HymanMinskyandtheWarOnPoverty

AnAggregateDemandSolu;on

ADecadeofContribu;ons•  (1965)“Poverty:The‘AggregateDemand’Solu;onandotherNon‐Welfare

Approaches,”Ins;tuteofGovernmentandPublicAffairs,UCLA•  (1965)“TheRoleofEmploymentPolicy,”ReprintedfromPovertyin

America,ChandlerPublishingCo•  (1968)“EffectsofShiXsofAggregateDemanduponIncomeDistribu;on,”

AmericanJournalofAgriculturalEconomics,Vol.50,No.2•  (19??)“WhereDidtheAmericanEconomy–andEconomics–GoWrong?”

DraXManuscript.•  (19??)“PolicyandPoverty,”DraXmanuscript•  (19??)“MinimumWages”•  (1972)“EconomicIssuesin1972:APerspec;ve,”Lecturegivenat

WashingtonUniversity,October6,1972.DraX.•  (1973)“TheStrategyofEconomicPolicyandIncomeDistribu;on,”The

AnnalsoftheAmericanAcademyofPoli;calandSocialScience,Vol.409•  (1975)“ThePovertyofEconomicPolicy,”DraXManuscript,Presentedat

theGraduateIns;tuteofCoopera;veLeadership

2

TheAge‐OldProblemofPoverty

•  Povertywasapressingissue200+yrsago•  Influencedby:

–  Enlightenmentra;onalism–  Protestantevangelicalism–  Americanself‐confidence

•  Reformersbelievedpovertycouldbe“cured”

•  Twomaincauseswereconsidered:–  Lazinessorfoolishnessledtoimpoverishment–  Poli;calandeconomicstructuresfailedtoprovideenoughjobsandgavetoomuchincometotherich

3

PovertyinthePost‐WarEra

•  Li0lea0en3ontopovertythroughoutmostofthe1950s

•  Poli;caldiscoursewaspreoccupiedwithan3communism(McCarthyera)

•  Thena3onaldebateoverpovertyre‐emergesinthelate1950sandintensifiesinthe1960s

•  Concernforthepoorcomesontheheelsoffalteringeconomicgrowth(1953‐1958)

•  In1959,nearly40millionAmericanslivedinpoverty,despiteunprecedentedprosperityduringthe1950s

•  Discussionfocusesonthecausesofpovertyandunemployment

4

PavingtheWayforLBJ•  LeXistsandliberalscholars

preparedthewayforLBJ’sWaronPoverty

•  OXenmisleadingthepublicbyfocusingonthedefec;vementalityofthepoor

•  JKG:The Affluent Society (1958)

•  MichaelHarrington:The Other America(1962)

•  D.P.Moynihan’s“cultureofpoverty”thesis

•  Preparedthegroundforawaronpovertythatfocusedonpeople’sdefects

5

JohnF.Kennedy•  In1963,MichaelHarrington’sThe 

Other America becamethefirstPenguinpaperbackpublishedinAmerica

•  Seriousplanningtocombatpovertybeganthesameyear,followingadrama;cslowdowninexitsfrompovertyover1956‐1961

•  Othereventsfueledan;‐povertyagenda:

–  CivilrightsleadersassailedAlorneyGeneralRobertKennedyfortheadministra;on’spoorrecord

–  MarchonWashingtoninAug.‘63emphasizedneedforcivilrightsandjobs

•  ByNovember,PresidentKennedyhadapprovedanan3‐povertyprogram

•  Dayslater,Kennedywasassassinated,andLBJbecamethe36thPresidentoftheUnitedStates

6

WhoWasLyndonB.Johnson?•  AgreatadmirerofFDR

–  DirectedtheNYAinTexas

•  ElectedtoCongressin1937andtheSenatein1948

•  Democra;cMajorityLeader(1955‐1960)

•  GreatestAmericanliberalpresidentofthepost‐WWIIera–  Empireoflawsandagenciescalled

theGreatSociety

•  FirstAmericanpresidentthoroughlycommi0edtocivilrightsforAfricanAmericans

7

Johnson’s3‐ProngedApproach•  ThedayaXerKennedy’sassassina;on,PresidentJohnsonagreedto

move“fullspeedahead”withanan;‐povertyagenda

•  Hedeclaredan“uncondi;onalwaronpoverty”inhisfirstStateoftheUnionaddressonJanuary8,1964

