Macro Roundup

Jencks, Christopher, “The War on Poverty: Was It Lost?”The New York Review of Book, April 2, 2015. Available at:http://www.nybooks.com/articles/archives/2015/apr/02/war-poverty-was-it-lost/Must-read essay inThe New York Review of Booksby Harvard's Christopher Jencks. He make an apples to apples comparison btw the poverty rate on the eve of the war on poverty (19% in '64) and the poverty rate today (14.5% in '13) by reducing it for noncash benefits, tax credits, using PCE rather than CPU-U and his number comes out to be, "With these corrections the official poverty rate falls from 14.5 to4.8 percent, making the 2013 rate roughly a quarter of the 1964 rate (19.0 percent)." This is also interesting, "There is quite a bit of evidence thatAmericans need an income at least half that of families near the middle of the distribution in order to buy the things they need to hold up their heads in public. In such a world, the only way to reduce the number of people who feel and act poor will be to reduce the number with incomes less than half the 50th percentile (the median). If we adjust for noncash benefits, taxes, and changes in family size,incomes at the 10th percentile were 39 to 40 percent of incomes at the 50th percentile in both 1967 and 2012.9 It follows that a bit over 10 percent of American families had incomes less than half the median in both years.""...According to Figure 1, however, there was no clear trend in poverty after 1969, either up or down. The official rate rose in the wake of recessions, reaching 15 percent in 1983, 1993, and 2010-2012, and it fell during recoveries, dropping to 11 or 12 percent in 1973, 1979, 2000, and 2006. If you believe Figure 1, therefore, the War on Poverty got off to a promising start between 1964 and 1969 but then turned into a stalemate. Before accepting that conclusion, however, you need to ask where the numbers in Figure 1 come from and whether you should believe them.... But if we want to know how close America has come to eliminating the kind of poverty that existed in 1964, the official measure is supposed to provide an answer. However, the world has also changed in other ways that the official poverty count either ignores or mismeasures. As a result, Figure 1 does not actually tell us much about changes in the kind of poverty that Lyndon Johnson promised to eliminate...there is a fairly broad consensus among economists that the CPI-U has overstated the cost of maintaining a constant standard of living over the past fifty years, although they disagree about the size of the bias. The most widely used alternative to the CPI-U is the chain-price index for Personal Consumption Expenditure (which I will call the “PCE index”). The Commerce Department’s Bureau of Economic Analysis constructs this measure to calculate changes in the total value of all the consumer goods and services produced in the United States each year. The PCE index is therefore the largest single influence on government estimates of economic growth. If the poverty thresholds had risen in tandem with the PCE index rather than the CPI-U since 1964, the 2013 poverty line would have been 20 percent lower than it was, and the 2013 poverty rate would have been about 3.7 percentage points lower than it was....Figure 2 provides a first approximation of how correcting the 2013 poverty rate for noncash food and housing benefits, refundable tax credits, and upward bias in the CPI-U would change the 2013 poverty rate.With these corrections the official poverty rate falls from 14.5 to 4.8 percent, making the 2013 rate roughly a quarter of the 1964 rate (19.0 percent).If we were to lower the poverty threshold for cohabiting couples to match that for married couples the 2013 poverty rate would have fallen even more....The estimates in Figure 2 are not exact.More important, their combined effect may be smaller than the sum of their separate effects, making the drop in the “true” poverty rate smaller than Figure 2 suggests. But even if the true poverty rate was 6 or 7 percent in 2013, it would have fallen by about two thirds since 1964, putting it considerably closer to what Lyndon Johnson had promised in 1964 than to what Ronald Reagan had claimed in 1988....Fixing these flaws in the official poverty rate helps reconcile trends in poverty with trends in more direct measures of material well-being. Today’s poor live in less crowded housing, are more likely to have a complete bathroom and air conditioner in their residence, have bigger TV screens, are more likely to have a telephone, and more likely to have a cell phone. Nonetheless, most of the poor are still beset by constant financial anxiety. In part, that is because the poverty line was set so low in 1964. Linking the poverty line to the Consumer Price Index let it rise a little every year, but not much. Using a more realistic price index keeps the poverty line closer to its real 1964 level, ensuring that those we count as poor are more like those we counted as poor fifty years ago, but in both periods those just above the poverty line have suffered from many of the same problems.....Another reason the poor so often feel beleaguered, anxious, and depressed may be that what is often called “relative poverty” has not changed. Over time, any society’s definition of poverty adjusts up or down depending on how much income those in the middle of the distribution have. There is quite a bit of evidence that Americans need an income at least half that of families near the middle of the distribution in order to buy the things they need to hold up their heads in public.In such a world, the only way to reduce the number of people who feel and act poor will be to reduce the number with incomes less than half the 50th percentile (the median). If we adjust for noncash benefits, taxes, and changes in family size, incomes at the 10th percentile were 39 to 40 percent of incomes at the 50th percentile in both 1967 and 2012.9 It follows that a bit over 10 percent of American families had incomes less than half the median in both years.Using a relative measure not much had changed, even though the absolute poverty rate that Lyndon Johnson promised to reduce has fallen dramatically. Both liberals and conservatives tend to resist the idea that poverty has fallen dramatically since 1964, although for different reasons. Liberals hear the claim that poverty has fallen quite differently, although they do not like it any better than conservatives do.....The equation of “bad” with “worse” is so tight in American political discourse that when I tell my friends or my students that “there is still a lot of poverty, but less than there used to be,” they have trouble remembering both halves of the sentence. Some remember that there is still a lot of poverty. Others remember that there is less than there used to be. Few remember both.....Although I have argued that the absolute poverty rate has declined dramatically since President Johnson launched his War on Poverty in 1964, it does not follow that the programs he launched between 1964 and 1968 caused the decline. I argued that food stamps, rent subsidies, and refundable tax credits all had a role in the decline, but food stamps did not become a national program until the end of the Nixon administration, the fraction of poor families receiving rent subsidies grew quite slowly, and refundable tax credits remained tiny until 1993. The growth of these programs was nonetheless inspired partly by Johnson’s earlier success in convincing much of the Democratic Party that poverty reduction was a political and moral challenge they could no longer ignore. The successes and failures of specific anti-poverty programs will be the subject of a second article, which will appear in the next issue."The War on Poverty: Was It Lost?Christopher JencksApril 2, 2015 IssueLegacies of the War on Povertyedited by Martha J. Bailey and Sheldon Danziger Russell Sage, 309pp., $39.95 (paper)

