Tuesday, November 12, 2013

Learning economics through pictures: The War on Poverty

This is part 2 of the series.  Click here for part 1.

This picture shows the poverty rate in the United States, from 1950-2010.  (Image courtesy of Townhall.com)

When things seem to be going bad, many people clamor for the government to "do something".  (I've seen Thomas Sowell discuss this so many times that he gets credit from me - e.g., see here.)  With the War on Poverty, Lyndon B. Johnson decried poverty rates and said that the government should have a "War on Poverty".  This declaration, made in 1964, occurred when poverty rates had been falling somewhat steadily for the past 15 years.  Yet, with 15 percent of Americans in poverty, LBJ wanted to "do something".

Among the programs/agencies signed into law or expanded after the "War on Poverty" pledge in 1964 and before LBJ left office in early 1969 were:

* Medicare/Medicaid
* HUD (Department of Housing and Urban Development) - helped expand public housing
* Community Action Program
* Increases in federal welfare program known as "Aid to Families with Dependent Children" (AFDC)
* And more

These programs, of course, wouldn't have an impact right when the pledge was made.  The laws have to pass, then be implemented.  It is probably fair to say that the programs would have started to have an impact in 1967.  So if they started to matter 1967 - how should we assess their impact?

One way people might first think to assess whether the "War on Poverty" was a success would be to compare poverty rates shortly before and after it was implemented.  However, that wouldn't quite be fair, as that would be ignoring the trends that had been occurring prior to the "War on Poverty's" implementation.  What we see is that poverty had been decreasing the United States for the fifteen years prior to the "War on Poverty" programs.  Once they were implemented, however, the decreases in poverty immediately stopped.  if you just started in 1967 and looked at poverty rates from then until today, it would appear the War on Poverty had no impact.  Given the billions spent, that of course, would be bad.  Unfortunately, it's quite a bit worse than it first appears, as poverty rates had been declining, and that decrease stopped abruptly as soon as the War on Poverty programs were implemented.

Why?  A big reason is the so-called anti-poverty programs that were implemented actually discouraged work. These programs created a subculture of people who learned to get paid while not-working, and persistently stayed poor.  The programs passed by LBJ helped create what is often referred to as a cycle of poverty, and are the big reason why poverty rates in this country are higher today than they were when the War on Poverty programs started having an impact over 45 years ago.

This simple picture provides a great opportunity to teach several economic lessons:

1. Just having good intentions to fix the economy isn't enough.  Governments can intend the best, but can still fail and cause terrible consequences.
2. Sometimes the free market is the best way to reduce poverty.
3. Doing nothing can be better than doing something, especially when doing something distorts incentives to work.

Part 3 in this series will be released soon.

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