•  HesignedtheEconomicOpportunityActonAugust20,1964

•  Johnson’sapproachreliedon:

1.) Taxcutstospureconomicgrowth

2.) TheWaronPovertytorehabilitateandtrainthepoorforthejobsthat1.)wouldgenerate

3.) NewprogramslikeMedicare,MedicaidandModelCi3es,togetherwithabeefingupofexis;ngprogramslikefoodstamps,welfareandSocialSecurity,weresupposedtoaddressanyproblemsthat1.)and2.)didnotfix

8

RichardNixon•  EliminatedcomponentsoftheWaronPoverty

•  ButNixontooktenta3vestepstowardanewan;povertypolicyintheearly1970s

•  HisplanforaguaranteedincomefailedinCongress

•  ButSocialSecuritybenefitswereincreased,CongressapprovedanEarnedIncomeTaxCredit(EITC),andalimitedprogramforgovernmentjobsforthepoorandunemployedwasintroduced

9

TheDemiseofLiberalism•  Bythelate1970s,thepoli;cal

balancehadshiXedagainstliberalism

•  Theradicalmovementsofthe60splayedaroleinshiXingpublicopinion

•  Butsodidsoaringinfla3onandrisingunemployment

•  Conserva;vesblamedsocialprogramsfordiscouraginghardworkandentrepreneurship

10

RonaldReagan

•  Bythemid‐1980s,conserva;vesbegantoshapepublicdebateonpoverty,welfareandunemployment

•  Aggressivecampaigntoturnwhiteworkersagainsttheaverage,poorpersonofcolor

•  Ledtopopularbeliefthatpoorpeoplewerepoorbychoice

11

BillClinton•  Duringtheso‐called

“Clintonboom,”theproblemofunemploymentfadedfromtheradar

•  Alen;onfocusedontheharmfuleffectsofwelfare

•  Areturnto“mo3va3onalrehabilita3on”

•  Fewdaredtoaskwhethertheposi;vereportsonwelfarereform,povertyandunemploymentpaintedarealis;cpictureofwhatwashappening

12

GeorgeW.Bush•  By2001,the‘Goldilocks’

economyhadfaltered

•  TheUSenteredarecessioninMarch2001andunemploymentrosesharply

•  TheprivatesectorshowedalmostnonetjobgrowthfromMarch2001‐spring2005–  Onlysignificantjob

growthwasinthepublicsector

•  By2004,theUShadthehighestpovertyrateofanyrichdemocracy

13

Source:UNICEF,Child Poverty in Perspec:ve: An Overview of Child Well‐Being in Rich Countries,Innocent Report Card 7,2007.

WastheWoPSuccessful?•  IntheLongTerm….

•  No

•  SincetheWaronPoverty:–  Unemploymentrateshavetrendedupward–  Long‐termunemploymenthasbecomeincreasinglyconcentratedamongthe

laborforce’smostdisadvantaged–  Povertyrateshavestagnated–  Realwagesformostworkershavedeclined–  Thegapbetweenthe“haves”andthe“have‐nots”haswidened

•  IntheShortTerm,condi;onsimproved–  Povertyratesfellfrom15%in1965tojustunder12%beforethestartofthe

Nixonrecession–  Roughly3%declinealributabletotheWoP

•  Buttheimprovementsweren’tevenlydistributed,andmostarenobe0erofftodaythantheywerebeforetheWaronPovertywaslaunched

14

TheLongTermSuccessoftheWoP

Year White Black

1940 40% 10%

1960* 75% 50%

1970 90% 70%

1990** 80% 60%

15

PercentofMalesAged25‐64withIncomesSufficienttoKeepaFamilyofFourOutofPoverty

*    Fastest decrease occurred between 1940 and 1950 **  Similar to 1965, when the War on Poverty began 