This administration today, here and now, declares unconditional war on poverty in America. I urge this Congress and all Americans to join with me in that effort. It will not be a short or easy struggle, no single weapon or strategy will suffice, but we shall not rest until that war is won.
—Lyndon Johnson, State of the Union Address, January 8, 1964

Some years ago, the federal government declared war on poverty, and poverty won.
—Ronald Reagan, State of the Union Address, January 25, 1988

2 Jonathan Vespa, Jamie Lewis, and Rose Kreider, “America’s Families and Living Arrangements: 2012,” Current Population Reports: P20-570, US Census Bureau, August 2013, Table 7.↩

3 Council of Economic Advisers, Economic Report of the President(Government Printing Office, 2014), p. 248, Table 6-2.↩

4 Benjamin Sommers and Donald Oellerich, “The Poverty-Reducing Effect of Medicaid,” Journal of Health Economics, Vol. 32, No. 5 (September 2013).↩

5 See, for example, Ruby Mendenhall et al., “The Role of Earned Income Tax Credit in the Budgets of Low-Income Families,” Social Service Review, Vol. 86, No. 3 (September 2012).↩

6 Council of Economic Advisers, Economic Report of the Presidentp. 248, Table 6-2.↩

7 This estimate is based on the fact that 14.5 percent of the population was below the poverty line in 2013, and that 8.2 percent were above half the poverty line, a ratio of 0.566 (Carmen DeNavas-Walt and Bernadette D. Proctor, “Income and Poverty in the United States: 2013,” US Census Bureau, September 2014, Tables B3 and B5). Assuming that 56.6 percent of those with incomes between 50 and 100 percent of the poverty line were also above the 75th percentile, 4.6 percent of the population had incomes between 75 and 100 percent of the poverty line and about 3.7 percent had incomes between 80 percent of 100 percent of the line. A 20 percent reduction in the poverty threshold would therefore have reduced the poverty rate from 14.5 percent to about 10.8 percent.↩

