Keeping people in poverty by trying to bring them out of it

By David Cay Johnston
December 9, 2011

By David Cay Johnston

The views expressed are his own.

In nearly all 34 countries with modern economies, inequality is rising, a new study by the Organization for Economic Cooperation and Development shows. The gap is especially pronounced in the United States where the country’s largest program to alleviate poverty may be adding to the problem, not alleviating it.

The United States ranks fourth in income inequality after Chile, Mexico and Turkey. In the U.S. the best-off 10 percent make on average 15 times the incomes of the poorest 10th, compared to a six to one ratio in the Nordic countries, Austria, Hungary and Switzerland.

The OECD report, published on Monday, cites the U.S. earned income tax credit as an explanation for a sharp increase in the hours worked by low-wage Americans.

The tax credit, the largest U.S. program to alleviate poverty, is meant to be an incentive to work, but it may also contribute to poverty, effectively holding down wages of all low-skilled workers. Now how is that?

Imagine that more people whose skills limit them to low-paid work decide to work more hours so they can get the credit. Add in people who have the skills for better-paid work but cannot find it and so take lower-paid jobs because of the implicit supplement to their wages provided by the earned income tax credit.

The result is more workers seeking more work, allowing employers to hold back wage increases or even reduce wages because of the enlarged supply of labor. The employers benefit. The American median wage, in 2011 dollars, has hovered at just above $500 per week for more than a decade.

Add in the elimination of America’s largest welfare program 15 years ago, Aid to Families with Dependent Children, and the labor market is flooded with single mothers with few job skills. This not only holds down their pay, it also tends to depress the wages of all low-skilled workers.

DECENT LIFE UNAFFORDABLE

A pernicious problem in America is people who work but whose wages are too low for them to afford a decent life.

One in four Americans earns low wages — less than $11 an hour. Among modern countries only South Korea has a larger share of its workers in low-wage jobs and then only by a smidgen, according to a new study by John Schmitt of the Center for Economic and Policy Research, a liberal leaning economics policy organization in Washington.

Schmitt’s work shows that the share of American workers earning less than two-thirds of the median wage has been slowly increasing since 1980, a trend that also goes to the decline of unions due to anti-worker laws enacted by Congress.

The problem is not indolence, the OECD report shows.

America’s lowest paid workers, the bottom fifth, are working far more than they once did. In 1986 they put in 1,030 hours, a bit more than half time. By 2004 they were up to 1,300 hours. That is an increase of 26 percent.

Significantly, in almost every other country in the OECD study, hours worked by the poor fell.

DEPRESSED WAGES

The data indeed show that the flood of low-income workers, especially single mothers, is depressing the wages of all low-skill workers. One of four Americans with a job earns less than $15,000 and average income is less than half that.

Research by Professor Bruce Meyer of the University of Chicago Harris School of Public Policies shows that the largest increase in low-wage work was among single mothers with three or more children. In place of AFDC, as it was known, Congress in 1996 adopted Temporary Assistance to Needy Families with a maximum of 60 months of assistance.

Providing day care for children or poor working mothers has become a growing subsidy expense borne heavily by federal and state governments. In many cases the cost of child care, especially when a single mother has two or more children, exceeds what she can earn even working fulltime.

The earned income tax credit has grown rapidly and now benefits 26 million low-income individuals and families, primarily single parent households. The annual cost is approaching $60 billion.

Milton Friedman, the Nobel prize-winning Chicago School economist, proposed what became the EITC, a form of negative income tax, to encourage people to work. He noted that many people on welfare faced marginal tax rates of more than 100 percent if they left the dole for low-wage jobs. President Ronald Reagan championed the EITC because it required people to work to get benefits.

The credit provides its greatest benefits to people making from about $10,000 to $14,000. Earn more and the credit falls off. Work 1,300 hours at $10 an hour and you are in the sweet spot to get the biggest tax credit. Work an extra week and benefits slip.