PovertyRatesforSeniors

•  Onlytheelderlyhavesustainedtheirimprovementsoverthelongterm

•  Povertyrateforthose65+wasnearly30%in1966

•  Felltoabout15%by1974•  Thenfelltoaround10%bytheendofthe1990s

•  Butwasalmosten;relyduetoexpansionsinSocialSecurity‐‐hadlilletodowiththeWoP

16

WhattheWaronPovertyDidNotInclude

•  AlthoughhisTaskForcepleadedwithhimtodoso,Johnsonrefusedtomakedirectgovernmentjobcrea3onpartofthewaragainstpoverty

•  Johnsonwasalsoopposedtoredistribu3onandavoidedtermslike“inequality”

•  AndherejectedproposalstoliXincomesthroughdirectaid(e.g.grants),tellinghisassistant,BillMoyers,“nodoles”

•  HeeveninstructedLesterThurowtoremoveallreferencesto“cashhandoutstothepoor”fromtheEconomic Report of the President in1964(an;‐Buddhist!) 

17

PovertyRemainsaSeriousProblem

•  Ineachofthelast50years,atleast11%oftheUSpopula;onhasbeenpoor

•  In2004,afamilyof4consideredpoorifhouseholdincomewasbelow$19,157

•  37millionpoorunderthatdefini;on

•  Millionsmoreinstateofnearpoverty(notcounted)withincomesthatfailtoprovideforadecentstandardofliving

18

WhatFollows

•  Wecanacceptthatstayingoutofpovertyispartlyamalerofindividualeffort

•  Butitisalso(andmoreso)aboutins3tu3onsandstructuresthatallowindividualstosucceedorfailintheiraspira;ons

•  ThelevelofindividualeffortprobablyhasnotchangedmuchsinceLBJlaunchedhisWaronPoverty

•  Butstructuresandins;tu;onshave,andthesechangeshelpusexplainthesuccessesandfailuresofJohnson’sWaronPoverty

19

Elimina;ngtheWelfareStructure

•  Johnson’sreformsreliedonwelfareandtransferpaymentsratherthanworkandjobs

•  Minskysaid,“Weliveonlyaswellasweproduce”

•  TheexplosionoftransferpaymentsrepresentsaperversionofRoosevelt’sNewDealandTruman’sFairDeal

•  Lotofthepoorcanonlybeimprovedbyprogramsthatputthemtowork

20

TheWoPAccordingtoMinsky

•  MinskybelievedthatthewaronpovertywouldfailunlessADwas“adequate”

•  Hefocusedon:– Thesizeofthenecessarydemand– Thebarrierstoachievingit– Theefficiencyoftheavailableweapons– Thepossiblesideeffectsthatwouldaccompanyan“adequate”AD

21

Minsky’s“Non‐WelfareApproach”

•  Hearguedthatstandardwelfareeconomicsmisinterpretedwelfarebecauseitignoredtheimportanceofuncertainty

•  Minskyadvocatedapolicyapproachthatwoulddiminishuncertaintyforall(asopposedtoadop;ngins;tu;onalarrangementsthatmodifyordiminishuncertaintyforapar;cularsector)

•  Hepointedoutthat“inaworldwithuncertainty…[a]schemethatlimitsthelossesthatareallowablemaybeanecessaryfirststep….”

22

MoneyIncomevs.IncomeInKind

•  Economiststendtopreferprogramsthatdistributemoneyincomeoverthosethatprovideincomeinkind

•  Efficiencyvs.Safety

•  Butpoli3calsolu;onstendtofavorsafety(educa;on,Medicare,housingsubsidies,etc.)

•  Economists’efficiency‐orientedpolicyprescrip;onsarebasedonworldwithcertainty

•  Butthe“prac3calman’spreference[is]forprogramsthatprovideincomeinkind”

23

AHigherFloor

•  Minskyarguedthatthewaronpoverty,ifsuccessful,wouldestablish“afloortofamilyrealincomethatissubstan;allyhigherthantheexis;ngfloor”

•  Butthisgoalhadtocompetewithother,exis;ngpolicygoals:

1. Fullemployment2. Economicgrowth3. Domes;cpricestability4. Interna;onalstabilityofthedollar

•  Theweightalachedtoeachofthesegoalswouldindicate“howseriouslythewaronpovertyistobetaken”

24

#1TheGoalofFullEmployment

•  MinskyarguedthattheweightalachedtothisgoalhadtoincreaseiftheWaronPovertywastosucceed

•  Healsobelievedthattherewereposi;veexternali3esassociatedwithemployment

•  Andhebelievedthatitwas“belertoeliminatepovertybymeansofincomefromjobsthantoeliminatepovertybytransferpayments”

25

Defining“FullEmployment”

•  MinskyridiculedthePhillipscurveapproach,arguingthatit“seemstobeguilepolicymakersandanalystsintocuxngtheemploymentgoaltofitthepricelevelcloth”

•  Hesuggestedsomealterna;vewaystodefinefullemployment:

–  “Whenoverabroadspectrumofoccupa;onsandalargepropor;onofthegeographicalregionsmorejobsareopenatagoingwagethanthenumberofunemployedworkers”

–  “Tightfullemployment”•  AtargetunemploymentratethatreflectsEuropeanpostwarexperienceandUSwar3meexperience–about2½percent

26

Benefitsof“TightFullEmployment”

•  Mostobviousbeneficiariesarethosewhosepovertyisduetounemployment

•  BenefitsofTightFullEmploymentpolicyinclude:–  Someheadsoffamiliesnotcurrentlyinthelaborforcewillbedrawnintothelabormarket

– Willincreasestateandlocalgovernmenttaxreceiptsandalleviatestrainonbudgetstofinancewelfareservices

–  Freesupfinancialandrealresourcestohelpthepoorwhoreallymustdependuponpublicsupport(e.g.children,disabled,elderly)

27

#2TheGoalofEconomicGrowth

•  Theweightalachedtothisgoalshoulddeclinewiththeintroduc;onoftheelimina;onofpovertyasapolicygoal

•  Policiesaimedatincreasingtherateofeconomicgrowthalmostalwaysaffectincomedistribu3onperversely–  Benefitsflowtothewell‐to‐doattheexpenseoflowincomefamilies

•  Doesnotimplyano‐growtheconomy

•  Growthmayevenbehigherat;ghtfullemploymentthanwithslackemployment,evenwithoutgrowth‐s;mula;ngpolicymeasuresinplace

28

TightLaborMarketsvs.Growth

Impact of Economic Growth with Unchanged Labor Market

Conditions

Low‐income High‐income

Accelerated Growth shiPs the en:re distribu:on upward but does li0le to 

eliminate exis:ng poverty 

Impact on Distribution from a Move from Slack to Tight Labor Market

Low‐income High‐income

A Tight Employment Policy reduces poverty by trunca:ng the lower end of the income 

distribu:on 

#Individuals #Individuals

29

PovertylinePovertyline

#3TheGoalofPriceStability•  Minskyreferredtothegoalofdomes;cpricestabilityas“amostpeculiar

policygoal”thatwas“notconsistentwith;ghtfullemployment”

•  Bythemid‐1960s,thePhillipscurvewasentrenchedinmainstreamthinking

•  Policymakerswerecondi;onedtotheideaofatradeoffandwerewillingtosacrificeemploymentinordertoachievepricestability

•  Minskyques;onedtheexistenceandstabilityofthePhillipscurveandinsistedthatthebenefitsofpricestabilitywerenebulouswhilethecostsofpursuingthegoalcouldbequitehigh

•  Hebelievedpolicymakershadalachedtoogreataweighttothegoalofpricestability

30

Infla;onasAReasonable‘Price’toPay

•  Minskyarguedthatthetransi;onfromslackto;ghtlabormarketswould“morethanlikelybeaccompaniedbysomeinfla;on”

•  Thewagesofhigh‐incomeworkerswouldriseatleastasfastasproduc;vity,buttheincomesoflow‐wageworkerswouldriseevenfaster

•  CostsofG&Sproducedbylow‐wageworkerswouldriserela;vetothoseproducedbyhigh‐wageworkers

•  MinskyacknowledgedthatthiswouldshowupintheCPI

•  Buthebelievedthatthecostsimposedbyamodestincreaseofinfla;on(es;matedat4percent)wouldbeoutweighedbythegainsfromelimina;ngtheoutputgap

31

#4TheGoalofExchangeRateStability•  TheUSwasonBrelonWoods

•  Domes;cpolicyhadtoensure:

–  HoldersofUSdollarsdidnotconvert,en masse,tothereserveasset(gold)

