Has Macroeconomic Performance Regained Its Antipoverty Bite

JONATHAN SCHWABISH [*] From the mid-1980s to the early 1990s, several important studies examined the statistical relationship between the U.S. official poverty rate and overall economic performance. Most of these studies focused on the apparent break in this relationship beginning in the late 1970s or early 1980s. In this article, we present the results of our study of the relationship between macroeconomic performance and the poverty rate, using annual time-series data on macroeconomic variables, such as the unemployment rate and per-capita GDP growth from 1959 through 1998. Like these earlier studies, we also find that economic performance had a smaller antipoverty effect during the 1970s and 1980s than it did in earlier years. However, our estimates suggest that the weakened economic growth-poverty relationship may have been an aberration of this period and that the expected relationship of the 1960s has again been reestablished in the 1990s. This is true even after accounting for changes in earnings inequality over the entire period. (JEL E6, 132) I. INTRODUCTION The decade of the 1960s witnessed the longest economic expansion in U.S. history. Since then the economic terrain has not been so smooth. The U.S. economy experienced the oil crises during the 1970s, the long and deep recession of the early 1980s, the long expansion of the late 1980s, the recession of the early 1990s, and the long and sustained growth of the past seven years. Over this entire post-1960 period, the nation's official poverty rate has roughly reflected these changes in economic performance, rising in times of high unemployment and recessions and falling during periods of prosperity (Figure 1). During the 1960s, for example, the nation's poverty rate fell as the economy expanded. In that decade, real GDP grew by almost 50%, the male unemployment rate fell from 6.4% to 2.8%, and the poverty rate dropped from 22.2% in 1960 to 12.1% in 1969. A growing and prosperous economy was believed to be the nation's most effective antipoverty policy instrument, and research studies documented this relationshi p (Aaron 1967); "trickle down" was the conventional wisdom of the time, indicating a belief that we could "grow" ourselves out of poverty. However, beginning in the late 1970s or early 1980s, this seemingly robust relationship between macroeconomic performance and the poverty rate seemed less clear. For example, although real GDP grew by approximately 35% during the 1970s, the poverty rate dropped only slightly--from 12.5% to 11.5%. During the 1980s, the link between economic growth and the poverty rate was even less apparent. Although real GDP grew about 30% over the decade, the poverty rate at the end of the period was no lower than at the beginning. The official poverty rate rose steeply during the recession of the early 1980s and then receded very slowly during the ensuing recovery. The early 1990s saw another steep rise in the poverty rate, accompanying the recession of that period; by 1992 the rate nearly reached the peak of the early 1980s. Since this last recession, the nation has experienced an uninterrupted seven-year run of economic growth. The overall civilian unemployment rate has fallen from 7.5% to less than 5% over the period, and the rate of growth of GDP has averaged over 3% per year. This performance has been reflected in the nation's poverty rate, which fell from nearly 15% in 1992 to about 13% in 1998. II. ECONOMIC PERFORMANCE AND THE POVERTY RATE: RESEARCH EVIDENCE Since the mid-1980s, several important studies have attempted to establish the statistical relationship between the official U.S. poverty rate and overall macroeconomic performance. [1] The earliest of these studies is that by Blank and Blinder (1986), who produced time-series regression estimates using annual observations from 1959 [2] to 1983 with the nation's official poverty rate (for families and for individuals) as the dependent variable. …