American Journal of Economics and Sociology, Inc

American Journal of Economics and Sociology, Inc.

It's No 'Laffer' Matter: Claim That Increasing Welfare Aid Breeds Poverty and DependenceFails Statistical TestAuthor(s): Sanford F. Schram and Paul H. WilkenSource: American Journal of Economics and Sociology, Vol. 48, No. 2 (Apr., 1989), pp. 203-217Published by: American Journal of Economics and Sociology, Inc.Stable URL: http://www.jstor.org/stable/3487602Accessed: 19/05/2009 19:48

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It's No 'Laffer' Matter: Claim That Increasing Welfare Aid Breeds Poverty

and Dependence Fails Statistical Test

By SANFORD F. SCHRAM and PAUL H. WILKEN*

ABSTRACT. The claim is analyzed that there is a Laffer-type relationship between welfare spending and poverty. Conservative analysts in recent years have asserted that over the last several decades poverty declined with increased welfare

spending up to a point, beyond which increases in spending produced increases in poverty. Measures of pre-transfer and pre-welfare poverty are used in order to account for poverty due to welfare dependency. Employing data for 1959- 1983, the authors find evidence which casts doubt on the validity of the hypothesis that there has been a Laffer-type relationship between welfare spending and

poverty.

Introduction

FOR TOO LONG, when explaining poverty, various analysts have contented them- selves with "blaming the victim." And while this discursive sport seems to be

enjoying a period of renewed popularity, a new pastime is gaining credence with social commentators-"blaming the program." This new perspective in-

corporates much of the old's disdain for the poor but focuses responsibility for the poor's plight on the social welfare programs which ironically are designed to help them. Neoconservative analysts, most prominently Charles Murray in

Losing Ground, have maintained that we have overinvested in social welfare

programs and that beyond a certain point increased spending on public assistance has become counterproductive.' From this perspective, by the 1970s welfare benefits soared so high that they made living in poverty a meaningful option for the poor. One major consequence of the increased value of welfare benefits

they assert, has been that for some time now social welfare programs have done more to cause poverty than to alleviate it.

* [Sanford F. Schram, Ph.D., is associate professor of political science, and Paul H. Wilken, Ph.D., is director of institutional research, at the State University of New York College at Potsdam, Potsdam, NY 13676-2294.] The authors thank Sheldon Danziger, Pat Turbett, Michael Wiseman, Doug Brown and John Fitzgerald for their helpful suggestions. Dan Powers provided critical

computing advice and Steven Sureshac and Chou Wang helped prepare the data for analysis. Debra Hegerfeld supplied excellent clerical assistance.

American Journal of Economics and Sociology, Vol. 48, No. 2 (April, 1989). ? 1989 American Journal of Economics and Sociology, Inc.

American Journal of Economics and Sociology

Lowell Gallaway and his associates, Richard Vedder and Therese Foster, have made specific empirical claims lending support to the argument that increased social welfare spending has encouraged the poor to live in poverty dependent on the State. Gallaway and Vedder in one summary of their argument have written "[a]s federal public assistance grew greater [in the 1970s] the disincentive effects that aid poses for work effort became so substantial that the poverty- reducing effects of public aid were overwhelmed by the poverty-increasing disincentive effects. Boosts in aid caused more, not less, poverty.. . . The increase in public assistance beyond 1972 levels has added an estimated 5.7 million Americans to the poverty rolls, as more of us, voluntarily, have chosen to be poor."2

Figure 1: Poverty and Federal Per Capita Public Aid 1959 - 1983

(U. S. Population and 1980 Prices)

24% - hypothesized

22% - Latter curve * | relationship

20% -

18% - 1980-83 Poverty Rate

16% -

14%- -

O g * . 12%-

10% 1 $20 $40 $60 $80 $100 $120 $140 $160 $180 $200 $220 $240

Per Capita Public Aid Source: U.S. Bureau of the Census, Statistical

Abstract of the United States.