If the earned income tax credit, combined with the end of welfare as we knew it, hold down wages for low-skill workers then it is time to find smarter ways than Chicago School theories to reduce poverty for those who work.

13 comments

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“The tax credit, the largest U.S. program to alleviate poverty, is meant to be an incentive to work, but it may also contribute to poverty, effectively holding down wages of all low-skilled workers. Now how is that?”

Our economy is one big field trial to replicate the Speenhamland Effect. Mission Accomplished!

“like the EITC, Speenhamland was an attempt to raise earnings without placing a burden on employers. If wages fell below a certain level, the government made up the difference; as wages rose, the government benefit fell
Employers soon discovered they could “game” the system by cutting wages below what workers were really worth to them… The Poor Law Commissioners’ Report of 1834, summarizing the failed program, called Speenhamland a “universal system of pauperism.”
“In the long run, the result was ghastly,” wrote economic historian Karl Polanyi in his 1944 classic The Great Transformation . “Wages which were subsidized from public funds were bound eventually to be bottomless…”
http://www.thesocialcontract.com/artman2  /publish/tsc_19_3/tsc_19_3_rubenstein_3 _printer.shtml

Posted by beowu1f | Report as abusive

The author has previously claimed that President Obama overturned a policy which restricted income/tax information for the top 400 income earners. Does anyone know to which policy he is referring, or on what date President Obama changed the policy?

Posted by BlueGrassPhotog | Report as abusive

If the statistics are correct about income (i.e. the statement “One of four Americans with a job earns less than $15,000 and average income is less than half that”) then the United States meet our very own criteria as a “third world country.” We are predominately a poor nation with a relatively small “elite” class lucky enough to earn over $15,000 per year. (I earn about 6x that amount and still consider myself “poor” by modern standards.)

Posted by DisgustedReader | Report as abusive

Poverty is a universal problem of mankind from time immemorial. But to get undue attention we are asked to look at (today) only the “34 countries with modern economies.” I think it’s more than a little disingenuous to ignore the rest of the world in this “review”.

“The [earned income] tax credit, the largest U.S. program to alleviate poverty, is meant to be an incentive to work…”. “more people whose skills limit them to low-paid work decide to work more hours so they can get the credit.” WHAT…a government policy actually WORKS, in that it accomplishes it’s stated intent? Oh NO!

“The result is [an] enlarged supply of labor…the labor market is flooded with single mothers with few job skills.”

OK, so all those lower class toughs in school that caused trouble, or stared out the window, or texted most of the day instead of learning actually left school (or dropped out) with “few job skills”? WHOSE FAULT IS THAT?

Is it any wonder that many immature women who try to “trap” a man not yet ready to commit to a permanent relationship, or who set out to become a single mother intentionally, or who are not willing to make the compromises necessary to keep a relationship (even marriage) find themselves with one or more “responsibilities” and “few job skills”? WHOSE FAULT IS THAT?

By 2000, the “1300 [average] hours” worked is an ANNUAL TOTAL. Working that amount puts these people “in the sweet spot to get the biggest tax credit”. That’s two and a half hours of work a week! Consider that in addition to the Earned Income Credit, these people also get child care subsidies, food stamps, and medicaid.

But this tender-hearted journalist thinks it TERRIBLE that people with “few job skills” and “responsibilities” earn too little “to afford a decent life”. Please. Their life today is well above that of the American middle class in the fifties!

Many, if not most, drive. Many, if not most are FAT! Their apartments and houses sport satellite TV dishes or cable connected flat scree TVs of substantial size. Their kids have the iPods, cellphones and “bling” sneakers and usual accessories.

Every household has a refrigerator, running pure water, sewage service, electrical service, heat and most have air conditioning. Resident individuals are NOT poor by any stretch of the imagination in either the actual or historical sense.

If their “take-home” pay does not cover these possessions, then they have found a safe and reliable way to make crime pay. I wish I could have done as well through my life working a couple of hours a week, standing on the local corner “hanging out” or watching soap operas, etc. to kill the rest of the time.

