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."

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