In a previous article,3 we examined evidence for the hypothesis by Gallaway and Vedder that in the 1970s high benefits attracted poor families onto welfare so that high-benefit states tended to have increases in child poverty while low- benefit states tended to have declines.4 In the present analysis, we look at a related hypothesis by Gallaway, Vedder and Foster which posits that there is a

Laffer-type relationship between federal welfare spending and poverty.5 In other words, they suggest that poverty declines as welfare spending increases up to a certain point, beyond which poverty rises with further increases in spending.6

In the following analysis, we review data relevant to this particular empirical claim, present alternative interpretations of data relating to it and offer a reassessment of the welfare dependency thesis. Rather than confirming the idea that social welfare programs cause poverty, our analysis reveals the poverty of the "blaming the program" perspective.

204

Welfare

II

It's No "Laffer" Matter

GALLAWAY AND HIS COLLEAGUES have given the welfare dependency thesis a level of specificity it has previously lacked. Their empirical analyses go beyond re-

viewing secular trends of social welfare spending and poverty7 and offer instead statistical evidence indicating causal relationships between the level of spending and benefits on the one hand and poverty rates on the other hand. For this reason alone, their work deserves special attention.

They present a "Poverty-Welfare Curve" (given in Figure 1) which purports to show evidence of a Laffer-type relationship between federal per capita welfare

spending in constant dollars and the percent of the population classified as

poor, controlling for unemployment and per capita income.8 Gallaway, Vedder

Figure 2: Poverty and Per Capita Public Aid From 1959 - 1983

O- Per Capita Public Aid

- Poverty Rate

$240- 24%

$220- *. O - 22% $200- /

$ 80- \ / -20% Per Capita $160- * p0 Poverty Rate Public Aid $140- - 18%

$120- \ / -16% $100- \ 0 . $80 - / -14%

$60 - -12%

$40 - oo2o?0

*o . .*

$20 1 I I I I 10% 1955 1960 1965 1970 1975 1980 1985

Year Source: U.S. Bureau of the Census, Statistical

Abstract of the United States.

and Foster refer to the curve as a Laffer-type one because it takes the same shape as the relationship economist Arthur Laffer has suggested exists between taxes and revenue. For Laffer, beyond a certain point increases in the marginal tax rate produce less revenue. The Poverty-Welfare Curve posits a similar, if inverse,

quadratic relationship, namely that, after accounting for factors such as unem-

ployment and income, poverty declines as welfare spending increases up to a certain point, beyond which poverty rises with further increases in spending.

In order to reconsider this claim, let us start with a simple trend line analysis. Gallaway, Vedder and Foster examine the effects of spending on poverty for

1953 to 1983, using the "official" poverty rate for 1959 to 1983 and estimated rates for 1953 to 1958.9 They measure social welfare spending with real per capita federal expenditures. When we plot these data, we find, like them, that

205


the relationship between the national poverty rate and per capita public aid

expenditures is more curvilinear than linear. (See Figure 1.) Yet it is highly questionable whether there is a Laffer-type relationship between poverty and

public aid. In fact, close inspection of the data suggests there is not. More

importantly, examination of trend line data reveals that what relationship we do find is the product of poverty first declining in the 1960s while expenditures

Table 1

Regressions for a Quadratic Relationship Between Per Capita Federal Public Aid and Individual Poverty Rate

1953-1983

Percentage of All Persons with Incomes Below the Poverty Line

Per Capita Income

Median Income

(1) Linear -.0006

(.75)

Average Family Size

Percent of Families Female-Headed

Unemployment

Public Aid

Public Aid2

Adjusted R2 Rho

(Standard Error of Rho) Durbin-Watson Threshold

.62 (3.1) -.10* (1.9)

.0003* (1.9)

.98

.85 (.10) 2.09

$179.41

(2)

-.41 (.99)

(3) Linear

-.001 (3.6) -4.9 (.83)

-22.5 (.51)

.18 .34 (2.3) (1.7) -.005 -.05 (1.5) (1.1)

.00001* .0001 (1.7) (1.1)

.98 .99

.86 .42 (.12) (.22) 1.69 1.68

$186.65

Note - t-statistics appear in not reported.

parentheses. Constants are

aIn the linear version of each equation, all variables except the quadratic term are linear. In the log version, all except the expenditure terns are logged.