“The largest increase in low-wage work was among single mothers with three or more children.” OK, do we want these people sitting home making MORE children?

“Providing day care for children or poor working mothers has become a growing subsidy expense borne heavily by federal and state governments.” “The earned income tax credit…now benefits 26 million low-income individuals and families, primarily single parent households [at an] annual cost…approaching $60 billion.

You can create any kind of society you want just by the incentives and penalties chosen. Maybe I’m old fashioned, but before 1950 America paid NO ONE to pump out children of marginal intelligence, motivation or prospects.

I think it’s high time Taxpayer “Representatives” came up with a better investment for all this money!

Posted by OneOfTheSheep | Report as abusive

Columnist here…

@OneOfTheSheep, your math is way off.

1,300 hours per year is 25 hours per week, not 2.5; it is up from less than 20 hours per week in 1986.

Posted by DavidCayJ | Report as abusive

@DavidCayJ,

Thanks for catching that. Goof was mine, not the calculator’s.

Fortunately that correction doesn’t really change the validity of my perspective. I find it interesting that the “sweet spot” of the earned income credit is right where the average worker loses incentive to work more.

This suggests that the work is to get the most out of the earned income credit rather than to bring in as much as possible because the family can’t make ends meet. Not unlike farmers who find more profit in “farming the programs” instead of farming the land.

Posted by OneOfTheSheep | Report as abusive

Every job our society deems worth having done should pay a living wage. We can start by raising the minimum wage. The next step is, when unemployment is high, government should do large works projects, and train workers in fields of current shortages and projected needs; this both keeps labor expenses down for public projects, and unemployment low, which keeps wages up and employers competing for workers.

Posted by Clavis | Report as abusive

A person – whatever their social condition – is not really able to make ends meet at all on $14,000/year. I know the rents that are charged in my rural area and those of a friend in metro New York and they aren’t very far apart. They are even closer in the nearest city with a tiny fraction of the population of NYC.

A one-bedroom apartment in this rural town, in a very shabby old building, can rent for $600 to $750.00/month: heat included but not always utilities. My friend’s apartment in the NY area has four rooms – is behind a restaurant on the ground floor and backed by a parking lot for the upstairs tenants and sits just back from a major highway. It has a very small kitchen (about 8′x8′) – with only a very worn sink and some very old appliances but no counter tops or cabinets and is actually the entrance to the other three rooms. The bathroom has very old fixtures and is a very small corridor space (with cracks in the walls and leakage stains at all the plumbing connections) just off that kitchen. It is 8 feet by a little over 5 feet wide. To reach the bathroom from the bedroom – and the small room behind that can only be entered through the larger bedroom – he has to walk through the living room and kitchen. He pays $1,000 per month.

The commenter who seems to think that there was once a day when people had better work ethics, that social morality enjoyed some kind of golden age, and that there were no such things as single parents, forgets that the days when social welfare programs were only offered by charitable organizations, was also the days when the world had millions of priests and nuns and other “do gooders” who would volunteer to work for free and could at least staff kitchens and free clinics for the very poor and working poor. It is grossly inadequate for the demand and skills required now and will likely will be more inadequate in the future. He also forgets, or doesn’t realize, that building condition and the requirements that apartments and houses have stoves, refrigerators and working plumbing, are a matter of building and safety codes and not something even at the discretion of the homeowner or tenant.

He also seems to forget that in the days before building codes, many people lived in slums or near slum like conditions even in rural areas. As a Vista Volunteer I was able to see inside some of the older tenement buildings in NYC first hand. They were “dumbbell” tenements in Manhattan’s Little Italy that were still occupied. That type of tenement building was actually an improvement over older and even more squalid types of buildings that infested Manhattan. The dumbbell at least allowed light and air to enter the buildings at the front and back and through a five-foot wide shaft carved out of the party walls between buildings. The shaft permitted some ventilation but at six stories high it didn’t let in light. It was fought at the time by wealthy landlords like the Astors, as too good for the immigrant “garbage” and they resented the fact that it limited the number of rental units they could pack onto the narrow lots.

