BEING POOR IS GETTING SCARIER IN THE U. S.

Being Poor Is Getting Scarier in the U.S.

193 Jan 4, 2015 6:00 PM EST

By Mark Whitehouse

By any measure, the U.S. is among the wealthiest countries in the world. Judging from new research, though, it's becoming an increasingly hazardous place to be poor.

Every advanced nation has a mechanism to protect its most vulnerable members from economic shocks. In the U.S., government transfer programs such as unemployment insurance, food stamps and the earned income tax credit act to offset the impact of recessions, particularly for the poorest families. By putting much-needed money in the pockets of the people most likely to spend it, these "automatic stabilizers" also help the broader economy recover.

In a paper presented over the weekend at the annual meeting of the American Economic Association, economists Hilary Hoynes of the University of California at Berkeley and Marianne Bitler of UC Irvine explored how well automatic stabilizers in the U.S. are working. Using state-level data on unemployment rates and a measure of household income that accounts for taxes and transfers, they compared the effects of the most recent recession to those of the last deep recession in the 1980s.

The result: The U.S. is doing a significantly worse job of protecting its most vulnerable households than it did a few decades ago. Specifically, the economists estimate that during the 2008 recession, a one-percentage-point increase in the unemployment rate was associated with a nearly 10 percent increase in the share of 18- to 64-year-olds with household incomes of less than half the poverty level. That's roughly double the effect of unemployment in the 1980s recession.

Here's a chart showing the estimated effect of a one-percentage-point increase in the unemployment rate on the share of households that fall below various income levels, for both recession periods (ATTI means income after taxes and transfers):
Hoynes20141231

It's hard to imagine how anyone can survive at 50 percent of the poverty level. As of 2013, using the measure of income employed by Hoynes and Bitler, that corresponded to $9,384 a year for a family of three. Nonetheless, more than 7 million people were living below it.

Hoynes and Bitler attribute the increased vulnerability of the poorest households in part to the welfare reforms of the 1990s, which sharply reduced access to cash aid. In 1996, for example, Congress replaced the Aid to Families with Dependent Children program with Temporary Assistance for Needy Families, which was aimed at getting people back to work faster.

There are various ways the U.S. can improve its social safety net without unduly reducing the incentive to work. The Affordable Care Act, for example, subsidizes health care for the poorest families. Congress could expand the earned income tax credit, which provides added income to people in low-paying jobs. Rules restricting access to emergency cash assistance could be relaxed during severe recessions.

Over the past three decades, economic output per person in the U.S. has increased more than 60 percent, to an estimated $54,678 in 2014. Surely such a rich country can afford to do better for the poor.

To contact the author on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net