POVERTY and PROSPERITY in the USA in the LATE TWENTIETH CENTURY Poverty and Prosperity in the USA in the Late Twentieth Century

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POVERTY AND PROSPERITY IN THE USA IN THE LATE TWENTIETH CENTURY Poverty and Prosperity in the USA in the Late Twentieth Century

Edited by

Dimitri B. Papadimitriou Levy Institute Professor ofEconomics Bard College. A1I1Ul1Idßle-on-Hudson. New fork

and

Edward N. Wolff Professor ofEconomies New fork University. New fork

Palgrave Macmillan ISBN 978-1-349-22955-0 ISBN 978-1-349-22953-6 (eBook) DOI 10.1007/978-1-349-22953-6

First published in the United States of America in 1993

ISBN 978-0-312-09473-7

Library of Congress Cataloging-in-Publication Data Poverty and prosperity in the USA in the late twentieth century / edited by Dimitri B. Papadimitriou and Edward N. Wolff. p. cm. Includes index. ISBN 978-0-312-09473-7 I. Poor-United States. 2. Income distribution-Uni ted States. 3. Uni ted States-Economic conditions-198 1- 4. Poverty-United States. 5. United States-Economic policy-198 1- I. Papadimitriou, Dimitri B. 11. Wolff, Edward N. He I IO.P6P594 1993 330.973'092---dc20 92-39847 CIP Contents

The Jerome Levy Economics Institute of Bard College vii Foreword by Dimitri B. Papadimitriou viii Acknowledgments xi Notes on the Contributors xii

1 Introduction Maury Gittleman and Edward N. Wolf! 1

Part I Poverty: Trends, Composition and Sources 19

2 Why were Poverty Rates so High in the 1980s? Rebecca M. Blank 21 Comment Daniel H. Weinberg 56

3 Who are the Truly Poor? Patterns of Official and Net Earnings Capacity Poverty, 1973-88 Robert Haveman and Larry Buron 58

4 The Health, Earnings Capacity , and Poverty of Single mother Families Barbara L. Wolfe and Steven Hili 89

5 Recent Trends in Economic Inequality in the United States: Income versus Expenditures versus Material Well-being Susan E. Mayer and Christopher Jencks 121 Comment Paul Ryscavage 204

Part II Anatomy of Income Inequality 209

6 Social Security Annuities and Transfers: Distributional and Tax Implications Edward N. Wolf! 211 v vi Contents

7 W(h)ither the Middle Class? ADynamie View Greg J. Duncan, Timothy M. Smeeding and Willard Rodgers 240 Comment William T. Dickens 272

8 Changes in Earnings Differentials in the 1980s: Concordance, Convergenee, Causes, and Consequences McKinley L. Blackburn, David E. Bloom and Richard B. Freeman 275 Comments Alan S. Blinder 308 Kevin Lang 312

9 The Changing Contributions of Men and Women to the Level and Distribution of Family Income, 1968-88 Maria Cancian, Sheldon Danziger, and Peter Gottschalk 317 Comment Daniel H. Weinberg 354

Part III Policy Discussion 355

10 Poliey Forum: Prospeets for Future Poliey Robert B. A very Sheldon Danziger William T. Dickens Robert Haveman Dimitri B. Papadimitriou (moderator) Timothy M. Smeeding Edward N. Wolf! 357

Index 381 The Jerome Levy Economics Institute of Bard College

Founded in 1986, The Jerome Levy Economics Institute of Bard College is an autonomous, independently endowed research organ ization. It is nonpartisan, open to the examination of diverse points of view, and dedicated to public service. The Institute believes in the potential for economic study to im prove the human condition. Its purpose is to generate viable, effec tive public policy responses to important economic problems. It is concerned with issues that profoundly affect the quality of life in the United States, in other highly industrialized nations, and in countries with developing economies. The Institute's present research agenda includes such issues as financial instability, poverty and problems associated with the dis tribution of income, employment and economic growth. In all its endeavors, the Institute pi aces heavy emphasis on the values of personal freedom and justice. The opinions expressed in this volume are those of the authors and do not necessarily represent those of the Jerome Levy Economics Institute of Bard College.

