Building from Evidence: Policies to Combat Poverty

Thursday, May 7, 2015

In our previous post, we discussed some evidence that poverty is not transmitted through culture, or the attitudes, preferences, and orientations of those living in poverty.  If anything, the evidence suggests poor parents instill a culture of mobility among their children.  This shouldn’t lead us to pin all of the responsibility for lifting children out of poverty on their low-income parents, however, any more than poverty’s persistence should be solely blamed on them. Instead, these findings highlight our collective obligation to provide these families with the inputs they need to keep their children from being stuck in poverty as they grow. Culture does not doom children to poverty, so policy changes are critical to helping children move up the economic ladder.   

In order for economic mobility to occur, people have to be financially secure. From this perspective, financial security refers to having a floor (i.e., a minimum standard of living or amount of goods and services families must consume) from which to launch oneself forward. Trying to move up the economic ladder without being financially secure is like imagining yourself trying to jump while you are falling after jumping off a building; it is simply impossible. Based on my research on the culture of poverty, the following policies are recommended:

  1. Living Wage – The federal minimum wage is currently $7.25 per hour.  At that rate, an individual working 40 hours per week would only earn $15,080 per year, below the 2014 poverty threshold for a single parent with one child ($16,317). In other words, even if a single parent worked full time, a minimum wage job would not allow the family to live above poverty.  In order to help children live above poverty, the federal government should mandate a living wage. 
  2. A strong social safety net—Many families in poverty lack critical supports, essential for the economic security that provides a foundation for upward mobility. Research has found that ‘good jobs’—the kind that come with health and retirement benefits, adequate flexibility, and consistent earnings—can help families to build wealth. This evidence suggests that policy should address not only what work pays, by mandating a living wage, as described above, and also by advancing a robust Earned Income Tax Credit, but also the other features that turn jobs into platforms of prosperity.

However, being financially secure at any level of the economic ladder you is not the same as having the capacity to move up to the next rung. Elliott & Lewis (2014) suggest that assets are needed to propel people up the economic ladder. This may be particularly true of low-income households. Rauscher and Elliott (2015) find evidence that suggests low-income households face a ceiling on what they can earn. While experience and seniority may improve income among those at the bottom of the income distribution within a particular field of employment, those at the top (of the low-income category) may cease to experience any income gains over time beyond a certain level. They also find evidence that indicates initial income is associated with more rapid wealth change among high-income, but not low-income households. Conversely, they find evidence that suggests low-income households accumulated net worth at a similar rate regardless of initial income. This suggests that low-income households earning less than others in their income category have a similar potential for asset accumulation as those earning more. These findings together support the idea that income, while important for providing a floor, carries less potential for stimulating intra-generational wealth mobility among low-income households than asset accumulation. 

This raises questions about what policies might best facilitate economic mobility, particularly among the poor.  We suggest three policy changes that are realistic and cost effective, based on research and American values of opportunity and equity, and provide tremendous mobility potential.

  1. Children’s Savings Accounts – A growing body of evidence shows that children’s assets improve not only college entrance and completion rates, but also early academic achievement.  By providing a concrete link between childhood goals and college outcomes, CSAs serve as an institution supportive of parents’ and children’s aspirations for the future. These accounts and the assets they help families accumulate can help children develop a college-going identity, provide a sense of self-efficacy in working toward their goals, and encourage educational engagement.
  2. Individual Development Accounts – While CSAs recognize that children are economic actors in their own right, there is abundant evidence that children can be positively affected by their parents’ financial well-being. While CSAs improve child academic outcomes and future economic achievement, financial help for parents is required to improve experiences of children in poverty.  IDAs offer a tool for parents to save for emergencies or toward opportunities for mobility, such as their own advanced education, entrepreneurship, or long-term asset investment.  Savings may reduce parental stress, with implications for parenting quality and, in turn, mobility, as recent findings suggest
  3. Wealth Transfers – Transfers could take multiple forms and are not necessarily divorced from the account structures described above, both of which are good vehicles for asset-building transfers. To facilitate child mobility out of poverty, policy should prioritize federally-funded deposits into child CSAs and adult IDAs, paralleling the considerable tax-side investments in the asset accumulation and economic mobility of those more economically advantaged.  Research shows that poverty impedes cognitive function.  Wealth transfers to families below the poverty line would help increase parental cognitive capacity, with potentially wide-reaching impacts for children, ranging from improved educational interactions to more efficient household economics or even income growth.  Taxpayer investments and transfers would be used to incentivize individual savings and maximize the impact of each dollar appropriated   

As a package, these policies should provide meaningful change for families living in poverty.  Moreover, by incentivizing individual savings, amplifying families’ own investments, and building on children’s aspirations, they align with the American Dream of how upward mobility is supposed to work, and what we want to think about how people get ahead. As such, they could just be the answer to our search for that yet-elusive ideal: policies both the Right and Left can support, with real promise to create a path to prosperity for all.

 
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Today’s student loan system is in place because of a political compromise, and growing discontent with student debt may signal that this arrangement has run its course. While there are resources and organizations in place to help those struggling with debt, the time has come to consider a new direction for financial aid, William Elliott III and Melinda Lewis argue in “Student Debt: A Reference Handbook.”

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