8 Figure 1 does not adjust the official poverty rate for the upward bias caused by the assumption that cohabiting couples need more income than married couples or for the reduction in poor families’ out-of-pocket medical spending when they get Medicaid. On the other hand, it assumes that the effects of refundable tax credits, noncash food and housing benefits, and upward bias in theCPI-Uare additive, which may overstate their combined effect.↩

9 I am indebted to Chris Wimer and Anny Fenton for these calculations.↩

1. 1
2. 2
3. 3
4. 4
5. 5
6. 6
7. 7
8. 8
9. 9

John Halpin and Karl Agne, “50 Years after LBJ’s War on Poverty,” Half in Ten/Center for American Progress (January 2014),pp. 21-22.↩

Jonathan Vespa, Jamie Lewis, and Rose Kreider, “America’s Families and Living Arrangements: 2012,” Current Population Reports: P20-570, US Census Bureau, August 2013, Table 7.↩

Council of Economic Advisers, Economic Report of the President(Government Printing Office, 2014), p. 248, Table 6-2.↩

Benjamin Sommers and Donald Oellerich, “The Poverty-Reducing Effect of Medicaid,” Journal of Health Economics, Vol. 32, No. 5 (September 2013).↩

See, for example, Ruby Mendenhall et al., “The Role of Earned Income Tax Credit in the Budgets of Low-Income Families,” Social Service Review, Vol. 86, No. 3 (September 2012).↩

Council of Economic Advisers, Economic Report of the Presidentp. 248, Table 6-2.↩

This estimate is based on the fact that 14.5 percent of the population was below the poverty line in 2013, and that 8.2 percent were above half the poverty line, a ratio of 0.566 (Carmen DeNavas-Walt and Bernadette D. Proctor, “Income and Poverty in the United States: 2013,” US Census Bureau, September 2014, Tables B3 and B5). Assuming that 56.6 percent of those with incomes between 50 and 100 percent of the poverty line were also above the 75th percentile, 4.6 percent of the population had incomes between 75 and 100 percent of the poverty line and about 3.7 percent had incomes between 80 percent of 100 percent of the line. A 20 percent reduction in the poverty threshold would therefore have reduced the poverty rate from 14.5 percent to about 10.8 percent.↩

Figure 1 does not adjust the official poverty rate for the upward bias caused by the assumption that cohabiting couples need more income than married couples or for the reduction in poor families’ out-of-pocket medical spending when they get Medicaid. On the other hand, it assumes that the effects of refundable tax credits, noncash food and housing benefits, and upward bias in theCPI-Uare additive, which may overstate their combined effect.↩

I am indebted to Chris Wimer and Anny Fenton for these calculations.↩...

1 John Halpin and Karl Agne, “50 Years after LBJ’s War on Poverty,” Half in Ten/Center for American Progress (January 2014),pp. 21-22.↩

Although I have argued that the absolute poverty rate has declined dramatically since President Johnson launched his War on Poverty in 1964, it does not follow that the programs he launched between 1964 and 1968 caused the decline. I argued that food stamps, rent subsidies, and refundable tax credits all had a role in the decline, but food stamps did not become a national program until the end of the Nixon administration, the fraction of poor families receiving rent subsidies grew quite slowly, and refundable tax credits remained tiny until 1993. The growth of these programs was nonetheless inspired partly by Johnson’s earlier success in convincing much of the Democratic Party that poverty reduction was a political and moral challenge they could no longer ignore. The successes and failures of specific anti-poverty programs will be the subject of a second article, which will appear in the next issue.

Liberals hear the claim that poverty has fallen quite differently, although they do not like it any better than conservatives do. Anyone, liberal or conservative, who wants the government to solve a problem soon discovers that it is easier to rally support for such an agenda by saying that the problem in question is getting worse than by saying that although the problem is diminishing, more still needs to be done. The equation of “bad” with “worse” is so tight in American political discourse that when I tell my friends or my students that “there is still a lot of poverty, but less than there used to be,” they have trouble remembering both halves of the sentence. Some remember that there is still a lot of poverty. Others remember that there is less than there used to be. Few remember both.