* = expenditure term is significant at .05 level for a one- directional test.

(4) Log

-1.1 (3.8) -.21 (.19)

.54 (1.9)

.18 (3.5) -.005* (2.7)

.00001* (1.9)

.99

.24 (.20) 2.03

$256.98

206

Welfare

rose and then climbing in the late 1970s and early 1980s when expenditures initially leveled off and then subsequently declined. (See Figure 2.)

Table 2 REGRESSIONS FOR A QUADRATIC RELATIONSHIP BETWEEN PER CAPITA

CASH PUBLIC ASSISTANCE AND INDIVIDUAL POVERTY RATE 1953-1983

Percentage of All Persons with Inccres Below the Poverty Level

Per Capita Income

Median Income

(5) Linear

-.0004 (.57)

(6) Log -.31 (.90)

Average Family Size

% Families Female-Headed

Unemploymnt

Cash Assistance

Cash Assistance

Adjusted R2 Rho


.60 (3.3) -.23* (1.7) .0009 (1.5)

.98

.88 (.06) 2.26

$125.79

(3

(1 .00 (1

(. 2.

$12

(7) (8) Linear Log

__

- -.001 (5.7) -5.5 (1.0) -30.3 (.69)

19 .28 .1) (1.8) 01* -.14 .9) (1.3) 005* .0006 .7) (1.3) 99 .99 87 .39 07) (.21) 04 1.64 7.77

Note - t-statistics are in parentheses. not reported.

Constants are

aIn the linear version of each equation, all variables except the quadratic term are linear. In the log version all except the expenditure terms are logged.

* = expenditure term is significant at .05 level for a one-directional test.

Figure 2 does indicate that expenditures did continue to rise in the late-1970s while the poverty rate stagnated. Danziger and Plotnick have noted the declining anti-poverty effectiveness of transfers: "Cash social insurance, cash public as-

sistance, and in-kind transfers all became less effective at reducing poverty."10

-1.3 (6.7)

.34 (.36)

.29 (1.1)

.15 (3.9)

-. 009* (2.1)

.00003 (1.5)

.99

.17 (.20) 1.81

$117.13

207



FEDERAL PUBLIC AID AND THE PRE-TRANSFER POVERTY RATE

1967-1983

Pre-Transfer Percentage of Families with Incomes Below the

Poverty Line

(9) a 10 (11) (12) Linear Log Linear Log

Per Capita Income .0002 .29 - - (.27) (.16)

Median Income - - -.0009 -.90 (6.5) (5.5)

Average Family Size - - -5.9 -.93 (1.7) (1.5)

% Families Female-Headed - - 9.7 .06 (.39) (.34)

Unerployment .89 .31 .35 .11 (2.9) (3.0) (4.7) (3.8)

Public Aid .01 .00006 .04* .002*

PbcA2 (.15) (.01) (2.8) (2.1) Public Aid -.00002 -.0000005 -.0001* -.000006*

~2 (.10) (.05) (2.9) (2.2) Adjusted R .92 .92 .99 .99

Rho .49 .54 .13 .28 (Standard Error of Rho) (.41) (.33) (.22) (.24) Durbin-Watson 1.65 1.45 2.69 2.46 Threshold

Note - t-statistics appear in parentheses. Constants are not reported.

aIn the linear version of each equation all variables are linear except the quadratic term. In the log version, all except the expenditure terms are logged.

* = expenditure term is significant at .05 level for a one- directional test.

This occurred in spite of a high proportion of all transfers continuing to go to the poor. Yet given that the anti-poverty effectiveness of transfers varies widely by group, adverse demographic changes in the 1970s, such as the rise in the number of female-headed families, were the primary factors behind the reduced

proportion of the poor lifted out of poverty.l' In addition, the rise in families who were relatively less successful in escaping poverty was compounded by their being eligible primarily for programs, such as AFDC, which were suffering cutbacks and declining in real value. Further, deteriorating economic conditions

208

Welfare 209

lent a hand and contributed to the stagnation of the poverty rate. In sum, ex-

penditures continued to climb in the late-1970s, but there are good reasons to

suspect that the stagnation of the poverty rate at that time was attributable to factors other than the disincentive effects of welfare.

