Public Policy and the Income Distribution Public Policy and the Income Distribution Alan J. Auerbach David Card John M. Quigley Editors Russell Sage Foundation New York The Russell Sage Foundation The Russell Sage Foundation, one of the oldest of America’s general pur- pose foundations, was established in 1907 by Mrs. Margaret Olivia Sage for “the improvement of social and living conditions in the United States.” The Foundation seeks to fulfill this mandate by fostering the development and dissemination of knowledge about the country’s political, social, and eco- nomic problems. While the Foundation endeavors to assure the accuracy and objectivity of each book it publishes, the conclusions and interpreta- tions in Russell Sage Foundation publications are those of the authors and not of the Foundation, its Trustees, or its staff. Publication by Russell Sage, therefore, does not imply Foundation endorsement. BOARD OF TRUSTEES Thomas D. Cook, Chair Alan S. Blinder John A. Ferejohn Alan B. Krueger Kenneth D. Brody Larry V. Hedges Cora B. Marrett Christine K. Cassel Jennifer L. Hochschild Eric Wanner Robert E. Denham Kathleen Hall Jamieson Mary C. Waters Christopher Edley Jr. Melvin J. Konner Library of Congress Cataloging-in-Publication Data Public policy and the income distribution. / Alan J. Auerbach, David Card, and John M. Quigley, editors. p. cm. Includes bibliographical references and index. ISBN 0-87154-046-0 1. Economic assistance, Domestic—United States. 2. Economic secu- rity—United States. 3. Poverty—United States. 4. Income distribution— United States. 5. United States—Social policy. I. Auerbach, Alan J. II. Card, David E. (David Edward), 1956- III. Quigley, John M., 1942- HC110.P63P69 2006 339.4′6′0973—dc22 2005050847 Copyright © 2006 by Russell Sage Foundation. All rights reserved. Printed in the United States of America. No part of this publication may be repro- duced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Reproduction by the United States Government in whole or in part is per- mitted for any purpose. The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials. ANSI Z39.48-1992. RUSSELL SAGE FOUNDATION 112 East 64th Street, New York, New York 10021 10 9 8 7 6 5 4 3 2 1 This volume is dedicated to Eugene Smolensky by his many colleagues and students, friends, and admirers. Contents Contributors ix Preface and Acknowledgments xi Alan J. Auerbach, David Card, and John M. Quigley Chapter 1 Introduction 1 Alan J. Auerbach, David Card, and John M. Quigley PART I GOVERNMENT TRANSFER PROGRAMS 31 Chapter 2 What Did the 1990s Welfare Reforms Accomplish? 33 Rebecca M. Blank Chapter 3 The Take-Up of Social Benefits 80 Janet Currie Chapter 4 Government Programs and Social Outcomes: Comparison of the United States with Other Rich Nations 149 Timothy M. Smeeding PART II TAXATION AND SOCIAL INSURANCE 219 Chapter 5 Income and Wealth Concentration in a Historical and International Perspective 221 Emmanuel Saez Chapter 6 Social Security and the Evolution of Elderly Poverty 259 Gary V. Engelhardt and Jonathan Gruber viii Public Policy and the Income Distribution Chapter 7 The Measurement and Evolution of Health Inequality: Evidence from the U.S. Medicare Population 288 Jonathan Skinner and Weiping Zhou PART III GOVERNMENT POLICIES AND OUTCOMES 317 Chapter 8 The Socioeconomic Status of Black Males: The Increasing Importance of Incarceration 319 Steven Raphael Chapter 9 Public Health and Mortality: What Can We Learn from the Past? 359 Dora L. Costa and Matthew E. Kahn Index 399 Contributors ALAN J. AUERBACH is Robert D. Burch Professor of Economics and Law at the University of California, Berkeley. DAVID CARD is Class of 1950 Professor of Economics at the Univer- sity of California, Berkeley. JOHN M. QUIGLEY is I. Donald Terner Distinguished Professor and professor of economics at the University of California, Berkeley. REBECCA M. BLANK is dean of the Gerald R. Ford School of Public Policy and co-director of the National Poverty Center at the Univer- sity of Michigan. DORA L. COSTA is professor of economics at the Massachusetts Insti- tute of Technology and research associate at the National Bureau of Economic Research. JANET CURRIE is professor of economics at Columbia University and research associate at the National Bureau of Economic Research. GARY V. ENGELHARDT is associate professor of economics in the Maxwell School of Citizenship and Public Affairs at Syracuse University. JONATHAN GRUBER is professor of economics at the Massachusetts Institute of Technology. x Public Policy and the Income Distribution MATTHEW E. KAHN is associate professor at the Fletcher School, Tufts University. STEVEN RAPHAEL is associate professor of public policy at the Goldman School of Public Policy at the University of California, Berkeley, and research affiliate of the National Poverty Center. EMMANUEL SAEZ is professor of economics at the University of Cali- fornia, Berkeley, and research associate at the National Bureau of Economic Research. JONATHAN SKINNER is John French Professor of Economics and pro- fessor in the Department of Community and Family Medicine at Dartmouth. TIMOTHY M. SMEEDING is Maxwell Professor of Public Policy and director of the Center for Policy Research at the Maxwell School, Syracuse University. WEIPING ZHOU is research associate and statistician at the Center for Evaluative Clinical Sciences, Dartmouth Medical School. Preface and Acknowledgments ALAN J. AUERBACH,DAVID CARD, AND JOHN M. QUIGLEY In December 2003, a conference was organized in Berkeley. We com- missioned the eight papers in this volume, seeking out the preemi- nent expert on each of the related topics treated in this book. Drafts of the papers included here were originally presented at that confer- ence. Each paper was reviewed and discussed by two experts on the topic, and the papers were revised and greatly improved in response to these comments. The discussants for these papers included Sheldon Danziger, Victor Fuchs, Irwin Garfinkel, Robert Haveman, Hilary Hoynes, Ron Lee, Peter Lindert, Robert Plotnick, John Karl Scholz, Joel Slemrod, Michael Stoll, and Barbara Wolfe.1 Many institutions and individuals contributed to the completion of this book. Financial support for the research was provided by a number of research institutions at Berkeley: the Robert D. Burch Center for Tax Policy and Public Finance, the Center for Economic Demography and Aging, the Center for Labor Economics, and the Berkeley Program on Housing and Urban Policy. Additional finan- cial assistance was provided by the Russell Sage Foundation. We are grateful to each of these organizations. We are also grateful for the efforts of Mercedes Arevalo- Romero, Amanda Randolph, Larry Rosenthal, and Henrietta Williams in organizing the conference and providing editorial and logistical support. xii Public Policy and the Income Distribution Note 1. We regret that space constraints preclude publication here of the pene- trating insights of discussants and conference participants. The discus- sants’ comments, however, can be easily accessed electronically from the Robert D. Burch Center for Tax Policy and Public Finance (http://emlab. berkeley.edu/~burch/). Chapter 1 Introduction ALAN J. AUERBACH,DAVID CARD, AND JOHN M. QUIGLEY The postwar era in the United States has been a time of rising national income and unprecedented gains in the economic well-being of American households. This prolonged period of growth led to a reduc- tion in poverty rates but was also associated with a rise in the in- equality of wealth and family income. Concurrent changes in demographics—increased immigration, the baby boom and bust, shifts in marriage and living arrangements, and continued subur- banization—have affected labor markets, the demand for social ser- vices, and the overall distribution of well-being. At the same time, changes in transfer and entitlement programs have affected the levels of support offered by the government to the poor, the aged, and the infirm. The chapters in this book analyze the complex interactions among demographics, poverty, the distribution of income, and public pol- icy from a longer-run perspective, taking stock of our knowledge of trends and causes, and identifying key areas where positive eco- nomics can contribute further to our understanding of policy options. In considering these broader linkages, it is important to keep in mind the extent of absolute improvement in the well-being of Amer- icans, their incomes, and their economic circumstances. Figure 1.1 shows the trend in inflation-adjusted income per capita during the period 1960 to 2000. Real national income per person grew by 250 percent over the forty-year period. Figure 1.2 shows how these increases in economic output have translated into trends in 2 Public Policy and the Income Distribution Figure 1.1 Per-Capita Gross National Product of the United States, 1960 to 2000 (2000 Dollars) $40,000 $30,000 $20,000 $10,000 $0 1960 1965 1970 1975 1980 1985 1990 1995 2000 Source: U.S. Department of Commerce (2004, 167, table 1). Figure 1.2 U.S. Family Income, 1947 to 2000(2000 Dollars) $80,000 $60,000 $40,000 $20,000 Median Mean $0 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Source: U.S. Census Bureau (2001). Introduction 3 family income. Median family income—the level of income sepa- rating the top and bottom halves of the distribution—rose from about $20,400 in 1947 (in 2001 dollars) to about $52,300 at the turn of the century. To be sure, the increases have not been without interrup- tion. Decreases occurred during major recessions—in 1975, for exam- ple, and in the early 1980s and early 1990s—but these declines were small, and the reverses were of short duration.