Both liberals and conservatives tend to resist the idea that poverty has fallen dramatically since 1964, although for different reasons. Conservatives’ resistance is easy to understand. They have argued since the 1960s that the federal government’s antipoverty programs were ineffective, counterproductive, or both. Since the 1970s they have cited the stability of the post-1969 poverty rate to support those judgments. To them, the suggestion that poverty has fallen sounds like a suggestion that the War on Poverty succeeded.

Another reason the poor so often feel beleaguered, anxious, and depressed may be that what is often called “relative poverty” has not changed. Over time, any society’s definition of poverty adjusts up or down depending on how much income those in the middle of the distribution have. There is quite a bit of evidence that Americans need an income at least half that of families near the middle of the distribution in order to buy the things they need to hold up their heads in public. In such a world, the only way to reduce the number of people who feel and act poor will be to reduce the number with incomes less than half the 50th percentile (the median). If we adjust for noncash benefits, taxes, and changes in family size, incomes at the 10th percentile were 39 to 40 percent of incomes at the 50th percentile in both 1967 and 2012.9 It follows that a bit over 10 percent of American families had incomes less than half the median in both years. Using a relative measure not much had changed, even though the absolute poverty rate that Lyndon Johnson promised to reduce has fallen dramatically.

Fixing these flaws in the official poverty rate helps reconcile trends in poverty with trends in more direct measures of material well-being. Today’s poor live in less crowded housing, are more likely to have a complete bathroom and air conditioner in their residence, have biggerTVscreens, are more likely to have a telephone, and more likely to have a cell phone. Nonetheless, most of the poor are still beset by constant financial anxiety. In part, that is because the poverty line was set so low in 1964. Linking the poverty line to the Consumer Price Index let it rise a little every year, but not much. Using a more realistic price index keeps the poverty line closer to its real 1964 level, ensuring that those we count as poor are more like those we counted as poor fifty years ago, but in both periods those just above the poverty line have suffered from many of the same problems.

The estimates in Figure 2 are not exact. More important, their combined effect may be smaller than the sum of their separate effects, making the drop in the “true” poverty rate smaller than Figure 2 suggests. But even if the true poverty rate was 6 or 7 percent in 2013, it would have fallen by about two thirds since 1964, putting it considerably closer to what Lyndon Johnson had promised in 1964 than to what Ronald Reagan had claimed in 1988.8

Figure 2 provides a first approximation of how correcting the 2013 poverty rate for noncash food and housing benefits, refundable tax credits, and upward bias in theCPI-Uwould change the 2013 poverty rate. With these corrections the official poverty rate falls from 14.5 to 4.8 percent, making the 2013 rate roughly a quarter of the 1964 rate (19.0 percent). If we were to lower the poverty threshold for cohabiting couples to match that for married couples the 2013 poverty rate would have fallen even more.

That said, there is a fairly broad consensus among economists that theCPI-Uhas overstated the cost of maintaining a constant standard of living over the past fifty years, although they disagree about the size of the bias. The most widely used alternative to theCPI-Uis the chain-price index for Personal Consumption Expenditure (which I will call the “PCEindex”). The Commerce Department’s Bureau of Economic Analysis constructs this measure to calculate changes in the total value of all the consumer goods and services produced in the United States each year. ThePCEindex is therefore the largest single influence on government estimates of economic growth. If the poverty thresholds had risen in tandem with thePCEindex rather than theCPI-Usince 1964, the 2013 poverty line would have been 20 percent lower than it was, and the 2013 poverty rate would have been about 3.7 percentage points lower than it was.7

Price changes. Using the Consumer Price Index to adjust the poverty thresholds for inflation pushed up the threshold for a married couple with two children from $3,142 to $23,624 between 1964 and 2013. All the other thresholds rose by the same multiplier (about 7.5). Whether $23,624 bought the same standard of living in 2013 that $3,142 bought in 1964 is an almost unanswerable question. If no new goods or services had been introduced since 1964, if the quality of existing goods and services had not changed, if poor people still wanted the same mix of goods and services as in 1964, and if the prices of all goods and services had risen by a factor of 7.5, almost everyone would agree that multiplying the 1964 poverty thresholds by 7.5 was the right way to correct for inflation. Reality, however, does not meet any of these requirements. Many things that were for sale in 2013 did not exist in 1964, the quality of goods and services available in both years changed at different rates, and prices of identical goods and services also changed at different rates. As a result, even economists cannot agree on how much the value of a dollar has changed.