•  Accomplishedbykeepingshort‐terminterestrateshigh

–  Thedeficitoncurrentaccountwasconstrained•  Accomplishedbykeepingincomelow,rela;vetocapacityandbyrestraininginfla;on

throughunemployment

•  Movingto;ghtfullemploymentwouldunderminethesegoals:–  ↑Y→↑M→↓CA–  ↑P→↓X→↓CA

•  Minskysuggestedthatifthewaronpovertywastobetakenseriously,policymakerswouldhavetoabandondollarstabilityasapolicygoal

32

Summary:AReorderingofGoals

Asuccessfulwaronpovertywouldrequire:

1.)TightFullEmployment–Elevatedasapolicygoal

2.)Domes;cPriceStability–Downgradedasaneconomicconcern,butrelevantasapoli:calconcern

•  An;‐povertyprogramsneedtominimizetheextentofinfla;onthataccompanies;ghtfullemployment

3.)EconomicGrowth–DowngradedSomewhat

4.)StabilityoftheDollar–DowngradedSubstan;ally

33

Minsky’sAn;‐PovertyApproach

•  Minskyinsistedthat“;ghtfullemploymentisessen3alfortherapidelimina;onofpoverty”

•  ThepolicyproblemishowtoachieveandsustainTFE

•  Theweaponsaremonetaryandfiscalpolicy

•  Eachhas“whatkind”and“howmuch”dimensions

•  Minskyassumedawaythemajorobstacle(BrelonWoods)andfocusedontheremainingbarriers

•  Themostsignificantbarrierstemmedfromthepoli3calweightalachedtodomes;cpricestability

34

Accep;ngSomeTransi;onalInfla;on

•  Minskycau;onedthatitwouldbenecessaryto“rideout”atransi;onalinfla;onaryperiodinordertowageasuccessfulwaragainstpoverty

•  Hefocusedontwosourcesofinfla;onarypressurethatwouldaccompanythetransi;ontoTFE:–  Theeffectonthera3ooflowtohighwages–  TradeunionpressureforhigherwagesduringTFE

•  Thefirstwasconsidereddesirableconsequenceinthewaronpoverty,thesecondcouldbedealtwiththroughanincomespolicy

35

TheRoleofanIncomesPolicy

•  Minskyadvocatedguidelinesforwageandnon‐wageincomes

•  Herecognizedthatitmaybenecessarytoestablishguidelinestolimitthegrowthofcorporateincome(dividendsandretainedearnings)byusingpuni;vetaxpoliciestopreventtheseincomesfromrisingfasterthansomeguidelines

•  Hewantedtheguidelinesthemselvestobedeterminedthroughabargainingprocess

36

WhatAboutthe“Transi;onal”Infla;on?

37

AFinalWordonInfla;on

•  Minskyarguedthatdomes;cpricestabilitywas“inprac;cenotconsistentwithTFE”

•  Healsoarguedthat“theeconomiccostsofmildinfla;onarenotimposing”

•  Butherecognizedthatinfla;on“remainsapoli;calhobgoblin,”sothean;‐povertyprogramwouldhavetobedesignedtominimizetheinfla;onthatwouldaccompanyTFE

38

WasMinskyRight?

•  Lookattheexperienceduringthe“ClintonBoom”

•  USexperiencedarecessionin1990‐1991•  LeadingIndicatorssuggestedastrongrecoverybetween1992and1995–  InvestmentroseatfastestpacesinceWWII–  Produc;vityroseattwicetherateofthe70sand80s–  Infla;onremainedlow

•  TheClintonAdministra;onsawrisingproduc;vityas“theprimarysourceofincomegrowth”and“theanswertostagnantrealwages”

39

ButLivingStandardsDidnotImprove•  AccordingtotheCensusBureau,medianfamilyincomein

1994,adjustedforinfla;on,was$38,782,onepercentbelowits1991level

•  Andtherewasnosignificantincreaseinmedianfamilyincomein1995

•  Con;nuesthedownwardtrendthatbeganintheearly1970s•  Theaverageweeklyearningsof80%ofworkingAmericansfell

by18%between1973and1995,from$315/wkto$258/wk

•  NB:Totalcompensa;on(healthandpensionbenefitspluswages)rosebyroughly2.7%duringthisperiod,butthatwasthelowestincreasesincethesta;s;cwasfirstcompiledin1981

