Poverty and Discrimination

Kevin Lang

• Publisher: Princeton University Press
• Year: 2011
• ISBN:
  9781400839193
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Many ideas about poverty and discrimination are nothing more than politically driven assertions unsupported by evidence. And even politically neutral studies that do try to assess evidence are often simply unreliable. In Poverty and Discrimination, economist Kevin Lang cuts through the vast literature on poverty and discrimination to determine what we actually know and how we know it.
Using rigorous statistical analysis and economic thinking to judge what the best research is and which theories match the evidence, this book clears the ground for students, social scientists, and policymakers who want to understand--and help reduce--poverty and discrimination. It evaluates how well antipoverty and antidiscrimination policies and programs have worked--and whether they have sometimes actually made the problems worse. And it provides new insights about the causes of, and possible solutions to, poverty and discrimination.
The book begins by asking, "Who is poor?" and by giving a brief history of poverty and poverty policy in the United States in the twentieth century, including the Welfare Reform Act of 1996. Among the topics covered are the changing definition of poverty, the relation between economic growth and poverty, and the effects of labor markets, education, family composition, and concentrated poverty. The book then evaluates the evidence on racial discrimination in areas such as education, employment, and criminal justice, as well as sex discrimination in the labor market, and assesses the effectiveness of antidiscrimination policies.
Throughout, the book is grounded in the conviction that we must have much better empirical knowledge of poverty and discrimination if we hope to reduce them.

CHAPTER 1

Introduction

The Writings of Thomas Malthus and David Ricardo earned economics the nickname the dismal science. In An Essay on the Principle of Population (1798), Malthus argued that population growth inevitably outstrips the growth of food production, so eventually population becomes too great for food supply. In The Principles of Political Economy and Taxation (1817), Ricardo expanded this argument to the “iron law of wages.” At wages above the subsistence level, population grows, driving down wages. At wages below the subsistence level, the poor face starvation, population declines, and wages rise. Poverty policies that transfer money to the poor must be ineffective in the long run because wages must always end up at the subsistence level.

Writing less than a century later, Alfred Marshall was much more optimistic. He believed it was possible to eliminate poverty, if not within a generation, at least within two generations.¹ Marshall thought poverty policy consisted of increasing the demand for labor and reducing the supply of unskilled labor. He argued that economic growth increased the demand for labor. Increased education would lower the supply of unskilled labor, both directly, by moving workers from the unskilled to the skilled labor force, and indirectly, by reducing population growth. To further reduce the size of the unskilled labor force, society should encourage later marriages and childbearing among the “lower strains.” Finally, government should address the environment in which the poor lived. Marshall commented on the benefits of the suburbs, “where excellent systems of drainage, water supply and lighting, together with good schools and opportunities for open air play, give conditions at least as conducive to vigour as are to be found in the country,” and continued, “There is no better use for public and private money than in providing public parks and playgrounds in large cities, in contracting with railways to increase the number of workmen’s trains run by them, and in helping those of the working classes who are willing to leave the large towns to do so, and to take their industries with them.”² Marshall saw little role for redistribution of income to the poor. Giving the poor money would reduce their industriousness. Only the victims of misfortune were good candidates for such charity.

In sharp contrast, Henry George, in Progress and Poverty (1879), maintained that because land was fixed in supply and necessary for production, only landowners would benefit from progress. According to George, the solution was to raise taxes on land (not on structures or other improvements) in proportion to their value. In this way, the benefits from the increased value of land could be shared with workers.

1. The Content of This Book

From the vantage point of another century of experience, it is clear that Marshall’s optimism was in part justified and in part exaggerated. Standards of living are much higher than they were in the late nineteenth century. On the other hand, poverty did not disappear in two generations. In large part, this is because our understanding of what it means to be poor has changed over time. Much of chapter 2 is devoted to exploring this issue.

But the issue is not only that we have redefined who is poor. Using a constant definition of poverty, over the past three decades there has been little change in the proportion of Americans who are poor, despite dramatic increases in average incomes. Thus the Marshall-George debate remains relevant. Has the relation between economic growth and poverty broken down? Did some other trend hide the positive effects of economic growth? Or is the problem the way we measure poverty? Chapters 3 and 4 address these issues.

Many of Marshall’s concerns remain relevant today. As chapter 4 shows, there is a strong relation between poverty and the state of the labor market for low-wage workers. Chapter 5 addresses the effectiveness of different policies designed to raise after-tax wages for low-wage workers. Some of these policies follow in the Marshallian tradition of increasing skills and demand for low-wage workers. Others have a somewhat more Georgist flavor (although certainly not based on taxing land), using the tax system to support low-wage workers or intervening directly in the wage-setting process.

We also see renewed focus on the family and on increasing the age of mothers at first childbirth. Chapter 6 addresses issues such as out-of-wedlock births and teenage childbearing. It looks at policies designed to help children. As discussed earlier, Marshall also believed that poverty was closely related to place. He advocated getting the poor out of crowded cities. Today, many analysts believe that concentrated poverty is a particular problem. Chapter 7 addresses the issues associated with such poverty and programs designed to alleviate it.

Since Marshall’s time, the availability of public schooling has increased dramatically. Not only public primary schooling but public secondary schooling is universally available in the United States. Yet the effectiveness of public education, particularly in high-poverty areas, is hotly debated in this country. Chapter 8 discusses the debate over education reform.

Finally, the concern that programs that support the poor will “sap their industriousness” has been a recurring theme over the centuries of poverty policy. The 1996 Personal Responsibility and Work Opportunity Reconciliation Act, more commonly known as welfare reform, was a response to concerns that welfare was hurting the very people it was designed to help, very much as Marshall believed that the Poor Laws passed in the late eighteenth century in England had hurt laborers by encouraging them to rely on support for the poor. It is still somewhat early to assess the impact of welfare reform, but chapter 9 discusses the background of reform and what we know about its effects.