Refundable tax credits. As part of its effort to reform welfare by “making work pay,” the Clinton administration persuaded Congress to expand the Earned Income Tax Credit (EITC) between 1993 and 1996. By 2013 theEITCprovided a refundable tax credit of $3,250 a year for workers with two or more children and earnings between $10,000 and $23,000. Because the official poverty count is based on pre-tax rather than post-tax income, these tax “refunds” are not counted as income, even though the working poor often view the checks as the highpoint of their year—the one time when they can afford to live like other Americans.5 According to the Council of Economic Advisers, treating refundable tax credits like other income would have reduced the poverty rate by another 3.0 percentage points in 2012.6

Of course, Medicaid also pays some relatively small medical bills that poor families without Medicaid pay out of their own pockets. The best estimates I have seen suggest that in 2010 Medicaid reduced the average poor family’s out-of-pocket medical spending by about $500.4 That does not mean, however, that the introduction of Medicaid in 1965 reduced recipients’ medical bills by the 1965 equivalent of $500, leaving them with more money for everything else. The patchwork of subsidies and free care that existed before 1965 meant that even then poor patients often paid less than the market price for the care they received. I have not been able to find any evidence on how large those savings were. But if the introduction of Medicaid improved poor families’ access to health care without reducing their out-of-pocket medical spending, we should not think of it as having raised their overall standard of living in the same way that the introduction of food stamps or rent subsidies has.

Before Medicaid was created, the poor sometimes got such care from state and municipal programs or from doctors and private hospitals that offered “uncompensated” care. Medicaid coverage has undoubtedly made such care available to many poor families that previously went without it, saving some lives and improving many others. But it has not had the same effect as food stamps or rent subsidies on poor families’ nonmedical standard of living. When a poor family gets food stamps or a rent subsidy, it spends less of its cash on food and shelter and has more to spend on the phone bill, fixing the family car, or taking a child to McDonald’s for her birthday. Medicaid frees up far less money for such uses than food stamps or a rent subsidy, because poor families without Medicaid cannot afford to set aside enough money for major medical emergencies. They know that if they need expensive care they will somehow have to get it free or else do without.

Medical care is by far the most expensive of today’s noncash benefits, and Medicaid and veterans’ benefits now pay for most of the big medical bills that poor families incur. However, incorporating these programs’ value into poverty calculations is more difficult than incorporating food and housing subsidies. Most of what Medicaid spends on the poor is for “big ticket” items, like nursing homes, heart surgery, and cancer treatments, that poor families have never been able to pay for out of their own income.

Noncash benefits. Noncash benefits now provide many low-income families with some or all of their food, housing, and medical care. Such programs were either tiny or nonexistent in 1964, and their growth has significantly reduced low-income families’ need for cash. However, the Office of Management and Budget (OMB) does not allow the Census Bureau to incorporate the value of these benefits into the recipients’ poverty thresholds. The President’s Council of Economic Advisers estimates that even if we ignore Medicare and Medicaid, food and housing benefits lowered the poverty rate by 3.0 percentage points in 2012.3

Had they been married, however, the bureau would have taken a more upbeat view of their economic situation, classifying them as a family of two with a poverty threshold of $15,600. As a result of this change they would both have been above their poverty threshold instead of below it. According to the Census Bureau’s most recent data, 11 percent of all opposite-sex couples who lived together in 2012 were unmarried.2 We don’t have such a figure for 1964, but it was probably only 1 or 2 percent. The assumption that cohabiting couples need more income than married couples has therefore raised the official poverty rate. This increase in the poverty rate would make sense only if the absence of a marriage license increased a couple’s expenses by 55 percent (from $15,600 to $24,238). The Census Bureau has never tried to defend that assumption, presumably because it is a byproduct of rules set by the Office of Management and Budget, which the Census must follow whether it likes them or not.

