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Policies to lift Americans out of poverty
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It’s no secret that opportunity in the U.S. is staggeringly low. Studies suggest that mobility is lower in America than in other developed countries, and according to the Pew Charitable Trusts 70 percent of children born into poverty here will not make it to the middle class. Contrary to popular belief, mobility hasn’t actually gotten worse over the last several decades, according to a recent paper by Harvard economist Raj Chetty and his colleagues — but that’s hardly any consolation.
The Obama administration’s big idea has been to increase the minimum wage to $10.10. But analysis from the Congressional Budget Office shows that this would reduce the number of Americans living below the poverty line by only about 2 percent while causing hundreds of thousands to lose their jobs.
Clearly, policymakers must do better.
A good place to start would be to identify the causes of low mobility and target public policies toward those causes. Fortunately, there is much sound science to navigate by. Research by Chetty and others has shown time and again that the inability to move up in life is caused by segregated communities, failure to graduate from high school, broken homes, and a persistent joblessness that keeps young men from reaching the first rung of the ladder. If we as a nation are serious about helping the poor, then we must pursue a mobility agenda that takes these factors into account and holds the promise of helping far more than 2 percent of those in poverty.
Such an agenda would begin with the recognition that residential segregation is a major impediment to mobility. Those in low-income neighborhoods do not always have the benefit of interaction with effective role models. Economists have proposed many ways to reduce segregation, such as encouraging the in-migration of richer households into poorer areas, improving public transit routes into poor areas, and improving pre-K education. The evidence for these reforms is mixed.
A far better way to improve the human capital of residents in disadvantaged neighborhoods is to use increased school choice to cut the artificial ties that bind students to specific neighborhood schools. A 2012 National Bureau of Economic Research paper by economist Justine Hastings and colleagues found that truancy rates declined by 21 percent for students who won a charter-school lottery, and these students’ test scores improved as well. This suggests that school choice can affect student outcomes through increased motivation and personal effort as well through improved school and peer inputs.
The school-choice fix requires no additional resources. States and localities just have to change the rules and allow for open enrollment where students can choose their school regardless of their neighborhood. If a school is oversubscribed, then a lottery could be used to determine which students are accepted. Even though there could be initial resistance to such a program, even the most ardent critics should acknowledge that getting low-income students out of poorly performing schools is an improvement over the status quo.
A mobility-focused agenda must also recognize that failure to complete high school is, for many, the major factor affecting mobility. In 2009–10, the U.S. had its highest graduation rate in more than 30 years, and yet over 20 percent of high-schoolers did not graduate on time or at all. According to the Department of Education, students from low-income families drop out of high school at five times the rate of students from middle-income families.
A growing body of research has documented that financial incentives can have an impact on the odds that low-income students will achieve their educational goals. For example, Roland Fryer of Harvard has found financial incentives to be a cost-effective way to encourage students to read books. With high-school graduation so important for mobility, Congress should fund a pilot “milestone credit” program, wherein low-income teenagers receive a cash bonus upon receiving their diploma.
College aid also should be restructured. The government spends $33 billion a year subsidizing college tuition, yet many students (especially low-income students) never graduate. Without a college diploma, the social and economic benefits of college vanish. We agree with a recent CBO report that proposes restructuring the Pell Grant program as a loan program, wherein a student would receive a direct loan at the beginning of each term that would be forgiven at the end of the term as long as the student completes the classes.
Education prepares individuals to work, yet people are choosing to work at historically low rates. The Great Recession, combined with higher taxes and increased regulation, has been lethal to the work force. Only 63 percent of Americans are in the labor force, equivalent to 1970s levels. More than 10 million Americans are actively looking for jobs but cannot find work.
Pro-growth policies are desperately needed, but take time. In the interim, Congress should take immediate action to help the unemployed get back to work right away by allowing employers to develop customized job-training programs, such as the Wisconsin Fast-Forward Initiative, which is being piloted this month. Additionally, work-share agreements are a practical alternative to layoffs, allowing a worker to work fewer hours at their job and still collect a portion of their unemployment insurance.
Additionally, we must address the fact that many anti-poverty programs discourage work. The CBO has found that the phase-out of government benefits can create up to 100 percent marginal tax rates for the working poor, meaning that for every additional $1 earned, $1 in benefits is taken away. The Affordable Care Act adds an additional 15 percent marginal tax rate from the phase-out of subsidies for low-income families.
The Earned Income Tax Credit is a clear exception. The EITC is a wage-supplement program, meaning that people get larger total payments the more they work, up to a point. Not surprisingly, economists find that the EITC encourages work-force participation. The Census Bureau estimates that the EITC lifted 5.4 million people out of poverty in 2010 alone. However, reforms are needed in two areas. Childless adults are eligible only for a maximum EITC of $500, which phases out at a very low income. Additionally, there is a marriage penalty, because the EITC is calculated on household income, not individual earners’ income. As a result, the marriage of two low-income individuals may cause them to lose EITC benefits.
Any mobility agenda is incomplete without addressing how to best support single mothers. Famlies headed by a single mother have a much higher rate of poverty (37 percent) than do two-parent families (10 percent). Chetty and others find that “the strongest and most robust predictor [of low mobility] is the fraction of children with single parents.” Even having a child from a two-parent home raised in a community with high concentrations of single mothers is negatively correlated to mobility. One of the surest ways to lift single mothers out of poverty is to encourage them to participate in the work force. In a 2000 study, Lemke, Witte, Queralt, and Witt find that increased child-care subsidies for low-income households significantly increase the probability that current and former welfare recipients will work. The tax code provides a child and dependent-care credit up to 35% of child care costs. Qualifying expenses are capped at $3,000 for one child or $6,000 for two children. However, this is significantly below average child-care costs. A study from Child Care Aware reports that the average annual cost of full-time care for an infant in center-based care ranges from $4,863 in Mississippi to $16,430 in Massachusetts. Congress should increase the size of the child-care tax credit and make it refundable to encourage low-income women to climb the ladder of opportunity.
While mobility is possible for some, it may be beyond the reach of others. For these individuals and families, the government has a responsibility to provide an easy-to-understand, comprehensive, transparent level of support. But even this is not happening. The House Budget Committee recently detailed the 92 anti-poverty programs available for education, housing assistance, food aid, health care, cash assistance, and more. The sheer number of programs results in duplication of services and eligibility confusion for participants, and it obfuscates who is being helped and how.
Existing programs should be streamlined to improve transparency about the tax penalties implicit in each program, increase the benefit take-up rate of the truly poor, and begin a national conversation about how high up the income ladder benefits should go.
Throwing more money at poverty is not the solution. The government has spent trillions of dollars on poverty relief — $799 billion in 2012 alone — with no increases in upward mobility. Proposals to increase the minimum wage or increase overtime payments primarily help the middle class, not the impoverished. And refusal to reform the welfare state, with its disincentives for work, marriage, and education, prolongs the cycle of dependence.
We desperately need creative and thoughtful reforms in some of the most fundamental areas of civil society to ensure that America remains the land of opportunity for generations to come.
— Aparna Mathur is a resident scholar at AEI. Abby McCloskey is program director of economic policy.
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