III

Problems With the Analyses

GALLAWAY, VEDDER AND FOSTER'S Poverty-Welfare curve is based on a multivariate

analysis which does take other factors into account, specifically per capita income


CASH PUBLIC ASSISTANCE AND THE PRE-TRANSFER POVERTY RATE 1967-1983

Pre-Transfer Percentage of All Persons with Inconmes Below the Poverty Rate

Per Capita Incore

Median Income

Average Family Size


Unemploynent

Cash Assistance

Cash Assistance2

Adjusted R2 Rho


(13) Unadjuste (14, Linear for (13) Log

.0009 .0009 .44 (3.2) (3.0) (3.4)

_ _ _

1.0 (12.6)

.03 (.27)

-.0003 (.59)

.95

.01 (.33) 2.20

1.1 .34 (13.9) (13.1) -.08 -.004 (1.1) (.69) .0002 .000008 (.58) (.31)

.94 .96 .04

(.37) 1.95 2.12

Unadjusteg for (14)

.44 (3.5)

.35 (16.0) -.008*

(2.7) .00003*

(1.9) .95

2.00 $151.89

Note - t-statistics are in parentheses. Constants are unreported.

aIn the linear version of each equation, all variables are linear except for the quadratic term. In the log version, all except the expenditure terms are logged.

bFor equations where Rho approximates 1.00, the equation is recomputed on the basis of first differences in all the variables. For equations where Rho approximates 0.00, the equation is recomputed without adjusting for autocorrelation.

expenditure term is significant at .05 level for a one-directional test. = expenditure term is significant at .05 level for a one-directional test.

and unemployment. They present a series of regressions all basically variants of the equation:

P = a - b1Y + B2U - b3A + b4A2,

(15) Linear

-.0008 (5.3) -7.9 (2.1) -4.9 (.18)

.44 (5.9)

.17* (2.2)

-. 0007* (2.2)

.99

.34 (.21) 2.08

(16) Log

-.79 (4.6) -1.3 (1.7) -.04 (.18)

.14 (5.2) .008* (1.8)

-.00004* (1.8)

.99

.43 (.21) 1.84

210 American Journal of Economics and Sociology

where

P = poverty rate Y = per capita income U = unemployment rate A = per capita federal public aid

A2 = (per capita federal public aid)2.12

Table 5 REGRESSIONS FOR A QUADRATIC RELATIONSHIP BETWEEN PER CAPITA FEDERAL

PUBLIC AID AND THE PRE-WELFARE POVERTY RATE 1967-1983

I Per Capita Income

Median Income

Average Family Size


Unenployment

Public Aid

Public Aid2

Adjusted R2 Rho


(17) a (18 Linear Log -.0001 .09

First Differenc

for (18) -.61

(.16) (.16) (1.7)

.52 (2.0) -.04 (.55)

.00008 (.48)

.78

.77 (.34) 1.34

(19) Linear

~- - -.-.0008 (4.0)

_- ~ - 2.4 (.44)

_- ~ - 71.9 (1.9)

.26 .13 .13 (2.0) (1.6) (1.2) -.004 -.005* .008 (1.2) (2.4) (.43)

.000008 .00001* -.00007 (.94) (2.2) (1.5)

.82 .77 .95

.94 - -.25 (.28) (.38) 1.63 --- 1.63

$208.68

(20) Unadjusted Log for (20)

-1.2 (3.3) -.65 (.46)

.32 (.76)

.09 (1.5)

-.0008 (.50)

-.000001 (.36)

.95 -.06 (.39) 1.84

-1.3 (4.1) -.22 (.20)

.42 (1.2)

.08 (1.6)

-.0008 (.53)

-.000001 (.36)

.95

2.05

Note - t-statistics are in parentheses. Constants are unreported.

aIn the linear version of each equation, all variables are linear except for the quadratic term. In the log version, all except the expenditure terms are logged.

bFor equations where Rho approximates 1.00, the equation is recomputed on the basis of first differences in all the variables. For equations where Rho approximates 0.00, the equation is recomputed without adjusting for autocorrelation.