Cohabiting couples. Imagine two twenty-five-year-olds who are romantically involved, live together, and each earned $12,000 in 2013. If they were unmarried, the Census Bureau would have classified them as unrelated individuals, with poverty thresholds of $12,119 each. Since their incomes were only $12,000, the bureau would have counted them both as poor. They would each have needed at least $12,199, bringing their total household income to at least $24,238, for the bureau to stop counting either of them as poor.

The Census Bureau raises the poverty line every year by the same percentage as the increase in the Consumer Price Index for All Urban Consumers (CPI-U). TheCPI-Udoes not try to measure changes in what people need, or why they think they need it. Nor does it measure changes in what Americans mean when they talk about poverty. TheCPI-Ujust measures changes in prices. But if we want to know how close America has come to eliminating the kind of poverty that existed in 1964, the official measure is supposed to provide an answer. However, the world has also changed in other ways that the official poverty count either ignores or mismeasures. As a result, Figure 1 does not actually tell us much about changes in the kind of poverty that Lyndon Johnson promised to eliminate. Four changes are especially important when we try to measure changes in the poverty rate since 1964.

The survey also includes detailed questions about how much money each household member received during the previous calendar year from different sources, such as self-employment, wages, or unemployment benefits. “Family income” is the total pre-tax money income of everyone in the householder’s family. To decide who is poor, the Census Bureau compares each family’s total income to a poverty threshold that depends on the size of the family and the ages of its members. If a family’s total income is below its poverty threshold, the bureau counts all its members as poor. Taken together, these thresholds are known as the poverty line.

Before accepting that conclusion, however, you need to ask where the numbers in Figure 1 come from and whether you should believe them. The Census Bureau derives the numbers from a large household survey called the Annual Social and Economic Supplement (ASEC), which tries to interview the “householder” in a representative sample of residences. The “householder” must be one of the people who owns or rents the residence. If a married couple owns or rents the residence, either partner can be the householder. The Census Bureau also asks who else lives in the household, and whether they are related to the householder by birth, marriage, or adoption. Everyone related to the householder is considered part of the same “family.” Those who live alone or with nonrelatives are considered “unrelated individuals.”

According to Figure 1, however, there was no clear trend in poverty after 1969, either up or down. The official rate rose in the wake of recessions, reaching 15 percent in 1983, 1993, and 2010-2012, and it fell during recoveries, dropping to 11 or 12 percent in 1973, 1979, 2000, and 2006. If you believe Figure 1, therefore, the War on Poverty got off to a promising start between 1964 and 1969 but then turned into a stalemate.

The Census Bureau publishes a table every September showing its estimate of the “official” poverty rate for the previous calendar year, along with the rate in every prior year back to 1959. Figure 1 (see below) shows these estimates. They indicate that 19 percent of Americans were poor in 1964. Five years later, in 1969, the official rate had fallen by roughly a third, to 12.1 percent. Had the poverty rate continued to fall by a third every five years, it would have been 5 percent in 1979 and 2 percent in 1989. Had that happened, Johnson’s claim to a place in history would have gotten a big boost.

Bailey and Danziger also give a second reason for not using the poverty rate to measure the War on Poverty’s success, which is that the official poverty rate is probably misleading. That too is true. But any assessment of the war’s political legacy requires a detailed discussion of just how misleading the official poverty rate really is, why its flaws have been allowed to persist for decades, and how their persistence undermined political support for efforts to reduce poverty.

But Bailey and Danziger’s argument is more fundamental. They object to using trends in poverty as a measure of the war’s success because the prevalence of poverty depends not just on the success or failure of policies aimed at reducing it but also on other independent economic and demographic forces, like the decline in unskilled men’s real wages and the rising number of single-parent families. They are right about this. But Johnson’s promise to eliminate poverty was not contingent on favorable or even neutral economic and demographic trends. His promise was “unconditional,” because he wanted his country to make amoralcommitment to end the suffering that poverty causes.

Given that the War on Poverty was a commitment to eliminating it, the most obvious measure of the war’s success or failure is how the poverty rate has changed since 1964. Bailey and Danziger argue that just looking at changes in the poverty rate is a “simplistic” approach to assessing the War on Poverty, and in one sense they are right. If you want to know how well programs like Head Start or food stamps worked, or how many full-time jobs they created, the reduction in poverty over the past half-century is not a sensible measure.