Board of Governors Chairman S Jay Levy Vice Chairman David A. Levy President Leon Botstein Executive Director Dimitri B. Papadimitriou Peter C. Aldrich Leon Levy Jack Nash Brian F. Wruble

vii Foreword

The old dicbe 'the rich get richer and the poor get poorer' took particular significance during the decade of the 1980s in the United States because it was shown to be generally true. Report after report on research that focused on inequality in the 1980s provided unam biguous evidence of more gains by the richest in contrast to those of the lowest levels in the distribution al ladder that experienced more dedines. This state of inequality is reminiscent of industrial America of the 1800s and early 1900s when wealth and income were concentrated at the top. Even though the Great Depression and World War 11 were responsible for partially reversing and equalizing these trends, the return to the growing and disturbing concentration of high income and wealth on the top 1 percent, reinforces the views of many that the US economy has undergone a structural change in the income dis tribution during the decade of 1980. The wealth and income research findings, induding those detailed in the chapters of this volume, seem to reftect President Reagan's America which can be best described in the words of MIT economist Paul R. Krugman as 'another example of a big unprecedented jump in inequality to Great Gatsby levels' rather than Alexis de Toqueville's one distinguished by its egalitarian nature. To be sure, disagreements as to the appropriateness of inequality or poverty measures abound, but all suggest that official estimates of poverty are unrealistically low and thus, they underestimate the extent of income and wealth dispersion. Nonetheless, the research findings confirm the worsening of inequality irrespective of the measure used. It would seem, then, that the time has come for policy makers to heed the advice of economists and others who contend the United States is at serious risk if it does not address the growing inequality. The participants gathered at the Conference organized by the Jerome Levy Economics Institute of Bard College on 'Poverty and Prosperity in America at the Close of the Twentieth Century' were forceful about the need for innovative reform to train and employ the poor in order to save increasing numbers of Americans from the underclass. A failure to act will harm America's competitiveness by severely limiting the pool of skilled workers and further straining business and viii Foreword ix the economy. The United States simply cannot maintain its economic position unless more of its citizens become productive. No longer are economists advocating raising welfare benefits for the able-bodied. They are focusing, instead, on areas where results are observable - namely investing in pro grams that encourage people to enter the labor market - such as job training and child care. While not a panacea, there is a growing consensus that full employment should be the goal. Labor market reform, targeting the working age population with low skills and aiding families with children, ought to be anational priority. Other proposals that can accomplish this merit further discussion. For example, an employer based marginal employment subsidy like the New Jobs Tax Credit of a decade aga would target lower skilled workers for jobs; a wage rate subsidy that is highest for workers who can only be employed at minimum wage rates would also draw unskilled workers into the labor force. The subsidy would decrease as the worker's wage rose. Relating to families, attention ought to be paid to programs that expand subsidies for child care and to make the dependent care tax credit refundable. For people who do not earn enough to pay taxes, a cash refund could be awarded. Another approach is to create a tax credit based income. For example, the range would be a non refundable 30 percent child care tax credit for the highest income families, while the poor and near poor would receive a refundable credit up to 80 percent. Proposals that call for a universal child support policy, and tying child care subsidies for single parents to mandatory employment or job training - not unrelated to proposals put forth by US Senator Albert Gore and Representative Thomas Downey - merit attention. Further consideration ought to be given to policies targeted to youth - such as a capital account for the young workers to improve their behavior and aspirations, as well as programs to increase oppor tunities for vocational training and to ease the transition from school to work. The United States desperately needs public policy programs that must increase the employment levels of people at the bottom of the income and capability distribution scale. While not the answer to all the country's ills, programs that help overcome unemployment can improve the economic well-being of people in the lower half of the income spectrum, thereby strengthening the USo The policy proposals derived from the research undertaken and x Foreword articulated in the chapters of this book, deserve further discussion. What confronts us, is more than a divisive struggle between the haves and the havenots. When the system fails a large contingent of society, as it does currently, it creates many social problems, gives rise to inefficiency, and undermines the moral character and resolve of the nation.