= expenditure term is significant at .05 level for a one-directional test.

On the basis of these regressions, Gallaway, Vedder and Foster conclude that there is indeed a quadratic relationship between spending and poverty; that the mid-1970s marked the trough of this Poverty-Welfare curve; and that since then increased spending has brought more poverty as high welfare benefits discour-

aged people from working. There are, however, several problems with this analysis. First, there is some

question as to whether per capita or median family income best measures in-

-

Welfare

come's effects on the poverty rate. On the one hand, Glen Cain, in McLanahan, et al.,'3 has written, "Median income and earnings are logically and historically the principal correlates of poverty," whereas per capita income may often be unrelated to poverty. Cain notes that per capita income may rise while earnings decline simply because of changes in the worker/nonworker ratio in the population. Therefore, per capita income can rise while family incomes decline and produce more poverty. On the other hand, Rebecca Blank has suggested that median family income reflects changes in family size and structure and

thereby distorts the effects of the general availability of income on poverty.l4 A second issue is the value of per capita federal public aid expenditures as a

measure of social welfare spending's effects on poverty. Roberton Williams has

succinctly noted what he sees as three major problems with this measure.'5 First, only federal spending is included, even though the hypothesis under examination concerns the effect of total spending on the poor and poverty. Second, the measure standardizes expenditures in terms of the total population rather than

recipients. This creates the possibility of per capita expenditures rising while

expenditures per recipient are static or even declining. Expenditures and re-

cipients may rise faster than the population as a whole, especially during times of economic downturn, resulting in per capita expenditures increasing while the benefits per recipient are stable or even decreasing. Third, federal per capita public aid includes funds spent on in-kind assistance such as Food Stamps and Medicaid. These expenditures are undoubtedly of value to poor people, although the debate over how they should be counted continues to be an intense one.'6

Gallaway, Vedder and Foster, however, seek to assess the effects of federal

public aid expenditures on the "official" poverty rate which does not account for the value of in-kind benefits to poor people. The net result is that comparing these two measures biases the results in favor of the argument that increasing expenditures beyond a certain point produce more poverty.l7 With these mea-

sures, it is entirely possible to have growth in public aid expenditures, largely due to increases in spending on in-kind benefits, and to have simultaneously no change or even an increase in the official poverty rate strictly for the reason that it does not calculate the effect of in-kind benefits. Under these conditions, it would be possible to have public aid expenditures growing, "real" poverty declining, and "official" poverty static or increasing.

The matter of examining total rather than federal expenditures is straightfor- ward. Yet there is a strong possibility that they vary together, given the fact that the national government has contributed at least half of all public aid expenditures in about every year of the post-World War II period. The question of

per recipient versus per citizen expenditures is more problematic. Per citizen

expenditures may misspecify the level of benefits to recipients, but per recipient

211



CASH PUBLIC ASSISTANCE AND THE PRE-WELFARE POVERTY RATE 1967-1983

Pre-Welfare Percentage of All Persons with Incomres Below the

Poverty Level

Per Capita Income

Median Income

(21) Linear

.0001 (.65)

(22k Log

.05 (.49)

Average Family Size


Unemployment

Cash Assistance

Cash Assistance2

Adjusted R2 Rho


.57 (12.2) -.03

(.53) -.0001

(.55) .94

-.29 (.27) 2.18

(15 -.C

(2 .OC

(.

(. 2.

(23) Linear

-.0004 (2.2) 9.8

(2.1) 83.9 (2.4)

27 .32 >.3) (3.3) )07* .09* !.3) (1.8) )001 -.0006* 70) (2.7) 93 .95 48 .48 28) (.33) 21 2.13

Note: t-statistics appear in parentheses.

aIn the linear version of each equation, all variables except the quadratic term are linear. In the log version, all except the expenditure terms are logged.

