EconoMonitor

Ed Dolan's Econ Blog

Understanding the New View of Poverty (2): What Helps and What Hurts

Last week, the Census Bureau published a new Supplemental Poverty Measure (SPM) that changes our understanding of poverty in America. The first installment of this post looked at the way it erodes our stereotypes of who is poor, especially by showing that there are more poor white, working-age, home-owning Americans than we thought. No matter what population group or political party you belong too, it is now harder to dismiss income insecurity as something that threatens only people who are not like you. This installment turns to the issue of which government policies help reduce poverty and which policies may be making the problem worse.

The most important contribution of the SPM is to show that key federal antipoverty programs that official data omit play a big role in the lives of people living at or near the poverty level. The largest of those programs is the Earned Income Tax Credit (EITC). Because it is part of the tax code rather than a transfer program, it does not figure in the official poverty measure despite the fact that it is a source of supplemental cash income for families whose credits exceed taxes owed. According to the SMP, without EITC, the child poverty rate would be 4.2 percentage points higher. Although EITC is skewed toward families with children, it also has a substantial impact, 1.5 percentage points, on the poverty rate of working-age Americans. It has only a small impact on poverty among the elderly. (The following table summarizes these and other data.)

The second biggest difference between the SMP and the official poverty measure concerns the treatment of the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps). Even though the debit cards now provided to SNAP beneficiaries in place of the old paper stamps are, in practice, a close substitute for cash, SNAP is considered an in-kind benefit, and as such is omitted from the official data. SNAP is estimated to decrease the child poverty rate by 3 percentage points, the working-age poverty rate by 1.3 percentage points, and the elderly poverty rate by 0.9 percentage points.

Other in-kind programs included in the SPM but not the official poverty measure include supplementary nutrition assistance to women, infants, and children (WIN), school lunches, housing subsidies, and low-income energy assistance. They make smaller contributions to reducing poverty rates.

Although the new data show that government programs provide a significant part of the resources that poor families use to meet their basic needs, we should keep two reservations in mind when interpreting them. First, the numbers reported are static estimates that assume that a family’s resources would remain otherwise the same if any given program were to disappear. However, to the extent that antipoverty programs include features that discourage work effort, static estimates tend to overstate their impact. Second, the impacts of individual programs as reported in the SPM are not necessarily additive.  For example, if EITC alone reduces child poverty by 4.2 percentage points and SNAP by 3 percentage points, it is not necessarily true that the two programs combined reduce poverty by 7.2 percentage points, when we take their interactions into account.

On the whole, reforms of poverty programs over the past two decades have tried to reduce perverse incentive effects both of individual programs and of the ways that they interact. The EITC, which is a lineal descendent of Milton Friedman’s famous negative income tax, is a case in point. For a typical family, the EITC creates a positive work incentive from zero income up to about half of the poverty threshold, a range in which tax credits rise by 45 cents per dollar of earned income. From that point, the credits remain constant up to about three-quarters of the poverty threshold, after which they phase out at a rate of 21 cents per dollar of earned income. On average for all poor families, the EITC, taken by itself, very likely provides a net positive work incentive.

SNAP also has relatively low benefit reduction rates per dollar of added earned income. Those rates, which vary from state to state, are less than 10 percent for many families. Still, it must be kept in mind that benefit reduction rates are additive. If a family faces an EITC benefit reduction rate of 21 percent and a rate for SNAP of even 10 percent, it is losing 31 percent of each added dollar earned just to those two programs. When school lunches, heating assistance, and housing subsidies are taken into account as well, combined benefit reduction rates of the programs are high enough that they significantly undermine confidence in static estimates.

The problem becomes even more complex when the effects of Temporary Assistance to Needy Families (TANF, formerly AFDC) are included. TANF is an important source of cash income to poor families that is not singled out for study by the SMP because its effects are already included in the official poverty measure. A recent USDA study found that the combined effects of TANF and SNAP alone produce benefit reduction rates averaging 70 percent across states. If other programs were included, the benefit reduction rate would be even higher. High benefit reduction rates are a major reason why TANF relies on a range of administrative mechanisms to provide work incentives, such as time limits on benefits and requirements that recipients must work or actively seek work.

All of the programs discussed above provide resources that poor families can use to meet their basic needs. In addition, the SMP takes into account several factors that raise poverty rates by reducing net family resources.

Federal taxes before EITC credits are one such factor. For people of working age, federal income taxes before credits raise the poverty rate by half a percentage point and payroll taxes (FICA) by another 1.4 percentage points. Those taxes significantly blunt the beneficial impact of the EITC, especially for working adults who are just below the poverty threshold and for families with one or no children.

Work expenses, including work-related childcare, are also treated as a reduction in family resources. The SPM indicates that such expenses increase poverty among the working age population by 1.6 percentage points and child poverty by 2.2 percentage points.

Finally, the SMP shows that poverty rates are significantly higher when medical out-of-pocket expenses are subtracted from gross family resources. For child poverty, the increase is 3 percentage points, for people of working age, it is 2.7 percentage points, and for the elderly, it is a whopping 7 percentage points.

While it seems reasonable to deduct taxes and work expenses from gross income to get a measure of a family’s net resources, the logic of doing the same for medical costs is less obvious. They could instead be considered a necessary expense, along with food, clothing, shelter, and utilities. Doing so would raise both the poverty threshold and the measure of family resources by equal amounts and leave poverty rates unchanged. Under either approach, the conclusion would stand that rising medical out-of-pocket expenses make more people poor.

The treatment of work-related childcare and medical expenses in the SMP suggests that stronger government programs to provide those services to poor people would be an effective way to reduce poverty. However, the programs would have to be designed in a way that avoided further increases to already-high benefit reduction rates. For example, universal government-financed healthcare for the whole population would have no effect on work incentives for the poor, whereas expansion of an income-tested program like Medicaid could end up increasing benefit reduction rates and thereby discouraging work activity for families just above or below the poverty line.

The Census Bureau’s new Supplementary Measure of Poverty has, by and large, been received warmly by advocates of the poor. Writing in The New York Times, Charles M. Blow sees the SPM as demonstrating that government is the last friend left for millions of Americans down on their luck, and that antipoverty programs can play a very positive role in protecting the less-well-off. That is certainly true in the sense that the SPM shows that poor families draw heavily on government benefits to meet their basic needs.

At the same time, the SPM also reveals weaknesses in government programs. There are too many programs that are run by too many agencies and not well enough coordinated. The federal  tax system provides one of the most successful antipoverty programs in the form of the EITC and then largely negates its effect with high marginal income and payroll taxes on the working poor and near-poor. The nation’s out-of-control medical costs, which impose unnecessary economic burdens on Americans of all income levels, are especially damaging to the poor. Differences in programs from state to state reduce mobility and lock people into bad location decisions.

Economists like to capture these problems in tractable numbers like benefit reduction rates, but the numbers are only part of the story. Poverty policies also affect social behaviors like marriage, divorce, and pregnancy. The promise of aid, when frustrated by program complexity, encourages cynical gaming of the system in an attempt to capture benefits to which people feel entitled, but are not actually delivered.

The SPM is a step forward to the extent that it sheds new light on all of these issues—who is poor, what programs help, and what programs hurt. On the whole, however, it is more a call to action than a cause for celebration.

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