DIMITRI B. PAPADIMITRIOU Acknowledgments

We would like to thank the Board of Govemors of the Jerome Levy Economics Institute of Bard College for sponsoring a year-Iong re search project centering on the inequality in the United States at the elose of the twentieth century which elimaxed in a Conference on 'Poverty and Prosperity at the Close of the Twentieth Century' from which this collection of essays is drawn. We are indebted in many ways to the contributors for their cooperation and readiness in carrying out revisions. We want to thank Susan Howard and Linda Christensen of the Levy Institute and Maury Gittleman for his invalu able research assistance. Finally, sincere thanks are due to Tim Farmiloe, our publishing editor, and to Keith Povey for his editorial assistance.

DIMITRI B. PAPADIMITRIOU EDWARDN. WOLFF

xi Notes on the Contributors

Robert B. Avery is Professor in the Department of Consumer Econ omics at Comell University and a Research Associate at the Federal Reserve Bank of Cleveland. Prior to his arrival at Comell, Dr Avery was Senior Economist at the Board of Govemors of the Federal Reserve System (1981-8) and Assistant Professor of Economics in the Graduate School of Industrial Administration at Carnegie Mellon University (1975-81). While at the Federal Reserve Board, he served as Project Director of the 1983, 1986 and 1989 Surveys of Consumer Finances.

McKinley L. Blackburn is Assistant Professor of Economics in the College of Business Administration at the University of South Caroli na. Dr Blackburn's thesis research was devoted to analysing changes in the distribution of income among families in the USo

Rebecca Blank is Associate Professor of Economics and Education at the School of Education and Social Policy, Northwestem University. Dr Blank also taught at Princeton University, and until recently was with the Council of Economic Advisors in Washington, DC.

Alan S. Blinder is the Gordon S. Rentschler Memorial Professor of Economics, Princeton University. Dr Blinder is a regular contributor to Business Week, and on the editorial boards of the Journal of Economic Literature and the Journal of Monetary Economics, and is associate editor of the Journal of Public Economics. His publications include: Toward an Economic Theory of Income Distribution: Gen eral Equilibrium Systems: Essays in Memory of Rafael Lusky (ed. with P. Friedman); Economics: Principles and Policy (with W. J. Baumol); Economic Policy and the Great Stagflation, and Hard Heads and Soft Hearts.

David E. Bloom is Professor of Economics, Columbia University. Dr Bloom also taught at Harvard University and Carnegie-Mellon University.

Larry M. Buron is a PhD candidate in economics, University of Wisconsin at Madison. xii Notes on the Contributors xiii

Maria Cancian is a PhD candidate in economics, the University of Michigan.

Sheldon Danziger is Professor of Social Work and Public Policy, Faculty Associate in Population Studies, and Director of the Re search and Training Program on Poverty, the Underclass and Public Policy at the University of Michigan. From 1974-88 he was at the University of Wisconsin, where he was Director of the Institute for Research on Poverty from 1983-8. He is the editor of Fighting Poverty: What Works and What Doesn't (Harvard University Press, 1986), and the author of numerous articles.

William T. Dickens is Associate Professor, University of California Berkeley.

Greg J. Duncan is a Program Director in the Survey Research Center and Professor of Economics, The University of Michigan-Ann Arbor.

Richard B. Freeman is Professor of Economics at Harvard Univer sity, Research Associate at the Russell Sage Foundation and Director of Labor Studies at the NBER. He is the author of numerous books and articles.

Maury Gittleman is an economist at the Bureau of Labor Statistics.

Peter Gottschalk is Professor of Economics, Boston College. Dr Gottschalk also taught economics at Bowdoin College and was a Project Associate at the Institute for Research on Poverty at the University of Wisconsin.

Robert Haveman is the lohn Bascom Professor of Economics, Direc tor, Robert M. LaFollette Institute of Public Affairs, and Fellow, Institute for Research on Poverty at the University of Wisconsin Madison. Dr Haveman is co-editor of the American Economic Re view. His publications include: Eamings Capacity, Poverty and Inequality, Jobs for Disadvantaged Workers, and Starting Even: An Equal Opportunity Program to Combat the Nation's New Poverty.