* = expenditure term is significant at the .05 level for a one-directional test.

measures introduce the problem of endogeneity into the equation. The model under consideration suggests that beyond a certain point welfare spending en-

courages more welfare dependency and thereby creates more poverty. Welfare

dependency and the receipt of welfare are therefore endogenous to poverty and that endogeneity adversely affects our ability to evaluate the significance of a per recipient measure. Including a per recipient measure in our equation would make it impossible to disentangle the effects of spending on welfare

(24) Log

-.68 (1.5) 1.8

(1.3) .60

(1.5) .17

(2.8) .001 (.31)

-.00002 (1.1)

.94 -.46 (.38) 1.87

212

Welfare

dependency and poverty. The question of excluding in-kind expenditures because they are not accounted for in determining official poverty is also a valid one. The alternative would be to use a measure of poverty which is adjusted for in-kind benefits; however, reliable estimates of such poverty are available for

only a few years at best.'8 A third and related issue is whether the official poverty rate is in another sense

an inappropriate measure for indicating the extent to which welfare dependency and thereby poverty result from increased social welfare expenditures. While the official poverty rate does not account for the value of in-kind benefits, it does account for the effects of cash transfers. Cash public assistance payments usually do not lift poor persons out of poverty, but in some cases they may. In these instances poverty status can not be used as an indicator of dependency, and we can not suggest that increased welfare spending leads to increased de-

pendency. This problem can be addressed by using measures of pre-transfer and pre-

welfare poverty.19 Such measures indicate the level of poverty without accounting for the income which transfer payments or welfare benefits add to people's budgets. These measures do not strictly indicate the level of poverty in the absence of income transfers or welfare benefits, because undoubtedly under such hypothetical circumstances there would be greater economic productivity, less taxation and hence less poverty. They therefore overestimate pre-transfer poverty, but this limitation does not negate their usefulness for our purposes.

Our interest lies not in estimating the level of poverty without government expenditures but instead in examining what some have called "dependent"20 or "latent"21 poverty and how it is related to welfare spending. "Dependent" or "latent" poverty measures indicate the number of economically dependent people or those who do not have enough money from private sources to escape poverty. If the "dependent" or "latent" poverty population were to increase with welfare spending, we would have grounds for suggesting that increased welfare expenditures produce increased welfare dependency and more poverty.

Given these considerations, it is necessary to use a series of alternative measures to assess the "Poverty-Welfare Curve" argument.22 Tables 1-6 present the results of a series of regressions designed to assess this hypothesis. In Tables 1 and 2, we examine, like Gallaway, Vedder and Foster, the poverty rate from 1953 to 1983, even though the United States Government only reports the "official" poverty rate for 1959 on. In order to replicate their analysis, we use their estimates of the poverty rate from 1953 to 1958 which compare favorably with others that have been made recently.23 Tables 3 and 4 present results for the

pre-transfer poverty rate for the years available (1967-1983) and Tables 5 and 6 present the results for the pre-welfare poverty rate for those years. Each equation

213


is calculated with either per capita income or median income, percent of families female-headed and average family size. In this way we can account for the differences in median versus per capita income in predicting poverty. These

equations are also calculated separately, using both per capita federal public aid expenditures and per capita total cash public assistance. Per capita total cash

Table 7 SOCIAL WELFARE SPENDING AND BENEFITS 1960-1983

(1980 $)

Per Capita Federal Public Aid

$ 32.64 35.10 40.11 42.75 44.49 48.40 56.57 65.40 76.54 87.22

100.19 127.49 153.18 158.25 159.62 193.10 216.12 218.57 227.19 222.46 216.78 220.36 192.66 197.54

Per Capita Cash Public Assistance

$ 54.80 55.82 56.51 57.47 58.75 58.75 62.08 68.07 74.83 82.74 88.49

106.96 113.31 110.68 111.67 123.79 125.42 126.39 133.96 112.85 105.80 102.91

96.78 104.20

assistance has the advantage of including state and local as well as federal

spending, while excluding in-kind benefits which are not accounted for in the official poverty rate. Both log and linear versions of each equation are presented and for each equation we indicate where appropriate the threshold beyond which increased spending is related to increased poverty.