The ignorant and smug comments of the commenter – as usual – illustrate the shear gut selfish blindness that can envelope wealthy people and other pretentious more middle income types who forget that without social welfare programs, the slums will come back very quickly. Without all sorts of social subsidies – the buildings codes will have to be overturned, and the limitation on occupancy of apartments will have to be relaxed and we will see the return of Chinatown-like (Little Italy has since become part of Chinatown) living conditions where a dozen people pack into a small apartments and houses simply to pay the rent on squalid units. And slum conditions alone will breed all the social complaints the commenter mentions.

The pressure from the developing world will almost guarantee that standards of living fall here and the general condition of the housing stock will deteriorate rapidly. The fact that housing prices are falling still – apparently even in formerly stable areas – means that wages will not support the former market prices. One can guarantee it will get worse or my sister and father are lying that the underwater house they were able to pick up at what she thought was a good price and was supposed to be her home, is continuing to loose it’s market price. She’s a pretentious woman and very manipulative, but I doubt she’s lying this time. And it won’t be just the infrastructure that rots quickly in this country either.

The dumbbell buildings were built of masonry and are still standing, but most of this country is covered in “pretty boxes on the hillsides and they are all made out of Ticky-tacky”: hundreds of thousands of square miles of them. The “99 percent” live in them. OWS finally has a better idea by occupying the underwater houses. That way they might keep them intact – as long as someone is living in them. There are so many empty houses in my neighborhood it is worrisome. I built my own very small house as a do-it-yourself project and won’t be too surprised if I get back only what it cost me almost 25 years ago, if I have to sell out too. I did it without a mortgage. It cost a small fraction of what the new arrivals were paying just two years ago. And then I could be on welfare too. There is no real employment here anymore, and especially not for old people.

Posted by paintcan | Report as abusive

Did the single mothers who got jobs after the elimination of Aid to Families with Dependent Children end up with more, or less money after they got jobs?

Posted by Sewblon | Report as abusive

@Sewblon,

What’s your point? Even if the answer is no, is it not more equitable that these single mothers, many by CHOICE, work to provide for the family THEY CHOSE to start rather than be paid by taxpayers to sit home and pop out more and more dead-end babies? “Back in the day”, there were GENERATIONS on AFDC…it was a viable “way of life” for the lazy.

Posted by OneOfTheSheep | Report as abusive

@oneof the sheep – you are still obsessed with women have children that you think aren’t fit to live or to breed.

I live in a town in a state educational system that is primarily property tax funded and the rates have never been higher for educational quality that has never been lower. The system is stuffed with high cost layers of administrators who have good educations and who won’t work except for high salaries and great benefits. I have no idea what those people do for their incomes either. No one seems to know. The High School recently lost a principal without explanation but she walked off with a severance payment of $60,000. Not one article in the local papers has even been able to explain why she had such a luxurious contract. My Brazilian friend has been complaining for years that even educational programs to provide literacy and life skill classes for English as a second language students can’t exist without being infested with high priced, non performing parasites that claim they are fund raising professionals and administrators. And I have seen their counterparts in private business. I set eyes on the president of a large defense contractor who looked like he has been incubated in cotton and was a raised by extra terrestrials. It may not have mattered what the man’s IQ was as much as how much stock he had acquired in the company, to get that position.

Business behavior is in no position to lecture them either. They do the same thing. Parasites come in all income grades and classes.

The people who really take a bite out of budgets seem to be the well educated and well placed. They are the people capable of manipulation the system shamelessly and they have large pretensions to boot.

The high unemployment rates in this country are not due to laziness of the population or of a single low class. How convenient to think of it that way. They have far more to do with the way jobs are awarded and what are considered educations, or job skills at all.

