Poverty trap in the US

policy ▪ poverty ▪

When one hears about poverty trap, the image that comes up usually involve developing countries. It isn't necessarily so. Here is Jeffrey Liebman, Harvard professor (and an adviser to presidential candidate, Barack Obama):

Despite the EITC and child credit, the poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000. I told her that she should first try to find a $35k job closer to home. Also, she apparently can’t fully reverse her decision to take the higher paying job because she can’t get the child care voucher back (the waiting list is several years long she thinks). She is really stuck. She tried taking an additional weekend job, but the combination of losing 30 percent in increased rent and paying for someone to take care of her child meant it didn’t help much either.

The question is what is the policy solution here...

You can read the rest at Jeff Frankel's blog here. It's not easy to design a policy support for the poor -- a means-tested program such as EITC that cuts off benefit at a certain income may create an adverse incentive at the margin for those whose income is around the cut-off point.

HT: Greg Mankiw.

Slightly off topic, I think it's about time Indonesian politicians start to think in a systematic way about policy support for the poor that minimizes the incentive distortions to the broader economy. I think this can be done -- for all its faults, especially as a program designed and implemented in such a short time, the cash transfer program was relatively successful in achieving such an objective. It's high time that we think of such programs, especially given the expected global food price hikes.

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Does poverty kill?

economics ▪ poverty ▪

A recent NBER paper by Abhijit Banerjee and Esther Duflo:

This paper uses household survey data form several developing countries to investigate whether the poor (defined as those living under $1 or $2 dollars a day at PPP) and the non poor have different mortality rates in old age. We construct a proxy measure of longevity, which is the probability that an adult's mother and father are alive. The non-poor's mothers are more likely to be alive than the poor's mothers. Using panel data set for Indonesia and Vietnam, we also find that older adults are significantly more likely to have died five years later if they are poor. The direction of causality is unclear: the poor may be poor because they are sick (and thus more likely to die), or they could die because they are poor.

For Indonesia, they find that:

[In] all age groups, there is very little difference in death rates between the poor and the extremely poor, but the non-poor are less likely to die than the poor and the extremely poor. This is true both five years out and ten years out, and in both rural and urban areas. In rural areas, depending on the age group and whether we look at five to ten years out, the extremely poor are 1.4 to 5 times more likely to die than those who live between $6 and $10 dollars a day. (p. 14)

They find a similar pattern in the Vietnam data. Though they have not established the direction of causality between poverty and longevity, "[on] balance, we are tempted to interpret the evidence accumulated in this paper as revealing, at least in part, that poverty does kill."

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Two books on poverty

books ▪ economics ▪ poverty ▪

Thanksgiving weekend gave me a short break away from my microeconomics problem sets. So, I picked up Understanding Poverty, a collection of articles edited by Banerjee, Benabou and Mukherjee which I bought a few months back on a good friend's recommendation. I am not usually fond of anthologies, but this is no usual anthology. This one is a gem!

The articles are written by development-economics superstars, from Banerjee, Duflo, Eswaran and Kotwal, Laffont, Morduch, Tirole, etc. -- you name it. None of the articles has any equation. Yet in the background... , one can almost picture economic models underlying each of these articles. I find it a great read as somebody interested in both the theoretical and policy aspects of development. Highly recommended! I will share some of them once I have time.

Another good book on the subject on my shelf is The Bottom Billion by Oxford economist Paul Collier. I've read patches of it, and they look good. I just need to find time to read it in one go. In the winter break, perhaps...

Update: Here is a review of Understanding Poverty by New York Times's Nicholas Kristof.

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