the deepening despair of large parts of the black community, much of this can be traced to "white flight" (and job flight) from the inner cities, as well as the redlining of neighborhood districts, which has left blacks fighting for survival in economically depressed ghettoes. The point is that conservatives face an insurmountable challenge if they wish to turn welfare into a "black box" that explains all of America's social problems.



But speaking strictly from an economic viewpoint, the costs of welfare have been relatively modest, compared to the effects achieved. Many middle class readers who feel themselves over-taxed may wonder how they can afford to give yet more to the war on poverty. There are two important answers to this. First of all, any society that maintains a large population in poverty is already suffering tangible economic costs. Second, the middle class should not be called upon to shoulder more of the tax burden; it is already paying more than its fair share. The top 1 percent has enjoyed exploding incomes and falling tax rates over the last few decades -- they should be the ones to contribute more.



To put this in perspective, in 1991, those making more than $200,000 a year approximately constituted the top 1 percent. This group reported $403 billion in Gross Adjusted Income, and paid $100 billion of that taxes -- an effective rate of 25 percent. Suppose that were raised to 70 percent, which would have brought in $282 billion in taxes. That’s an extra $182 billion, which could have given a pay raise of over $5,000 to each of the nation’s 35.7 million people in poverty. Essentially, this would have eliminated poverty in America. (Remember, most of the nation's poor are already working; the extra $5,000 would easily boost them out of the danger zone.) (17) And we could accomplish this without changing the taxes of 99 percent of Americans.



It doesn't take heroic efforts to reduce poverty dramatically. Taxing the top 1 percent at 1950s levels would largely accomplish this.



Return to Overview



Endnotes:



1. Stanley Lebergott, The American Economy: Income, Wealth and Want, (Princeton: Princeton University Press, 1976), p. 508. This statistic refers to the proportion of husband-wife families with low incomes, not including aid-in-kind.



2. The richest 1 percent: In 1928, there were 15,466 Americans who made an income of $100,000 or more, in a nation of 122 million people. Derived from Internal Revenue Service data cited in Donald Barlett and James Steele, America: Who Really Pays the Taxes (New York: Simon & Schuster, 1994) pp. 66-7. The 15-20 percent middle class and plight of the poor: see Kevin Phillips, Boiling Point, (New York: HarperPerennial, 1994), p. 89.



3. Charles F. Holt, "Who Benefited from the Prosperity of the Twenties?" Explorations in Economic History, 14, July 1977, pp. 277-89



4. Gary Burtless, "Public Spending on the Poor: Historical Trends and Economic Limits," p. 56 in Sheldon Danziger, Gary Sandefur and Daniel Weinberg (eds.), Confronting Poverty: Prescriptions for Change (New York: Harvard University Press, 1994).



5. Ibid., p. 58. Definition includes AFDC, SSI/Aid to aged and disabled, EITC and all other cash aid.



6. Paul Taylor, "When Safety Nets Leave the Needy in Free Fall," Washington Post National Weekly Edition, September 9-11, 1991.



7. Burtless, p. 57. Between 1975 and 1992, Medicaid outlays rose from $30.3 billion to $96.9 billion in 1990 dollars. Medicare rose from $35.5 to $120.4 billion.



8. Source: U.S. Bureau of the Census, Current Population Reports, P-60 series.



9. Howard Oxley and John Martin, "Controlling Government Spending and Deficits: Trends in the 1980s and Prospects for the 1990s," OECD Economic Studies 17 (Autumn, 1991), pp. 158-60. Social Security and other transfers include government outlays on public pensions, health insurance and other income maintenance.



10. Timothy Smeeding, "Why the U.S. Antipoverty System Doesn't Work Very Well," Challenge 35, (January-February 1992), pp. 30-35, reported in U.S. House of Representatives, Committee on Ways and Means, 1992 Green Book, p. 1289. Income includes all forms of cash income and near-cash income, such as food stamps, minus national income and payroll taxes. Income is adjusted for family size using the U.S. poverty line equivalence scale. Persons defined as poor have incomes below 40 percent of the national median income.



11. Burtless, p. 81, citing Oxley and Martin, and unpublished data from the U.S. Department of Labor and Bureau of Labor Statistics.



12. Burtless, p. 57. Welfare figures include cash assistance (AFDC, SSI/Aid to aged and disabled, EITC, all other cash aid), in-kind assistance (food stamps, other food and nutrition, housing and energy aid, Medicaid, other medical assistance), Social Insurance (Old-Age and Survivors, Disability Insurance, unemployment insurance, workers' compensation, black lung, Medicare), education and training (Head Start, targeted federal aid to K-12, higher education, Guaranteed Student Loans, Federal targeted training, and public service jobs, including labor market programs and education and training). In 1990 dollars, total spending on all these programs came to $703.5 billion, of which Medicaid comprised $96.9 billion, Medicare $120.4 billion, and other medical assistance $11.8 billion.



13. Brandon S. Centerwall, "Exposure to Television as a Risk Factor for Violence", American Journal of Epidemiology, (Vol. 129, 1989), pp. 643-652.



14. Between 1960 and 1992, the number of births per 1,000 teenagers (aged 15-19) declined from 89 to 61. Data from U.S. Department of Health and Human Services, Characteristics and Financial Condition of AFDC Recipients, Fiscal Year 1992 (Washington, D.C.: Government Printing Office, 1992); 1994 Green Book, p. 47.



15. In 1993, the median male income was $21,102, and the median female income was $11,046 (U.S. Bureau of the Census, Current Population Reports, P60-188). In 1991, only 51 percent of all single parents who were supposed to receive child support received full payment, 24 percent received only partial payment, and 26 percent received no payment at all (U.S. Bureau of the Census, P60-187).



16. Divorce rate in 1960: 2.2 per 1,000 population. 1990: 4.7 (U.S. National Center for Health Statistics, Vital Statistics of the United States, annual; Monthly Vital Statistics Report.) Family historian Stephanie Coontz writes: "Studies of marital satisfaction reveal that more couples reported their marriages to be happy in the late 70s than did so in 1957, while couples in their second marriages believe them to be much happier than their first ones." Stephanie Coontz, The Way We Never Were: American Families and the Nostalgia Trap (New York: HarperCollins, 1992), p. 16.



17. Income figures from Internal Revenue Service, Individual Income Tax Returns, 1991. Poverty figures from U.S. Bureau of the Census, Current Population Reports, P60-188. In 1991, the poverty rate for all unrelated individuals was $6,932. For a family of three, it was $10,860. But three times $5,000 (our hypothetical pay raise for each poor person) is $15,000, so families in poverty would escape it completely.