Poverty and the Macroeconomy: Estimates from U.S. Regional Data

I. INTRODUCTION By now it is clear that economic growth alone has not been sufficient to eliminate poverty in the United States. The official poverty rate in the United States reached its all-time low of 11.1% in 1973, when gross domestic product (GDP) per capita, in 1996 dollars, was $19,456. By 1999, eight years into the longest postwar economic expansion, real GDP per capita increased by two-thirds, to $32,485, but the poverty rate had risen, not fallen, to 11.8%. (1) Economists have long suspected that the positive effects of increases in mean income on the poverty rate have been more or less offset by demographic shifts and the increasing spread in the distribution of income (Blank and Blinder, 1986; Danziger and Gottschalk, 1995), and the data seem to bear this out. Inflation-adjusted mean income was 45% higher in 1999 than in 1973 for the highest quintile of the population, but only 10% higher for the lowest quintile (U.S. Bureau of the Census, 200la). (2) The vulnerability of the poor to the business cycle also contributes to the poverty trap. Recessions cause not only unemployment but also declines in hours worked, decreased wages, and lower labor force participation rates (Sawhill, 1988). As shown in Figure 1, the poverty rate during the relatively mild recession of 1990-91, when unemployment peaked at 7.5%, was 15.1%, only 0.1% lower than the poverty rate during the far more severe 1980-82 recession, when unemployment peaked at 9.7%. (3) Prospects for eliminating poverty seemed brighter in the 1950s and 1960s, when strong economic growth accompanied a decline in the poverty rate from roughly one-third of the population in 1950 to one-eighth in 1970 (Gallaway, 1965; U.S. Bureau of the Census, 2001b). As shown in Figure 2, progress against poverty stalled during the 1970s, a decade of lower average GDP growth, high inflation, and general economic instability (Cutler and Katz, 1991), and in the 1980s, when poverty remained at high levels even as the economy returned to higher growth rates during the robust economic expansion of 1983-89. Recent research has emphasized the apparent rehabilitation of the poverty/growth relationship during the 1990s (Blank, 2000; Haveman and Schwabish, 2000). However, in his comment on Cutler and Katz (1991), Card (1991, P. 64) conjectures that the unusual dispersion in regional growth rates during the 1980s "contributed to the overall dispersion in individual and family income across the country and to the breakdown in the historical link between aggregate growth and poverty." This article follows up on Card's conjecture by investigating whether omitted regional heterogeneity played a role in the breakdown in the poverty/growth nexus during the 1980s observed in the previous literature. (4) The principal tool of analysis is pooled time-series cross-section regressions of census division poverty rates on macroeconomic and demographic variables. The use of pooled division-level time series is apparently original. (5) Most previous work on poverty has used either national-level time series (Blank and Blinder, 1986; Cutler and Katz; 1991; Hanratty and Blank, 1992, Blank, 2000; Haveman and Schwabish, 2000) or cross-sections of regions or counties (Triest, 1997; Levernier et al., 2000). The additional degrees of freedom available with pooling allow more efficient estimation, the additional variability in the regressors can mitigate collinearity problems that often plague macroeconomic data, and pooled estimation allows for a rich variety of methods to control for omitted variables that m ay influence the poverty rate, including both time-varying and region-specific effects in the parametric specification. (6) The main conclusion of the article is that regional poverty rates are responsive to changes in income and employment conditions for the entire sample period, and that there is very little if any difference in measured responsiveness between the 1980s and the 1990s, although there is evidence that poverty rates did react more strongly to the extraordinarily low unemployment rates of the late 1990s. …