We use the Cochrane-Orcutt technique to adjust our regressions for autocorrelation and report the Rho statistic (and its standard error) in each instance.24

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

214

Welfare

Where Rho approaches 1.00, it becomes appropriate to assess the significance of the variables by regressing the first differences of the dependent variable (Pt - Pt-,) on the first differences of the independent variables. Where Rho approximates 0.00, it is not necessary to adjust for autocorrelation. In cases where Rho approaches either of these values, we present the initial equation and its alternative.

Tables 1-6 offer conflicting findings which cast doubt on the validity of the

"Poverty-Welfare Curve." The major differences are between the regressions for official poverty and those of pre-transfer and pre-welfare poverty. The regressions for official poverty generally indicate a relationship between spending and poverty. (See Tables 1 and 2). The thresholds for these equations are generally meaningful and indicate, as does Table 7, that several years of relatively high spending are associated with relatively high poverty. The threshold for

Equation (4), however, is so large it implies that in no year was spending high enough to create more poverty. Also, the linear median income Equations (3) and (7) both fail to indicate a significant quadratic relationship between spending and poverty.

This lack of consistency intensifies when we consider the pre-transfer and

pre-welfare regressions in Tables 3-6. In these tables, only two of sixteen regressions indicate a significant quadratic relationship (in the right direction) between

spending and poverty. Moreover, one of these two equations, (14), has a threshold which indicates that we have not reached the point where increased spending produces increased poverty. Therefore while our data seem to suggest that there is a quadratic relationship between welfare spending and post-transfer poverty, there is no such relationship between welfare spending and pre-transfer poverty. While welfare spending seems to have a quadratic relationship with "official" or "net" poverty, it does not have such a relationship with "dependent" poverty. These disparate findings cast doubt on the idea that welfare dependency lies behind the increased poverty of recent years.

How do we explain the inconsistency between our pre- and post-transfer findings? The data on post-transfer poverty range from 1953 to 1983 while those on pre-transfer poverty cover 1967 to 1983, so the differences in coefficients

may be an artifact of the different time periods. This may imply that any observed

quadratic relationship between spending and poverty is a result of tracking expenditures over such a long time period that it actually reflects the many demographic, economic and policy changes which took place.

A more serious criticism is that aggregate time-series data on welfare spending and poverty are simply unreliable for estimating the effects of welfare on poverty. Peter Gottschalk and Sheldon Danziger have stressed the instability of individual coefficients in time-series regressions designed to assess the relative anti-poverty

215


effects of economic growth and income transfers.25 They suggest that taken as a whole such regressions may be very useful for projecting reliable estimates of poverty; however, they are a highly problematic source for determining the effect of any one factor on the poverty rate. The instability of our coefficients reinforces that assessment.

IV

Conclusion

GALLAWAY, VEDDER AND FOSTER suggest that welfare dependency is the primary cause for increased poverty in recent years. Yet, they never study welfare de-

pendency directly, overlook other factors which account for poverty, and misuse

aggregate time-series data to make inferences about individuals. For these rea-

sons, Gallaway, Vedder and Foster's time-series analyses are an inadequate basis for claiming that welfare dependency is the major reason for the high levels of

poverty in recent years. Our analysis indicates that welfare spending and benefits can not be singled out as primary factors in creating more welfare dependency and thereby more poverty.

Notes

1. Charles Murray, Losing Ground: American Social Policy, 1950-1980 (New York: Basic Books, 1984).

2. Richard Vedder and Lowell Gallaway, "AFDC and the Laffer Principle," Wall StreetJournal, March 26, 1986.

3. Sanford F. Schram, J. Patrick Turbett and Paul H. Wilken, "Child Poverty and Welfare Benefits: A Reassessment with State Data of the Claim that American Welfare Benefits Breed Dependence," AmericanJournal of Economics and Sociology, Vol. 47, No. 4 (October, 1988).

4. Lowell Gallaway and Richard Vedder, " 'Suffer the Little Children': The True Casualties of the War on Poverty," in War on Poverty: Victory or Defeat? U.S. Congress, Joint Economic Committee. (Washington, D.C.: United States Government Printing Office, 1986).

5. Lowell Gallaway, Richard Vedder and Therese Foster, "The New Structural Poverty: A Quantitative Analysis," in War on Poverty: Victory or Defeat? U.S. Congress, Joint Economic Committee. (Washington, D.C.: United States Government Printing Office, 1986).