Although most of this book is about poverty, the last third is about discrimination, and of that last third, three of the four chapters focus on race discrimination while the last is concerned with sex discrimination. There are two reasons for combining discussions of poverty and discrimination in a single book. The first is that the methods researchers use to study the two topics are closely related. Discrimination research relies on a combination of theory, observational studies, and experimental methods similar to those used in poverty research (discussed later). Although discrimination research relies more heavily on theory and less heavily on actual or quasi-experiments than does poverty research, it is easy to make the transition from the latter to the former. For the most part, those of you reading this book do not need a new set of analytical tools. Indeed, when we discuss sex discrimination, we will return to some of the same theories that we will have discussed when analyzing the relation between the decline of marriage and poverty.

The second reason for discussing poverty and discrimination in the same book is that, although the topics are distinct, they are also related. Most of the poor are not black, but the poverty rate is much higher among black Americans than among white Americans. To the extent that discrimination contributes to lower incomes among blacks, it contributes to poverty and helps to account for their higher poverty rate.

But it is also likely that higher poverty rates among blacks contribute to discrimination. Chapter 10 discusses a variety of theories of discrimination. Most rest on perceived or actual differences (or both) between blacks and whites. If blacks tend to come from more disadvantaged backgrounds than do whites, this can affect the flow of information from potential employees to potential employers and can, through multiple mechanisms, reduce the employment prospects of blacks relative to whites, even whites from the same background.

On the other hand, these differences could promote prejudice, but in many settings people are unable to act on their prejudice. Therefore, the existence of prejudice need not lead to worse outcomes for blacks than for otherwise equivalent whites. Chapter 11 examines the evidence for and against the existence of discrimination in the labor market as well as the role of policy in addressing labor market discrimination. Many researchers believe that differences between blacks and whites in labor market outcomes primarily reflect differences in the skills that people bring to the labor market. Chapter 12 explores the black-white test score gap and issues regarding differences in access to schooling and desegregation. Chapter 13 reviews the evidence on discrimination in other domains, including the justice system and customer markets.

Just as poverty is more common among blacks than among whites, it is more common among women than among men and is particularly common among femaleheaded households. Thus differences in earnings capacity between men and women may have an important impact on the prevalence of poverty. Chapter 14 addresses the debate over the source of this differential and policies designed to reduce it.

Some readers of earlier drafts of this book have commented that it would benefit from a lengthier discussion of inequality. After all, one important explanation for the lack of a decline in poverty over the past three decades is the dramatic increase in inequality. In the concluding chapter, I argue that reducing inequality must be an important component of any policy that reduces poverty. Nevertheless, I have made only a modest attempt to accommodate readers who have requested more on this subject.

There are two reasons that I have not added a complete chapter or more on the study of inequality. The first is simply a matter of space and time. This book is already longer than either the publisher or I anticipated, and it may well contain more material than can be covered in a typical semester course (although I do cover most of the material in a semester).

The second reason is that the study of inequality in many ways relies on a different set of tools and methods than does the study of poverty and discrimination. By its nature, the theory of inequality requires a more global approach. The empirical analysis of inequality, for the most part, uses a different statistical approach and, in particular, makes less use of actual and quasi-experiments, which are the focus of much of this book.

2. Recent Developments in the Study of Poverty and Discrimination

The earlier discussion may have given the impression that little has changed since Marshall and George debated progress and poverty. In fact, the study of poverty in general and poverty policy in particular has changed dramatically over the past thirty years. A large part of the impetus for the change can be traced to the debate over the negative income tax.

In 1962, the future Nobel laureate Milton Friedman proposed that the welfare system in the United States be replaced with a negative income tax.³ Under a negative income tax, all individuals or households with incomes below a certain level would receive a basic guaranteed annual income from the government. As household income increased, the government grant (or negative income tax) would be scaled back. When household income was sufficiently high, the household would not receive any grant from the government but instead would pay income tax as it would in a standard income tax system. Although Friedman was a well-known conservative, he was also a highly respected economist, and his proposal was subject to considerable analysis in professional journals.

Support for the negative income tax crossed political boundaries. The first proposal for a negative income tax came from the Johnson administration in 1965, and the 1967 reforms to the welfare system reflect some of the spirit of the negative income tax proposal. Nixon’s Family Assistance Plan proposed a form of negative income tax that was opposed by welfare rights activists on the left.⁴ James Tobin, also a Nobel laureate but, in contrast with Friedman, a recognized liberal, designed a negative income tax proposal for the McGovern campaign in 1972.⁵

The key aspects of the theoretical analysis can be summarized briefly. If the negative income tax were to be affordable, the rate at which the grant would be reduced as income increased would have to be substantial. At a minimum, the grant would decline by one dollar for every three dollars of income and more probably by one dollar for every two dollars of income. In today’s terms, even using the lower rate, a worker earning nine dollars an hour would see his family’s grant fall by three dollars for each hour that he worked. Thus, in effect, he would be earning only six dollars an hour. Because the after-tax hourly wage of working families would be much lower but their overall income would be higher, these families might work less under a negative income tax than they would otherwise.⁶

On the other hand, under traditional welfare, benefits were typically reduced by one dollar for every one dollar a recipient earned. Thus people with very low potential earnings who were therefore unlikely to earn much more than they would receive from welfare had little or no incentive to work. Under a negative income tax, they would keep some of their earnings and thus have some incentive to work. The advocates of the negative income tax hoped that it would encourage very low-income families to work and not reduce labor supply very much among somewhat higher-income households.

But of course it was possible that just the opposite would happen. Perhaps current welfare recipients would be little affected if their incentive to wor...