Poverty: The Crisis Katrina Revealed

The storm brought a brutal reminder of America's big class divide -- and the Bush Administration's policies are only deepening the rift

By Christopher Farrell

Can it be that nothing has changed since President Lyndon Baines Johnson famously declared "unconditional war on poverty in America" four decades ago? That depressing thought comes from the brutal and tragic images we all saw in the wake of Hurricane Katrina -- residents of New Orleans climbing onto rooftops, waving signs begging, "Rescue me." The flooded city's Superdome and Convention Center, and the Houston Astrodome filled with desperate evacuees. Children searching for parents, and parents searching for children.

The Gulf States' searing experiences and the new damage spawned by Hurricane Rita have pushed race and poverty in America back into national consciousness. It was hard to miss the message of the pictures: White middle-class citizens had the means to leave, while the poor, mostly black, were left behind.

The car, that icon of the American Dream, is now a symbol of something much different -- class divide in America. In New Orleans, 35% of black households didn't own a car, vs. 15% of white households. President Bush, in a nationwide address from New Orleans, talked about "deep, persistent poverty" and its "roots in a history of racial discrimination."


  Still, 2005 is not 1964. While far too many are poor in the world's wealthiest nation, progress has been made in battling poverty. The problem is that gains are at risk because of policy decisions by the White House and Congress over the past five years that have made life harder for the poor. If U.S. political leaders continue to concentrate on shoring up the finances of the country's wealthiest citizens and shredding the poor's safety net, the poverty rate will spiral higher. Indeed, the official poverty rate has already climbed to a three-year high of 12.7%, despite a strengthening economy.

There's no magic bullet, no one policy prescription for eliminating poverty. Still, over the past four decades, policymakers and their advisers have learned a lot about what it takes to bring the poverty rate down. But those policy initiatives have been neglected at best -- and reversed at worst -- in recent years.

First, let's look at what works. In the late 1980s and early 1990s, the issue of poverty was enveloped in despair. The condition seemed intractable. Studies showed that poverty was increasingly impervious to economic growth. A generation of conservative thinkers were shaped by Charles Murray's 1984 book Losing Ground, which argued that the government's Great Society programs actually worsened poverty.


  Murray argued that the poorest blacks had sunk into an underclass, a pathology marked by broken-down families, rampant drug use, and a population dependent on government largesse. Although Murray's analysis was wrong on many fronts, his thinking resonated with many people during the 1992 Los Angeles riots that occurred in the wake of the Rodney King verdict.

Yet by 2000, unexpected progress had occurred. The turning point was the 1996 Personal Responsibility & Work Opportunity Reconciliation Act, which cut welfare rolls by about half. The poor weren't just pushed off welfare. In many cases, they were better off -- albeit by a small margin. For instance, the official poverty rate among female-headed households with children dropped from 42% to around a third. The real average after-tax income for single-mother families rose slightly.

Perhaps more important, consumption rose for all groups within the overall class of impoverished Americans, according to a recent Brookings Institution study by Bruce Meyer and James Sullivan, professors at the University of Chicago and University of Notre Dame, respectively. The whole idea of an underclass disappeared from policy discussion.


  What accounts for these heartening signs of success? Strong economic growth and a tight labor market in the 1990s were critical. But so were a series of policy moves. Among the most important initiatives were an expanded Earned Income Tax Credit (EITC), a higher minimum wage, expanded child-care subsidies, and more money for Medicaid.

The EITC is a tax credit that goes toward families with low incomes. For a minimum-wage worker with two children, the EITC has the same impact as a 40% hike in annual earnings, according to research by Harvard University sociologists Christopher Jencks and Scott Winship. Housing vouchers opened up greater opportunities for parents to leave neighborhoods with concentrated poverty.

Of course, these programs weren't enough to lift many low-income families out of poverty. Nevertheless, living standards for a lot of them were improving. But all these programs suffered neglect or came under attack during the Bush Administration. The Republican Congress largely abandoned three decades of bipartisan support for the EITC, alleging that the program was rife with fraud. Congress turned back efforts to raise the minimum wage. Cash-strapped state governments slashed their support of Medicaid. In essence, the rich got tax cuts, the poor got cuts in support.


  Before Hurricane Katrina hit, the top priority of Congress and the Administration was getting rid of the estate tax -- which only affects the wealthiest 2% of the population. Congress planned on cutting $70 billion in capital gains and dividend taxes. Meanwhile, $35 billion in spending were slated to be cut from Medicaid, food stamps, child care, school training, and other such programs. For now, that legislative agenda is on hold. It should be deep-sixed -- permanently.

Long-term, the best antipoverty program is improving primary and secondary school education in the nation's poorest neighborhoods. But that takes time. Meanwhile, a lot can be done to open up opportunities for the poor to make a better life for themselves and their family. Expand the EITC. Raise the minimum wage. Hike child-care support. Stop cutting back on Medicaid. Make the housing-voucher program more generous.

A little bit here, a little bit there, and the poverty tide can be turned for the better -- slowly but inexorably. It's the right thing to do. And it's the economically smart thing to do.

Farrell is contributing economics editor for BusinessWeek. You can also hear him on Minnesota Public Radio's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace. Follow his Sound Money column, only on BusinessWeek Online

Edited by Patricia O'Connell

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