Steven Hili is a PhD candidate at the University of Wisconsin at Madison and a National Institute of Mental Health trainee. xiv Notes on the Contributors

Christopher Jencks is Professor of Sociology and Director of the Center for Urban Affairs and Policy Research, Northwestern Uni versity. Professor Jencks also taught at the University of California Santa Barbara and Harvard University.

Kevin Lang is Professor of Economics, Boston University. Dr Lang is a member of the Advisory Committee, Canadian Employment Re search Forum; Faculty Affiliate, Institute for Economic Develop ment, Boston University; and was the editor of the monograph series on 'Sociology and Economics: Controversy and Integration,' Aldine de Gruyter. He is the author of many books and articles.

Susan E. Mayer is Assistant Professor, Graduate School of Public Policy Studies, University of Chicago. Dr Mayer was a Research Associate at the Center for Urban Affairs and Policy Research, Northwestern University; Equal Opportunity Specialist in the Office of Civil Rights of the U.S. Department of Health and Human Ser vices; and taught at Indiana University.

Dimitri B. Papadimitriou is Executive Vice President and the Levy Institute Professor of Economics, Bard College; Executive Director of the Jerome Levy Economics Institute and the Bard Center. Dr Papadimitriou was a visiting scholar, Center for Economic Planning and Research (Athens, Greece); Wye Fellow, Aspen Institute. He is the general editor of the Levy Economics Institute Series, editor of Profits, Deficits and Instability (Macmillan Press, 1991); Aspects of Distribution of Income and Wealth (Macmillan Press, 1993); and, with Steven Fazzari, Financial Conditions and Macroeconomic Per formance, Essays in Honor of Hyman P. Minsky.

Willard L. Rodgers is a Program Director in the Survey Research Center at the University of Michigan.

Paul Ryscavage is Senior Labour Economist in the Census Bureau's Housing and Household Economic Statistics Division. He serves as a staff assistant to the Assistant Division Chief of that Division and conducts research on the nation's labor force and income distribu tion. Mr Ryscavage has worked at the Census Bureau since 1983 and prior to that, at the US Bureau of Labor Statistics since 1962.

Timothy M. Smeeding is Professor of Economics and Public Adminis tration, Syracuse University; Overall Project Director, Luxembourg Notes on the Contributors xv

Income Study. Dr Smeeding also taught at Vanderbilt U niversity, the University of Utah and Bowdoin College. He is the author of numer ous books and articles, including Poverty, Inequality and the Distribu tion of Income in an International Context: Initial Research from the Luxembourg Income Study (LIS) Project (with M. O'Higgins and L. Rainwater).

Daniel H. Weinberg is Chief, Housing and Household Economic Statistics Division, US Bureau of the Census. Dr Weinberg has taught at Yale University, worked on housing research at Abt Associ ates, and worked for nine years at the US Department of Health and Human Services on welfare and poverty research, and policy. He is the author of numerous articles and co-author of The Economics of Housing Vouchers, The Great Housing Experiment and Fighting Poverty.

Barbara L. Wolfe is Professor in the Department of Economics and Preventive Medicine at the University of Wisconsin-Madison. She is also Research Associate at the National Bureau of Economic Re search and Research Affiliate for the Institute for Research on Pov erty at the University of Wisconsin-Madison. Professor Wolfe is a member of the Expert Group of the European Economic Community Project on the Distributive Effects of Cost Containment in Health Care. She is a Co-Editor of the Journal of Human Resources.

Edward N. WoUf is Professor of Economics, New York University where he has taught since 1974, and a former research associate at the National Bureau of Economic Research. He has also served as Man aging Editor of the Review of Income and Wealth since 1987. He is the author of Growth, Accumulation, and Unproductive Activity: An Analysis of the Post-War US Economy, a co-author of Productivity and American Leadership: The Long View, and The Information Economy: The Implications of Unbalanced Growth.