Scott Sumner  

How much did poverty rise under Reagan?

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This is from a Jeff Madrick article on poverty in America, in the New York Review of Books:

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.
I see this all the time, and I find it really annoying. In a very technical sense this is true, but I'm going to present more complete data, and you tell me whether it's misleading.

The poverty rate was 11.6% when Carter took office in 1977. The poverty rate rose to 14% in 1981, when Reagan took office. The poverty rate fell to 12.8% in 1989, when Reagan left office.

So how can the NYR of Books say "it rose under Reagan to approximately 15 percent"? That's because in Reagan's second year there was a very serious recession, and the poverty rate reached 15%. But the NYR of Books creates the impression that it rose during the 8 years that Reagan was in office, which is simply not true. Poverty fell under Reagan. it was Jimmy Carter who presided over a surge in poverty.

Of course there are lots of ways to massage the data, such as adjusting for changes in the business cycle, as well as inflation. As a general rule, poverty increases during presidencies when the economy deteriorates (Carter, Bush I, Bush II) and declines during presidencies where the economy improves (Reagan, Clinton, Obama). Unfortunately, Jeff Madrick seems to have an agenda, which requires his readers to believe that poverty increased under Reagan.

One other point. Yesterday, David Henderson quoted from a book by Peter Schuck. Here is one bit that caught my attention:

If we include noncash government benefits such as food and housing, if we take account of the Earned Income Tax Credit, and if we use a more realistic measure of inflation than the Consumer Price Index, then we would conclude that the 2013 poverty rate was not the reported 14.5%, but, rather, 4.8%.
Over the course of 61 years, I've run into a surprisingly large number of people who earn income on the fringes of the economy, doing various odd jobs. They are often paid in cash. Many of these people probably had very low "official incomes" being reported to the government. Thus I suspect that if you included money earned in the underground economy, the poverty rate would be far lower than even 4.8%.

The point of this exercise is not to suggest that there is not a lot of poverty in America, in a relative sense. I am not trying to minimize the problem. I'm quite happy with people claiming that 15% of Americans are poor if they mean, "incomes that the average upper middle class person views as low". Thus people in New York or LA who make 20% or 30% above the official poverty line are probably viewed as "poor" by the average well paid professional. That's a valid opinion.

Rather my claim is that absolute poverty, not having enough income for food, clothing, and some form of shelter, has decreased sharply in America, even as relative poverty may reasonably be said to have stayed around 10% to 15%, or perhaps even edged up a bit.

Here is the official poverty rate data:

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COMMENTS (16 to date)
HispanicPundit writes:

Great post, this is a point used often by the left.

Wish there were more post on fundamentals like this.

Stephen Gradijan writes:

Viewing the poverty rate without showing a graph with recessions is radically misleading in my opinion. Such a graph (in the US anyway) shows that poverty soars rapidly during recessions and falls slowly over time during economic expansions.

This strongly suggests that the best anti-poverty remedy is to avoid recessions. Now if only someone could come up with a method to avoid recessions; NGDPLT anyone?

Jake writes:

Good post Prof Sumner.

I know everyone has their struggles but it's hard to feel too concerned about the relatively poor in developed countries when hundreds of millions elsewhere are literally naked and starving.

If we want to redistribute wealth for humanitarian reasons then those dollars should be going to the absolutely poor. Yet there is little support for this even among liberals.

I think it reveals nationalist undertones, same as the protectionist/jobs element of the Trump and also Bernie Sanders campaigns.

Nationalism is a cancer to human happiness and prosperity yet sadly it's so firmly rooted in our culture.

Scott Sumner writes:

Thanks HispanicPundit.

Stephen and Jake, Good points.

Thaomas writes:

Jake,

I sort of agree, but why pose redistribution to the near poor with redistribution to the far poor? The issue of the day is by how will redistribution to both be reduced.

john hare writes:

Redistribution without addressing root causes of the poverty being addressed will be an endless and increasing drain on those sending the help. There is a willingness by some people to redistribute to the last penny of my resources. Broke people don't do charity.

Russ Roberts writes:

Scott,

The other problem in all these calculations is that starting in the 1970s the divorce rate rose and the marriage rate fell. Huge increase in families headed by single moms. Distorts assessment of changes in poverty over time. I am working on a video series on these issues--first three episodes of the 4-5 that are planned should be released this fall. Will keep you posted.

BTW, if you're trying to assess the impact of the economy on the poor I don't think you want to include government benefits. That answers a different question.

steve writes:

A number of times I have run adds for casual labors wanted in Craigslist. Each time I will get 30 or more calls. Most of these are young men getting unemployment payments or some other welfare and who are getting unreported cash on the side. I believe that this underground economy is much bigger than most realize.

Jake writes:

Of course ideally the goal is to have everyone produce for themselves, making redistribution unnecessary. I think there is a short-run vs long-run tradeoff though.

In the long run we need pro-growth policies. Or perhaps it's better stated as we need to avoid anti-growth policies, since free markets do the heavy lifting for us. Economic growth is what creates wealth and eventually could eliminate poverty.

But in the short run, people are dying. The loss of life is tragic and mostly preventable. Even though redistribution traditionally has negative effects on long run growth, maybe it is worth sacrificing some future gains to alleviate suffering today.

It might even speed up the rate that impoverished countries develop, bringing them to self sufficiency faster. After all it's hard to build capital when you can barely feed and shelter yourself.

I'm not saying this is optimal policy -- just something to think about.

But to tie back into my original point. If you give me the option to send aid to absolutely poor foreigners vs say, Medicare recipients -- I believe it would be much more of a boon to humanity if you send it to the foreigners.

Scott Sumner writes:

Russ, Thanks, I look forward to seeing that.

Steve, Interesting.

Jake, Good points.

Shane L writes:

I would expect poverty and inequality measures to be influenced by large-scale migration. As large numbers of poor people from foreign countries moved to the US, the population of poor people was being continually refreshed, which I presume would increase apparent poverty rates.

Max writes:

What about changes in unemployment measurements? Do they impact performances? Is unemployment measurement before 1994 even comparable to today? Do you have an opinion on that or is this in general too much detail for macro economics? Could you point me to some good papers discussing this issue?

Why the focus on presidents? Aren't changes more dependent on the state of the legislature?

Mark Bahner writes:
Aren't changes more dependent on the state of the legislature?

Or the state of the Fed, e.g. with Fed policies that tighten money supplies and reduce inflation but increase unemployment.

Daniel Griswold writes:

Another great post, Scott. A few years ago, I caught Paul Krugman manipulating the poverty numbers to make Reagan look bad:

https://www.cato.org/blog/carter-reagan-poor

Still waiting for a correction.

Floccina writes:

How about taking the following on: These 5 charts prove that the economy does better under Democratic presidents


I say:

1. Too small a data set.
2. Clinton was and economic liberal, Nixon was not.
3. Congress has the power of the purse.
4. Accelerating inflation helps the economy grow but cannot go on for ever.

Still I would like to see your analysis.

Hunter writes:

According to this chart poverty rate went down from 1959 to 1973 and never whet any lower. Bretton-Woods system ended in 1971. Correlation or Causation with a two year delay?

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