Poverty and inequality

Economist Bradley Schiller provides a few statistics putting the U.S.’ economic status in global perspective:

  • Average (media) income in the U.S.: $44,000
  • According to Oxfam the wealthiest 1% of the world’s people took in over 80% of the income in 2018.
  • U.S. population (330 million) is 4-5% of world’s population (almost 8 billion);
  • U.S. produces 20% of the world’s economic output (and, I’d add, not so coincidentally, consumes 20 – 25% of the world’s resources);

Yet by most any definition, there is still widespread poverty in the U.S.; in pockets in the South (which Hurricane Katrina and its response in the Gulf Coast so brutally exposed in 2005), Appalachia, Tribal Reservations, and in most urban areas and many rural areas across the U.S. When Americans were asked what government priorities should be, a Pew poll in 2019 produced these results:

Suggestions % of respondents
Skills training for jobs of the future 62
Increasing taxes on wealthiest Americans 60
Free tuition at two-year public colleges 52
Expanding Medicare to cover all ages (universal health care) 50
Increasing federal minimum wage 48
Free tuition at 2- and 4-year public colleges 47
Eliminating college debt (seems to be a theme here …) 46
Expanding government benefits for the poor 34
Breaking up large corporations 33
Reducing illegal immigration 20
(Housing/rent? Retirement? Internet/telecom costs? Etc.) ?

You should be able to look at these and see some of the underlying philosophies we’ve talked about in class: human capital and the market; arguments that poverty’s causes are structural, and that welfare programs create dependency. You should also get a feel for which of these philosophies may be most commonly held by people. Also, there are some pretty stark differences, based on political party affiliation. 

A more recent poll on perceived problems:

Biggest problem facing US Percent responding
Health care costs 66
Drug addiction 64
Affordability of college 55
Federal budget deficit 53
Climate change 48
Racism 44

source: pewresearch.org

Yet more statistics:

Poverty rates over time, U.S.

Year Number of poor (millions) % below poverty line
1959 39.5 22.4
1973 22.9 11.1
1983 35.3 15.2
1993 37 15.1
2000 27 11.3
2004 35.6 12.7
2010 45 15
2013 46 15
2016 40.6 13

Source: Bureau of the Census

Social mobility

 What are your chances of reaching the
W/ parents in the…
Bottom quintile
Middle quintile
Top quintile
Top income quintile
6.3 %
16.3 %
42.3 %
Middle income quintile
17.3 %
25 %
15.3 %
Bottom income quintile
37.3 %
18.4 %
7.3 %
Hertz (2004)

Understand what the above graph suggests–you’re chances of moving up in the class structure is limited. Some people do it, but the further the distance, the greater the odds. Likewise, the prospects of moving down are quite limited–in other words, you have to screw up big time, or confront major misfortune, to be downwardly mobile.

Equity versus efficiency: Efficiency argument

Those who believe in efficiency first when addressing issues related to welfare point to the functioning of the market. For instance, in a marketplace of jobs, people come with certain skills and abilities, levels of education, etc (that is, human capital), and expect a certain compensation (in the form of wages or salary). Employers are willing to pay more for greater skills, and those who are motivated will seek the training that allows them to advance up the socioeconomic ladder. If we didn’t reward people for going out and developing their own human capital, for instance if we paid doctors and janitors the same wage, then what economic incentive would exist to be trained as a doctor or in some other professional occupation? Conversely, market proponents say, society needs those who are willing to forego extensive training, to do some of the so-called ‘dirty work’ in society–the low-wage, low-security jobs on the bottom rungs of the socioeconomic ladder. For the efficiency argument, motivation and achievement make the difference. The economy functions best when incentives exist for people to pursue a wide variety of opportunities, and be compensated in a manner that reflects the time, energy and resources they’ve invested. Those who don’t ‘make it’ are in large part to blame for their economic status. They’re often labeled as unmotivated, perhaps lazy, and content with living in a low-wage trap.

Equity argument

Those who would argue that poverty and inequality’s causes are mainly structural would beg to differ. They would say that the market approach assumes equal opportunity for all, that regardless of an individual’s motivation, if he/she doesn’t have the opportunities available to seek advancement (e.g., in the form of tuition, a home life and learning environment that is supportive of education, a good school that helps prepare for college or other post-secondary training), many areas of the job market are closed off. Now, go back up and check out that social mobility table. It isn’t impossible, but the odds of moving up very far are against most people. From the structural argument, one can begin to catch a glimpse of the groups in the population most likely to feel these limited opportunity structures–those with little formal education, those born into or living in poor households or unstable households, those with few supportive adult role models in or outside the household, etc. And we can begin to speculate as to whether those that share these traits may more likely be African American, Hispanic, Native American, female, divorced, coming from violent domestic circumstances, etc. In other words, the playing field isn’t level for all players in the job market, and we can begin to make educated guesses about who has advantages, and which groups may have very limited opportunities to rise above poverty. The economic system is inequitable, they say, and the government, because the economic system it supports in part produces these inequities, is obliged to do something about it–redistribute some of the wealth to help the least well-off in society.

One of these arguments contends that individual responsibility is the key to improving one’s economic condition. In fact, this argument embodies the changes in welfare law passed in 1996. The Welfare Reform Act of 1996, signed by then-President Clinton, was called ‘the Personal Responsibility and Work Opportunity Reconciliation Act, which should give you a flavor of its underlying philosophy. The other perspective says that individual motivation can take most people only so far, if they don’t have other advantages, many of which go with their social class. It’s about probabilities, and some groups’ chances of improving their material living standards are far less than others’.

