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Businessweek Archives

Hooray For The Rising Tide

Economic Trends

Hooray for the Rising Tide

It's finally benefiting the poor

Back in the early 1970s, it seemed a foregone conclusion that a rising economic tide would lift all boats. All through the early postwar period--and particularly during the long expansion of the 1960s--a robust economy and declining unemployment seemed sufficient to raise many out of poverty. In fact, the apparent effect was so strong that in 1971, one expert speculated that poverty in the U.S. would be virtually eliminated within a decade.

Fast-forward a couple of decades and that prediction looked like a cockeyed optimist's dream. During the 1970s and 1980s, economic growth hardly made a dent in poverty. The contrast between the expansions of the 1960s and 1980s was especially sharp. Whereas some 35% growth in gross domestic product from 1963 to 1969 was accompanied by a 7.4% decline in the poverty rate, a nearly equivalent rise in GDP from 1983 to 1989 lowered the rate by only 2.4%.

By the early 1990s, many experts concluded that a growing economy by itself was no remedy for poverty. At the same time, many states began experimenting with welfare reforms that culminated in the 1996 national legislation that limited welfare dependency and encouraged recipients to seek work. The upshot has been warnings that welfare reform will only push people deeper into poverty, since economic growth and the rise in jobs that accompanies it no longer benefit the disadvantaged.

The good news, report Robert Haveman and Jonathan Schwabish of the University of Wisconsin at Madison, is that this doesn't appear to be happening. Using an econometric model, they find that economic growth and falling unemployment since 1992 appear to have regained the antipoverty punch they enjoyed in the early postwar period. Indeed, by their measure, the positive effects look even stronger (chart).

Several developments seem to explain the turnaround--particularly, recently rising pay and job opportunities for those at the bottom of the ladder. During the 1980s, real wages of low-income workers fell by 16%, while the real minimum wage plunged by 31%. Both have been moving higher in recent years. And the extremely tight labor markets of the current long expansion seem particularly beneficial for disadvantaged workers.

Not everything is coming up roses. A new study by the Center on Budget & Policy Priorities reports that the worst-off families (the poorest of the poor) have become even more impoverished in the wake of welfare reform. And a closer tie between growth and poverty entails the risk that poverty could soar during a downturn.

"Unless policymakers respond with help, such as public-service jobs," warns Haveman, "poorer workers could take a severe economic beating in a recession."By Gene KoretzReturn to top

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Buckling Up Beats Air Bags

Seat belts are cheaper lifesavers

Anyone who doesn't wear a seat belt because his car has air bags is a fool. That's one implication of a new National Bureau of Economic Research study of the effectiveness of seat belts and air bags in saving lives by Steven D. Levitt and Jack Porter.

Past studies of the subject, the authors claim, have been flawed because of what statisticians call "sample selection bias." Because systematic data are collected only for fatal crashes, most studies of seat-belt and air-bag effectiveness rely on such data. But that means that crashes in which the use of these devices reduced injury severity so no one was killed aren't included in the sample analyzed. As a result, the benefits of the devices tend to be underestimated.

To get around this problem, the two economists draw on the same basic data--with one big difference. They use only data for cars involved in accidents in which someone in another vehicle is killed. This removes the bias in the sample selection, since people are no longer included in the data simply because they themselves were killed (they're only counted when a person in the other car is killed). Thus, those who walk away relatively unscathed are now as likely to be included as those who die.

Using this technique, the researchers find that seat belts are more effective in saving lives than most previous studies suggest, while air bags are less effective. Specifically, they estimate that seat belts reduce the likelihood of death in a crash by about 60% and air bags by 9% to 16% in frontal impacts. Using recent cost data for such equipment, they estimate that the cost per life saved with seat belts is about $30,000, compared with $1.6 million for air bags.

"The data," says Levitt, "suggest that we could get a bigger reduction in fatalities by increasing seat belt usage by 10% than by equipping all cars on the road with air bags."By Gene KoretzReturn to top

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