6. Op. cit. 7. See Murray, op. cit. 8. Gallaway, Vedder and Foster, op. cit. 9. Op. cit. 10. Sheldon Danziger and Robert Plotnick, "Poverty and Policy: Lessons of the Last Two De-

cades," Social Service Review, 1986, 60, 34-51. 11. Op. cit. 12. In some of their equations, Gallaway, Vedder and Foster use an expanded model to estimate

the effects of unemployment while accounting for the interaction between social welfare spending and the unemployment rate. The necessity of this estimation procedure arises when one assumes that the availability of means-tested income transfers inflates the unemployment rate by luring

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Welfare 217

poor people out of jobs and onto welfare, even while they continue to remain in the labor force (usually, it is argued, only to qualify for benefits). Gallaway, Vedder and Foster's results are basically unchanged whichever way they estimate the effects of unemployment and so we will refer only to the unemployment rate in our analysis.

13. Sara McLanahan et al., Losing Ground: A Critique (Madison, Wis.: Institute for Research on Poverty, University of Wisconsin, Special Report No. 38, August, 1986).

14. Rebecca M. Blank, "Where is the Money Coming From? Recent Changes in Income Patterns," paper presented at the Census Analysis Workshop: Income and Poverty, Data and Trends, October 2, 1986, Madison, Wisconsin.

15. Roberton Williams, "The 'New' Structural Poverty," unpublished manuscript, April, 1986. 16. Harold W. Watts, "Have Our Measures of Poverty Become Poorer?" Focus, Summer, 1986,

9 (2):18-23. 17. Gallaway, Vedder and Foster, op. cit. 18. Danziger and Plotnick, op. cit. 19. Sheldon Danziger, Robert Haveman, and Robert Plotnick, "Anti-Poverty Policy: Effects on

the Poor and the Nonpoor," a paper presented at the Conference on Poverty and Policy: Retrospect and Prospects, Williamsburg, VA, December 6-8, 1984.

20. Danziger, Haveman and Plotnick, op. cit. 21. Murray, op. cit. 22. In their most recent presentation of their work, Gallaway and Vedder take into account

some of the criticisms discussed here. They, however, continue not to use measures of "dependent" poverty, nor do they consider alternative specifications of the effects of income (e.g., such as controlling for the effects of median income, family size and family structure). See Lowell Gallaway and Richard Vedder, Poverty, Income Distribution, the Family and Public Policy, a study prepared for the use of the Subcommittee on Trade, Productivity, and Economic Growth of the Joint Economic Committee of the Congress of the United States. (Washington, D.C.: U.S. Government

Printing Office, 1986). Data for the individual poverty rate, the unemployment rate, per capita income and per capita federal public aid are from Gallaway, Vedder and Foster op. cit. Data for

per capita cash public assistance, average monthly AFDC benefits per family and the poverty rate for children in families are from the U.S. Bureau of the Census, StatisticalAbstract of the United States (selected years). Our data on the average family size 1955-1983 are also from Statistical Abstract; however, for 1953 and 1954 the data were not reported in the StatisticalAbstract and were retrieved from the U.S. Bureau of the Census, Current Population Reports, P-60 series. Data on median income for 1953-1970 are from the U.S. Bureau of the Census, Historical Statistics

of the United States (1975, p. 297) and for 1971-1983 are from StatisticalAbstract (1986, p. 450). 23. Gordon M. Fisher, "Estimates of the Poverty Population Under the Current Official Definition

for Years Before 1959: Final Results (Tables Only). Unpublished manuscript, June, 1986. 24. J. S. Cramer, Empirical Econometrics (Amsterdam, Holland: North-Holland Publishing

Company, 1969); and Peter Kennedy, A Guide to Econometrics (Cambridge, Mass.: MIT Press, 1985).

25. Peter Gottschalk and Sheldon Danziger, "Macroeconomic Conditions, Income Transfers, and the Trend in Poverty," in The Social Contract Revisited, D. Lee Bawden, ed. (Washington, D.C.: The Urban Institute, 1984, pp. 185-215).

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