America: The Forgotten Poor

President Trump’s first federal budget proposal, unveiled in March, was a direct assault on the lives of millions of Americans. By sharply cutting or eliminating essential social programs to help pay for a dramatic increase in military spending, it would likely push many people into poverty and have damaging effects on many others who usually manage to stay above the official poverty line. The ten-year budget proposal Trump made public in late May is far harsher and calls for cutting hundreds of billions of dollars from anti-poverty programs like Medicaid, food stamps, and child insurance programs.

The extent to which changes in the job market have already led to unstable earnings for low- and even middle-income families is not well understood, in part because measures of poverty are inadequate. Meanwhile, too little attention is being paid to new analyses showing that people of all racial and ethnic groups are losing confidence in the core American principle that hard work is a means to upward mobility. This will have long-term economic costs as low-income Americans increasingly see few benefits of education or hard work for themselves and their children.

The most widely followed indicator of poverty in the US is the official poverty measure (OPM), published by the Census Bureau once a year. In 2015, the last year for which data are available, 43.1 million people—13.5 percent of the population—were considered to be in poverty, defined as falling below an annual income threshold of $24,257 for a family of four. The poverty rate has been as low as 11.1 percent, in the 1970s; it rose under Ronald Reagan to approximately 15 percent and then fell to about 13 percent before rising again, then fell again under Bill Clinton to 11.3 percent before rising in the 2000s. But the OPM is a deficient measure in almost every way. It tells the public little about how materially deprived the poor are, how much income they actually have, how reduced their children’s chances are of developing skills for climbing into the middle class, or, most important, how many truly poor there are in America.

When the OPM was developed in the 1960s, the poverty threshold was set at slightly higher than a mere subsistence budget, but even then many, including its principal designer, a Social Security analyst named Mollie Orshansky, believed that this was too low. Today the OPM, though updated for inflation, still uses the same methods it did in the 1960s. It doesn’t take into account the effects of major federal programs started after President Lyndon Johnson’s War on Poverty, including food stamps, now known as the Supplemental Nutritional Assistance Program (SNAP), and refundable tax credits, the largest of which is the Earned Income Tax Credit (EITC). It also is not adjusted for a rising standard of living over time.

In 2011, the Census Bureau introduced a supplemental poverty measure (SPM) that includes these sources of income in determining the poverty rate. But the new measure also adjusts for other factors that reduce the income of the poor, such as medical and work-related expenses. Whereas Orshansky had set the poverty threshold at three times the cost of a minimal food budget, the SPM is based on roughly one third of actual family expenditures over the most recent five-year span.

Concerns that the OPM, when adjusted for inflation, overstates poverty are basically eliminated by this method. But the new measure, despite the addition of income from antipoverty programs, has consistently found higher levels of poverty than the original measure does. According to the SPM, 14.3 percent of Americans were below the poverty line in 2015, some 2.6 million more people than the OPM identified, yet the OPM remains the official US government standard. The annual poverty threshold under the SPM for a family of four with a mortgage is almost $2,000 higher than the OPM’s.

Both ways of measuring poverty can be analyzed further to tell us, among other things, how many people subsist on less than half the income that defines the poverty line, which analysts call deep poverty, and how many children live in poverty. The child poverty rate under the SPM is in fact lower than under the OPM because the SPM takes account of newer social programs that directly help families with children.

But these Census Bureau measures tell us nothing useful about the growing number of people whose average incomes are above the poverty line but who often fall under it for several months of the year. According to one sample, 94 percent of those who earn between 100 and 150 percent of the poverty line are officially poor for at least one month, for example. The government measures also tell us nothing about the long-term psychological effects of low incomes and rising inequality, which are undermining the belief that hard work pays off. Scholars have found a measurable relationship between this loss of faith and the declining interest many Americans now show in seeking a better future through education and job performance.

Two new books, The Financial Diaries: How American Families Cope in a World of Uncertainty and Happiness For All?: Unequal Hopes and Lives in Pursuit of the American Dream, fill in these gaps and broaden our understanding of poverty in a rapidly changing economy. They also show that the same problems that afflict those officially deemed poor in America are increasingly affecting those whose incomes are considerably higher. According to Federal Reserve surveys, fully one third of Americans say they are “just getting by.” Thirty-eight percent could not pay for a $400 emergency without selling an asset or borrowing; 14 percent couldn’t pay at all. These levels of economic distress may very well have made possible the election of Donald Trump, who consistently emphasized the lack of good jobs in America and promised, however simplistically, to create many more. The two books also imply that America is even more unequal than the conventional measures of income suggest.

The Financial Diaries examines the increasing volatility of earnings for workers in America, as documented in income surveys by, among others, the University of Michigan, the Pew Charitable Trusts, and the federal government. The authors, Jonathan Morduch, a professor at New York University, and Rachel Schneider, a senior officer at the Center for Financial Services Innovation, organized a team of ten researchers to follow week by week the cash flows of 235 households in 2012 and 2013. Their goal was to gather information on how people actually cope with low and, in particular, inconsistent earnings—information that the federal government does not adequately collect. About one fourth of the households had annual incomes below the SPM. Another third were “near-poor,” with annual incomes between 100 and 150 percent of the SPM. In total, three quarters had annual incomes below twice the poverty line as measured by the SPM, and all shared similar frustrations.