The older I get the more I realize my education, and I wasn’t a poor student, was really not first rate. That was not due to my negligence alone but the laziness and lack of focus by the very conflicted staff and times I was raised in. When I think back about my college years I am infuriated that I didn’t have more self-confidence and wasn’t less afraid to rock the boat by challenging the qualifications of my professors and the system. But had a nineteen year old with a low draft number tried to get too unruly or demanding, I would very likely have been eliminated by the scam of higher education and “sent to the front”. Or I would have become disgusted and walked out of the bait and switch that program had become after the first two years I was there. And I was on the Dean’s list for the first three years of the program. I am 60 now and realize there was nothing there at all. I knew more when I entered the door after High School than I got in that five-year program at that school.

The wealthy in this country have never been role models.
They know how to know people and it is obvious that networks of insiders can conceal their skills at chicanery (as Veblen described it) and their inadequacies, by design and collusion. You may call that “higher intelligence. But I call that fraud and polite “genetic” warfare.

You will have to accept the fact sooner or later, that laizez faire capitalism is inadequate for the 21st century. If the babies are “dead end” as you call them – it may be due to the fact that the economic and political system they are raised in is just as dead end, at least the way jobs and rewards are being distributed.

You unjustifiably flatter the so-called industrious. I’ve seen them in action and am not at all impressed. It takes knowing what the successful “know” and that is where the class background, the moving ladder of preferment that is no ladder at all, and the insider knowledge seems to have its true role in society. I think that as a self-employed person – I was able to direct my efforts far more productively than in any office I ever worked in save one. That exception was in an office run by a small time dictator who actually spied on me and paid barley living wages. The Republican Party is full of men like him and they are no friends to the working man, especially not the low income working man. They, like you apparently, think they are all expendable. I won’t believe their rhetoric any more than I would believe a glass of muriatic acid is good for the digestion.

The truth may come out, as you seem to believe, and you may not like it any more than I do. Actually everyone knows it to some extent and they can also sense by instinct, when they are out of it, and many would prefer not to think about it at all. They know the educational system will be of no help to them whatsoever. In fact, it means they cooperate with their negation.

Posted by paintcan | Report as abusive

@paintcan,

I am “obsessed” only with the traditional and ongoing utter waste of many Taxpayer dollars. If “we, the people” don’t demand better, we deserve no better. You seem to meekly accept just about everything except the truth which you refuse to recognize or even acknowledge. Your loss.

I share your skepticism of the “educational establishment”. But you reveal considerable ignorance if you think the selection process of”…large defense contractor…” Presidents (actually it’s the CEO or COO that “call the shots”) has anything to do with stock ownership. They are frequently awarded large stock “options” because these are tax favored and give the executive some “skin in the game” in making sure the company makes decent profit (incentive and profit both being honorable in case you don’t know that).

You obviously don’t like the fact that employers unilaterally decide who they hire to do what for what pay. In any non-union setting, this has always been so and will likely always be so. Get used to it.

So, you are not “impressed” by the industrious. Well, it’s the industrious who have brought about the standard of living in America that remains the envy of those who value any hope of sustainability. It sure won’t be achieved by those who are NOT industrious. So all your opinion makes you is an ingrate.

Most self-employed people are industrious or they don’t succeed. And here I refer to 50-80 hr./wk “industrious”. And yes, I regard EVERY working man that is not “industrious” quite expendable. The “standard of performance” I always worked to meet was MINE, which far exceeded what ANY employer could dare ask of anyone.

How anyone in America could live sixty plus years and be as befuddled, bewildered and bitter as your words suggest you to be is beyond my comprehension.

Posted by OneOfTheSheep | Report as abusive

Mr. Johnston, when you were on with Chris Hayes this morning, I heard you say something that I believe is inaccurate about taxes, I’ve heard this a few times by some in the media and I keep banging my head when I hear it. Unemployment taxes are not paid by employees…FUTA and SUTA taxes are paid strictly by employers into a federal and state account which is debited based on employee claims. Correct me if I’m wrong, but as an accountant, I have dealt with these taxes before with a company. Thank you.

Posted by beste1ja | Report as abusive