It’s important to remember that theories, in a sense, are to reality what a portrait is to a person–they try to represent reality, and they can be tested, refined, revised, etc., but they are probabilistic–that means that there are always exceptions to our predictions and explanations, and in the case of theories about humans, we’re lucky if we can explain at any time what half of them might do. So there are likely grains of truth in both of these arguments–don’t feel compelled to choose one and defend it into the ground. But you should think them through, and examine whether your own opinions are supported by evidence and defensible logic.

Defining poverty

Don’t expect that people agree even on a definition of poverty. There are reasonable differences of opinion. Some of them have to do with the difficulties of collecting data. For instance, we may agree that income and wealth are not the same thing. Income is a measure of the flow of money–we get paychecks every month or so, and pay taxes (or not) based on the total every year. Wealth is stock–it takes a stock of wealth to yield income. Companies have buildings, employees with skills and expertise, equipment/machinery, contracts, maybe property with natural resources, etc. They produce goods or services and sell these for income, and their workers gain income from the production/sales processes. Measuring income is relatively easy because we all are supposed to file tax returns. Measuring wealth is more difficult. Here’s a broad look at income distribution and inequality over time (Feller and Stone, 2009):

A Guide to Statistics on Historical Trends in Income Inequality | Center on  Budget and Policy Priorities


Note the drop in inequalities starting during the Great Depression (where the government instituted some progressive policies, such as Social Security, graduated income tax, labor’s right to organize, etc.). And note the rise, beginning in around 1980 with some of the policies of the Reagan Administration, which included a compression of graduated income rates, and a meteoric rise in stock market value (income on investment is considered ‘capital gains’ and taxed at a much lower rate). So the wealthy were keeping more of their money, presumably to invest in the economy, jobs, etc. Presumably

Then comes the difficulty of trying to figure out how much income is enough. Some of the basic necessities we discussed in class include:

  • Food
  • Clothing
  • Shelter
  • Health care
  • Transportation, fuel
  • Computer- and telecommunications-related
Feller and Stone (2009)

We could try to come up with units of measurement (e.g., calories, kilowatt hours, miles / day, square ft, etc.) that would give us minimum requirements, and then as economists would do, try to put a dollar value on those minimums. Of course we’d then have to make sure that if the cost of living increases over time, that this is reflected in our calculations of poverty, or the poor just keep getting poorer. For a family of 4 in the U.S., the income poverty level for 2019 is estimated at $25,750. The calculations were based on Social Security Administration research in the early 1960s, that assumed that food represented about 1/3 of a family’s budget. So we have another problem: not only has the value of the dollar decreased over time (and goods become more expensive), but the cost of putting food on the table has risen more slowly than say, the cost of real estate, and now rent or house payments likely make up a larger share of a family’s budget. There is no housing subsidy to compare, however, with the food stamp program (subsidized housing does exist, and housing ‘projects’ also, but they are not as available as food stamps, and they may offer a very low quality of life as well).

Add to this the unforeseen expenses that we all have–people get sick (which the health care industry counts on …), cars break down (auto repair industry … ), kids need money for something extra at school (retail stores), the stove breaks (appliance repair) and there’s no food in the fridge (restaurant industry), our wages/salaries don’t keep up with rising prices, etc. The calculations for a minimum income assume perfect management of the household budget, in a perfect world.

Poverty as relative, as a process

Some would say that it’s a problem to try to measure poverty in absolute terms. The World Bank calculates that for many in the world, $2 a day would be a sufficient income on which to survive. So $25,750 would look pretty good. How can we say someone is poor who is making that sort of money, when much of the rest of the world’s population wouldn’t earn even the annual wages of a family of four below the poverty line in a lifetime? These people believe that poverty should be measured relative to averages. The mean income is the average among all income earners; the median income represents the mid-point of all incomer earners (know the difference between the two; which do you think more accurately measures income in the U.S.?). A few billionaires can skew the mean average. But they only represent three income earners on the median scale. As a general rule, we sometimes classify the bottom 20% of income earners as among the poor, because they experience economic deprivation relative to the rest of the population. By a relative measure, we would always have people in poverty. Which method do you think is more reasonable for trying to understand poverty and inequality? Here is a look over time, at the growth of the economy versus the growth of median income:

Podcast: Economy is Growing... But Paychecks Are Not - Consumers' Research

Another concept important in this class is that, yes, poverty may have structural elements, and it may be in part a function of individual character, but it can also be seen as a process. Young families, for instance, may have little capital, they may not have been in the labor force very long, couldn’t afford a down payment on a house, may have debt from school loans, etc. As households mature, incomes tend to rise. Sociologist Karen Seccombe discussed different processes of poverty, of women who may go in and out of poverty, on and off welfare, because of bad breaks or misfortunes that suddenly change their circumstances (e.g., husband/father deserts, loss of a low-wage job because a mother had to stay home with her sick child). Seccombe describes profiles of single mothers that are likely to have a difficult time escaping poverty–what would this profile look like?

  • Bradley Schiller. 2001. The economics of poverty and discrimination. Upper Saddle River, NJ: Prentice-Hall.
  • Avi Feller and Brad Stone. 2009. Top 1 percent of Americans reaped two-thirds of income gains in last economic expansion. Sept 9, Center on Budget and Policy Priorities.
  • Tom Hertz. 2006. Understanding mobility in America. Center for American Progress.
  • Karen Seccombe. 2007. Families in Poverty. NY: Allyn and Bacon.