For Morduch and Schneider, there has been a “great job shift,” leading to stagnating and volatile earnings. The decline of manufacturing in the US, which once provided well-paid, often unionized jobs for about 18 percent of American workers and now employs less than 10 percent of them, has significantly reduced average wages and made steady work less secure. Technological change has enabled major companies to contract work to part-time and freelance workers—the new so-called contingent workers—or to services companies that pay their workers less. Even in manufacturing, 8 to 10 percent of jobs are temporary.

Morduch and Schneider’s main focus is the growing insecurity that many Americans have experienced in recent decades, largely as a result of volatile incomes. This is clear from analyses of long-term data, particularly by the University of Michigan’s Panel Study of Income Dynamics, which has followed the finances of individual families since the 1960s. The Yale political scientist Jacob Hacker was among the first to point out the sharp increase in earnings volatility, in his 2006 book, The Great Risk Shift.

Among Morduch and Schneider’s most important findings is that this volatility was not primarily caused by losing or changing jobs. Citing research based on the records of Chase Bank account holders, they write, “Nearly all of the income volatility experienced by the households in their study (86 percent) could be explained by variation in pay for a given job.” Unsteady and unpredictable hours, especially for young workers, have also contributed to volatility. And it has affected the life chances of children: studies show they do worse in school when their parents’ income is unstable. In the authors’ sample, the poor had more frequent and deeper dips in income than others.

The spending required to meet basic needs has also risen sharply. The median household, Pew reports, spends twice what it did in 1996 on health care—some $2,500 a year, adjusted for inflation. Housing costs for the lower third of the population have increased by 50 percent since the mid-1990s. Low- and middle-income families spend about one third of their income on housing. The cost of a bachelor’s degree from a public college rose 34 percent between 2003 and 2014.

As a result, many more people are falling into poverty for part of the year. Indeed, the concept of poverty itself is probably misunderstood, Morduch and Schneider argue. Even Michael Harrington’s pathbreaking book The Other America (1962), which concluded that up to 25 percent of Americans lived in poverty, implied incorrectly that the poor were mostly members of well-defined social groups who found it hard to break through a culture of poverty. Yet at any given time, many people are counted as poor who usually live above the poverty line. The number of poor today as measured by the SPM is somewhat lower than it was when Harrington was writing, but recent data show that almost one third of Americans, some 90 million people, were officially poor for two months or more between 2009 and 2011.

Though a lack of jobs and inadequate social programs leave far too many persistently poor, about two thirds of the “poverty spells” mentioned above lasted fewer than eight months. As a research report cited by Morduch and Schneider put it:

We speak easily of “the poor” as if they were an ever-present and unchanging group. Indeed, the way we conceptualize “the poverty problem,” the “underclass problem” or “the welfare problem” seems to presume the permanent existence of well-defined groups within American society.

Misunderstanding the data reinforces common prejudices and patronizing attitudes. During the failed effort to repeal the Affordable Care Act in March, Kansas congressman Roger Marshall, citing scripture, said, “The poor will always be with us,” in defense of the Republican proposal to replace Obamacare, which the Congressional Budget Office found would deprive 24 million Americans of health insurance. “There is a group of people that just don’t want health care and aren’t going to take care of themselves,” he went on. Utah congressman Jason Chaffetz put it this way on CNN: “And so, maybe, rather than getting that new iPhone that they just love and they want to go spend hundreds of dollars on that, maybe they should invest it in their own health care.”

Morduch and Schneider tell many stories about people whose finances have been buffeted by a changed economy. Taisha Blake, the mother of a seven-year-old, trained for sixteen weeks to become a nurse’s aide after her son was born. For a while, she was doing moderately well and picking up more shifts that offered extra pay. But the hospital had a budget crisis, and her hours and extra pay incentives were cut. Even with the EITC, food stamps, and a housing allowance, she wound up with a total income of $15,000 for the year, well below the SPM poverty line.

Becky and Jeremy Moore’s annual income of nearly $40,000 put them well above the SPM poverty line. But Jeremy repaired trucks on commission and his income was unsteady. In an earlier period, he almost certainly would have had a full-time job with one of the manufacturing companies in southern Ohio, like GM. No such jobs were now available, and the couple spent as much as six months of the year below the poverty line. Becky hesitantly signed up for food stamps and got some aid for her children’s health insurance. But workers become ineligible for such programs when their incomes temporarily rise above the poverty line, and if their incomes fall again, they must reapply, which can be difficult.

Morduch and Schneider find that struggling and insecure Americans have developed a range of coping strategies. Many of them do save, but usually for specific goals like a down payment for a car or a child’s wedding. The same is true of Individual Retirement Accounts. Many savers withdraw the funds long before retirement, even though this is subject to a tax penalty. Only about half of all American families now have retirement savings, despite the tax advantages of IRAs and similar accounts.

