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Why we continue to lose the War on Poverty

 

We have lost the War on Poverty.  But it is not because the Census Bureau classifies the same percentage of Americans living in poverty today -- around 15 percent -- as in the 1960s. 

Living standards for the lowest earners are much higher today than in the past because of the many means-tested welfare programs offered by national, state, and local governments, but these welfare payments and transfers are not counted by the Census in measuring poverty rates.

In the early 1960s, government assistance was modest, and consumer spending by poor households exceeded their income by about 10 percent. 

The War on Poverty will not be won until work is rewarded and the poorest Americans acquire the skills necessary to compete in an economy that is so different from the economy of 50 years ago.

By 2005, however, consumer spending by poor households was about twice as much as their income because of much higher government assistance and tax credits. 

A four person-household is in poverty today, according to federal poverty guidelines, if they earn less than $23,550 per year, but the consumer spending of this same household is around $45,000 per year.

Based on these estimates, you might be tempted to say that the War on Poverty has been won, as very few Americans today face the same economic circumstances that were facing the Southern sharecroppers visited by President Johnson 50 years ago. 

The reason the War on Poverty has not been won is because too many Americans are not able to economically succeed without permanent and substantial government assistance.

And an important reason that they are not able to succeed is because of government policies, ranging from assistance programs that penalize work and marriage, to an American education system that leaves too many of our children unprepared to compete in today's economy. 

The War on Poverty will not be won until work is rewarded and the poorest Americans acquire the skills necessary to compete in an economy that is so different from the economy of 50 years ago.

When President Johnson launched the War on Poverty, those who completed high school -- and even those who did not -- could compete for high-paying jobs. 

This is because there were many opportunities for workers at this skill level, and because U.S. education was relatively strong. 

Today, workers face much different job opportunities in a world in which we increasingly compete with workers from other countries, and in which technological change is no longer the rising tide that raises the fortunes of all workers.

Those who are highly trained, with 4 or more years of college, have benefited enormously from the remarkable advances in information processing and communications technologies that have raised the productivity and salaries of highly skilled workers. But these new technologies are not helping low-skilled workers. In fact, new technologies are providing some of the same services that low-skilled labor can provide, but at much lower costs. And the opportunities that are available for our least-skilled workers are impacted by the fact that some of these jobs can be off shored to low-wage labor in other countries.

This means that relatively few low-skilled workers can compete for high paying jobs. Moreover, many of our policies substantially penalize taking jobs. 

This is because most government assistance programs are means-tested, so that assistance declines as income rises, which in turn implicitly taxes work at a very high rate for the poorest Americans. 

The Congressional Budget Office estimates that a single parent with one child would effectively keep only $8000 if they were to take a job paying $30,000 per year compared to earning no income.

And much of this $8,000 would likely be used towards paying for child care. 

The Commonwealth of Pennsylvania has calculated that a single parent with two children is better off earning $5,000 per year than earning $30,000 per year. 

These examples show how our assistance policies are punishing work -- not rewarding work -- with the income earned by poor households being effectively taxed at rates that can exceed 100 percent. 

By punishing work, assistance policies create chronic use of government assistance by poor households because there is little incentive to leave government assistance.  

We can win the War on Poverty by changing policies so that we don’t depress the incentive to take jobs by the poorest households. 

Public education reforms are required to raise student achievement, particularly in math and science, so that our workers are as well-trained as workers in other countries. This needs to start by confronting teacher unions that have fought against merit-based pay and that have protected poorly performing teachers.

And we need far more opportunities for American workers, which requires a much higher rate of new business formation, as new businesses create a disproportionately large number of jobs.  

Entrepreneurship in this country is much lower today than in the past. About half of our most successful new businesses are founded by immigrants. 

We need immigration reform that makes it much easier for immigrant entrepreneurs to stay in this country and build new businesses.

In the absence of policy reforms that change the incentive to work, improve worker skills, and create new businesses, we will continue to lose the War on Poverty and watch future generations of poor Americans never realize their true economic potential.

Lee E. Ohanian is a Senior Fellow at the Hoover Institution, Stanford University, and Professor of Economics at UCLA. He is the co-author, with Kip Hagopian, of “The Mismeasurement of Inequality”, Hoover Policy Review, August, 2012.