40

GrowthWon’tEndPoverty

•  Itwasthefirst;meinpostwarhistorythattherealwagesofmostworkersfailedtoincreaseduringarecovery

•  Reflectedthefactthatcompensa3onhadbecomeincreasingly;edtocorporateshareprices

•  Moreandmore,rewardsfromgreaterproduc;vitywenttoshareholders,topmanagersandtheiremployees

41

Implica;onsforPoverty•  Minskyarguedthat“thepovertyprograminitsmostfundamentalsenseisconcernedaboutincomedistribu;on”

•  Heinsistedthatitmaleredhowthegainsweredistributedinagrowingeconomy

•  Hesaid,“theworldisbeleroffiflowincomesrisebysay5percentwhilehighincomesrisebysay2½percentperyearthanifallincomesriseby3percent”

•  Andheaddedthat“theworldisworseoff”if“thericharegexngricherandthepooraregexngpoorer”

•  EvenGreenspanwarnedinJuly1995thatthegrowinginequalitycouldbecome“amajorthreattooursociety”

42

Job‐RelatedPoverty

•  Normalforcapitalisteconomiestooperatewithsubstan;alunemployment–  Early50sandlate90sareexcep;ons

•  Intheabsenceofbigwars,unemploymentneverstayslowforverylong

•  Capitalistsdon’twantdepression‐levelunemployment

•  Buttheydon’twant“;ghtfullemployment”either

•  Wanttobeabletocontrolworkersandsuppresswages

43

Jobs,NotTransferPayments

ProblemwiththeWoPwasitsfocusonwelfareandtransferpayments

Focusshouldhavebeenonworkandjobs

Workingpoorendedupworseoffinmanycases

44

TooMuchIncome,TooFewJobs•  Minskyinsistedthat“weliveonly

asweproduce”

•  Lamentedthegrowthoftransferpaymentsforwelfare,pensionsandsocialsecurity

•  Provideinincomewithoutaddingtoproduc;on

•  Transferpaymentsaccountedforjust.1%ofGNPin1929

•  Calledthetrenda“perversionofRoosevelt’sNewDealandTruman’sFairDeal”

45

TakePeopleAsTheyAre

46

FocusonChangingtheSystem

•  Job‐relatedpovertycannotbesolvedaslongasgovernmentisrunforthecapitalists(Stricker,2007)

•  Twochoices:–  Trytoeliminateunemploymentindirectly,byadop;ngpoliciestopromoteeconomicgrowth

–  Targetemploymentdirectly,bycrea;ngjobsandraisingwages

•  Problemistofindjobsforallthosewhoneedandwanttowork

47

WhatRemainsoftheWaronPoverty?

•  EconomictheoriesuponwhichtheWoPwasbasedares3lldominant

•  Problemiswiththepoor

•  Relianceontherising;deofprivate‐sector‐ledgrowthcombinedwithsomesupplysidepoliciestoimprovecondi;onsforthoseatthebolom

48

NeedtoFocusonBones,NotDogs

•  Supply‐SideExplana3on–  Unemploymentimpliesaproblemin

thelabormarket–  Somethingiswrongwiththedogs

(mismatchinskillset)–  Solu;onisbelereduca;onand

trainingofdogs

•  Demand‐SideExplana3on–  Unemploymentimpliesaproblemwith

thelevelofaggregatedemand–  TrainingandEduca;onwillnotreduce

unemployment–itwilljustreallocateexis;ngjobs

–  Solu;onisincreasedspendingtomakemore“bones”(i.e.jobs)available

KeyOmissionsintheWoP

•  Lackedamassivejobcrea;onprogram

•  ResultedfromtheCEA’sbeliefthat–  Povertyisnotinextricablylinkedtounemployment

– UnemploymentcouldbesufficientlyreducedthroughADpolicies(esp.JFK’staxcutof1963)

– Abufferstockofunemployedwasnecessarytokeepinfla;onincheck

•  WemustovercometheseobstaclesifwearetoendpovertyinAmerica

50

EndingPoverty:ARadicalApproach

51