But low-income Americans also try to save in innovative ways. Some have formed savings clubs, whose members each agree to meet a weekly or monthly target. Working on such goals collectively makes it easier to save. Others have formed sharing groups, where they agree to help one another out when financial trouble appears. Notably, the authors find few instances of reckless spending.

Public policy is slow to catch up with the episodic poverty and general volatility of incomes in this economy. It is difficult to qualify for programs such as food stamps and Medicaid on a short-term basis. Better regulation of credit providers to protect borrowers is also needed. Lending terms need to be clearer, and abusive interest rates controlled. The Consumer Financial Protection Bureau, originally proposed by Senator Elizabeth Warren when she was still a Harvard Law School professor, has made notable progress on these issues, but the authors argue that much more needs to be done.

In the end, of course, better jobs are the answer. Laws mandating higher minimum wages and regulations to implement them will help. Legislation has also been proposed in several states to require businesses to provide more predictable hours for their employees.

Happiness For All? presents recent research on the psychological consequences of low and stagnating incomes and outright poverty. The author, Carol Graham, a professor at the University of Maryland and a fellow at the Brookings Institution, makes a convincing case that perceptions of well-being, including factors like stress and a sense of the value of one’s life, have become far more negative for poorer Americans since 2007. Most interestingly, this has affected attitudes toward work, education, and ultimately the future of their children.

By recent measures, America is no longer superior to other nations in income mobility—how far people move up the income ladder from their starting place. American mobility ranks among the lowest of rich nations just as its income inequality is now among the highest of those nations. The Princeton economist Alan Krueger has demonstrated, in a formula he calls the Great Gatsby Curve, that the more privileged parents are, the more likely their children will be upwardly mobile. The rest are left behind, and the gap is widening.

According to a 2014 Pew survey, 62 percent of Americans believe that their children will be economically worse off than they are. Some 61 percent of Americans think the economy favors the wealthy. The Aspen Institute and The Atlantic found in 2015 that 75 percent of Americans believed the American dream was “suffering.” Graham’s own findings show that poor whites are the most pessimistic of racial groups. African-Americans and Hispanics are generally more optimistic; this does not mean their incomes are adequate, but more likely that their expectations have not been so badly undermined. In 2015 the Princeton researchers Ann Case and Angus Deaton made the stunning discovery that since 1999 life expectancy for whites in midlife has actually fallen due to drug addiction and suicide—it seems fair to conclude that despair at the lack of good steady jobs has contributed to this. The growing frustration of poor whites was one of the things Donald Trump exploited during his campaign in promising more and better jobs in the nation’s rust belts.

The most significant, and incontrovertible, of Graham’s conclusions is that low-income Americans’ beliefs about economic opportunity detrimentally influence their behavior. “It is abundantly clear,” she writes, “that without hope and faith in the future, individuals will fail to take up incentives and interventions even in instances where policy changes make them available.”

Understanding the psychological effects of poverty, Graham argues, should encourage more generous social programs. These effects are not the result of a “poverty culture” but are due to economic and social disadvantages that can mostly be corrected. In my view—not hers—minimal cash allowances for poor children should be a first step toward recognizing that the nation is not solving its poverty problem. Even as some programs have helped children, the rates of child poverty in America are significantly higher than those of almost all rich nations.

A consensus has developed among poverty researchers that no single level of income, no matter how carefully drawn, can adequately define poverty. Neither the OPM nor the SPM considers whether the poor have sufficient access to the educational and social connections that can help them rise into the middle class or lead a full life. Yet social exclusion is commonly studied in England and much of Europe. In Europe, the poverty line is considered 60 percent of the median disposable income—typical family income after taxes—in an attempt to adjust for such factors. The OPM in America is only 30 percent of disposable income. The SPM, which adjusts, if only partially, to a rising standard of living, is somewhat higher but not nearly at the European level. The poverty researchers David Johnson and Tim Smeeding say that the OPM would have to be up to 50 percent higher to equal European poverty lines.

Graham would like to see the federal government publish measures of well-being to broaden ideas about social policies. Similarly, Morduch and Schneider make a strong case for policies that recognize the effects of volatile incomes and seek to reduce the pressures they cause. At the least, these books show that as the economy has changed, more attention, not less, should be paid to new and expanded social policies, including more financial support for children under five, more generous housing subsidies, and easier access to Medicaid. They reveal that America has become even more unequal than has been widely reported. There is little reason to think this will soon be reversed.

It is apparent that economic growth has not been an adequate means of reducing poverty. In light of a continuing high poverty rate, the budget President Trump has proposed (not to mention Republican proposals to cut Medicaid sharply) is both incomprehensibly harsh toward the poor and bound to fail to help struggling regions of the nation develop economically. Housing assistance would be cut, as well as community development and student aid programs, to name just a few. Trump’s budget would slash a total of $54 billion from social programs in fiscal year 2018 and funnel the money into defense spending. His proposed cuts in coming years would be far deeper. Many of these cuts are unlikely to get through Congress, but Trump’s budget makes clear that neglecting the poor is now a presidential priority.