Money alone can’t fight poverty

By Kate Marshall and Elliott Parker

Sunday, June 28, 2015 | 1:30 p.m.

Editor’s note: This is the second of a two-part column about poverty. The first ran in the Sun on June 21.

Fifty years ago, President Lyndon Johnson announced a War on Poverty, and it was a war most Americans hoped we might eventually win. Today, however, poverty remains an intractable and expensive social problem.

The Census Bureau reports the poverty rate back to 1959, but economists have estimated it back even further, and the drop from Franklin Roosevelt to Richard Nixon was remarkable: the poverty rate was 65 percent in 1935, 33 percent in 1948, 22 percent in 1959 and 11 percent in 1973. Many people thought the rate would fall to 0 percent by the 1980s.

For the past forty years, however, the poverty rate has varied between 11 percent in good times and 15 percent in bad times.

Of course, the official rate has flaws, including the fact that it does not account for the impact of government benefits. Recent studies show poverty rates would have risen significantly since 1967 without government programs.

Americans can be a generous people, if we know that our money is being well spent. The amount we spend to fight poverty is estimated to be significantly more than the poverty gap, or the amount it would cost to bring every poor American up to the poverty line with a cash payment.

Why does it cost so much? Why not just give the poor cash and be done with it?

If benefits only go to those with few assets and little income, you discourage people from building up assets to escape poverty, you encourage them to hide their income, and you add costly bureaucracy to try to prevent the wrong people from receiving benefits.

If you draw a line above which people no longer qualify, you discourage work. Earning more money may lift someone above the poverty line, but it also may push them over a cliff when all their benefits are taken away. Ironically, someone could be worse off as a result of trying to better themselves. Basic economic theory suggests that cash payments to bring everybody up to the poverty threshold would severely diminish the incentives of working and could easily double the cost of fighting poverty as many minimum-wage workers dropped out of the workforce.

To reduce this disincentive for work, some poverty programs slowly phase out benefits as a recipient’s income rises, even if they rise above the poverty line. Thus, he “near poor” still receive some benefits, although less than those with lower incomes. As a result, the poverty gap will significantly underestimate the cost of bringing people out of poverty.

Of course, we also may be uncomfortable with giving cash payments to the poor. Some tend to see all poverty as a moral failing — a result of choice, not circumstance — and assign the causes of poverty to poor judgment. That view measures morality by dollars earned, a patently absurd idea, and it falsely equates the working poor with others such as the mentally ill or drug-addicted.

Before the Great Recession, the census estimated that less than a quarter of those below the poverty line remained there for more than three years. For most, poverty lasted six months or less. Almost half of those who escaped poverty achieved incomes of 150 percent or more of the poverty line.

Poverty is also expensive because programs are scattered around different agencies with little coherence. Each has its own system of record-keeping, standards and administrators. Consolidating and streamlining this would make sense.

Negotiating this system can be a nightmare, particularly for people who already feel powerless and are uncomfortable with bureaucracy. Thus, many poor fall through the cracks, while others learn to take advantage of the system.

Can we break the poverty cycle, expand what works and drop what fails?

We need to create powerful incentives for the poor to work, but we also need better incentives for the poor to be hired. We need an economy that creates jobs for the poor and provides the opportunity for them to gain the skills they need to obtain employment.

We need to incentivize private employers to take a risk on those without a well-established record of productive work, but in a way that does not easily invite fraud. We also need to change the “cliff” incentive so that those who work are better, not worse, off.

For example, should unemployment benefits beyond the first few months require work on public projects? We know that Job Corps programs successfully improve earnings, and they also reduce incarceration rates. Could we create programs to hire young people in blighted neighborhoods to improve their communities? Could such programs include a financial skills component? Reno has the successful My Path program, an innovative savings program, which uses a teen’s first paychecks to learn healthy financial habits and gain financial capability skills.

We also need to recognize those things that tend to ensnare Nevadans into poverty, such as income volatility or a lack of access to financial tools.

We need to make it easier for the poor to get the education and skills they need to get jobs that pay a decent wage. Investing in education will take a long time to pay off, but it is a crucial part of a solution. While Gov. Brian Sandoval’s programs may not work as hoped, they do begin to recognize the need for this investment.

What have other states done that may work for Nevada? To help people out of poverty, South Carolina has tried to create more skilled middle-class jobs with a tax credit for companies that offer apprenticeships in the building trades as well as in nursing, pharmacy and information technology. By 2014, South Carolina had 670 companies enrolled that created 11,000 apprentices.

We should not let the difficulty of the problem dissuade us from the merits of trying new approaches. Conservatives and liberals may disagree on the means of fighting poverty, but they should always agree on the ends.

In the book of Matthew, Jesus said, “Truly I tell you, whatever you did for one of the least of these brothers and sisters of mine, you did for me.” There are few problems more challenging than fighting poverty, but we cannot give up.

Kate Marshall is a former state treasurer. Elliott Parker is a professor of economics at UNR.