As a result, some of today’s most important antipoverty programs, such as food stamps, Supplemental Security Income (a guaranteed minimum income for the elderly and disabled), and Section 8 rent subsidies for poor tenants in private housing, were either launched or dramatically expanded between 1969 and 1980. Had Johnson not put poverty reduction at the heart of the Democrats’ political agenda in 1964, it is hard to imagine that congressional Democrats would have made antipoverty programs a political priority even after Republicans regained control of the White House. This is the big story about the War on Poverty, which provides the setting within which the war’s specific programs need to be assessed.

Johnson was driven from office in 1968, not by the failure of his War on Poverty but by the failure of his war in Vietnam. The next two presidents, Richard Nixon and Gerald Ford, were Republicans who had never worried much about the poor. Yet despite that fact, the War on Poverty continued after Johnson went back to his ranch. Democrats retained control of Congress for another twelve years, and many of them remained committed to reducing poverty.

Before discussing specific anti- poverty strategies, however, I must note one major gap inLegacies. The War on Poverty was more than just a bundle of programs; it was Johnson’s bid for a place in history. He announced an “unconditional” commitment to do whatever was necessary to raise the incomes of the poor. He also realized that no one really knew how to eliminate poverty without resorting to politically unacceptable methods, like just sending checks to everyone who was poor. When he said that “no single weapon or strategy will suffice,” he was warning Congress and the country that success would require trial and error. When he added that “we shall not rest until that war is won,” he was promising that even if some of his early initiatives failed he would not cut and run but would instead try something new.

Legacies of the War on Povertyis a set of nine studies, edited by Martha Bailey and Sheldon Danziger, that assess the successes and failures of the diverse strategies that Johnson and his successors adopted to reduce poverty. The chapters are packed with evidence, make judicious judgments, and suggest a higher ratio of success to failure than opinion polls do.

Lyndon Johnson became president in November 1963. In January 1964 he committed the United States to a war on poverty. In August he sought and gained authority to expand the war in Vietnam. Of course, the War on Poverty was only a figure of speech—a political and economic promise, not a war from which young men would return in body bags. Nonetheless, most Americans look back on the two wars as kindred failures. Both have had an exemplary part in the disillusionment with government that has been reshaping American politics since the 1970s. Asked about their impression of the War on Poverty, Americans are now twice as likely to say “unfavorable” as “favorable.” In one poll, given four alternative ways of describing how much the War on Poverty reduced poverty, 20 percent chose “a major difference,” 41 percent chose “a minor difference,” 13 percent chose “no difference,” and 23 percent chose “made things worse.”1

the the point you were most interested in, the life of assets having been shorted see top of page 6)"....Whether a gross or net measure is more appropriate depends on the question being asked: the allocation of gross value added between labor and gross capital more directly reflects the structure of production, while the allocation of net value added between labor and net capital reflects the ultimate command over resources that accrues to labor versus capital....For instance, in an industry where most of the output is produced by short-lived software, the gross capital share will be high, evincing the centrality of capital’s direct role in production. At the same time, the net capital share may be low, indicating that the returns from production ultimately go more to software engineers than capitalists—whose return from production is offset by a loss from capital that rapidly becomes obsolete..."Rognlie, Matthew, "Deciphering the fall and rise in the net capital share,"Brookings Panel on Economic Activity, March 2015. Available at:http://www.brookings.edu/about/projects/bpea/papers/2015/land-prices-evolution-capitals-share
"...First, it argues that as a purely descriptive matter,the recent behavior of income shares is widely misunderstood: rather than experiencing a steady rise, the net capital share for large developed economies has followed a U-shaped trajectory in the postwar era, and its long- term expansion originates entirely in the housing sector.Although both gross and net income shares can be meaningful,net concepts are more relevant to the debate on inequality.Second, this paper observes that when net capital income outside the housing sector is disaggregated between the return on fixed assets and a residual share of pure profits, the U-shaped trajectory is driven mainly by the residual—calling the mechanisms in Karabarbounis and Neiman (2014b) and Piketty and Zucman (2014), which rely on changes in the aggregate value of capital, into question. Finally, it describes the theory of factor shares and the role of elasticities of substitution, evaluating various hypotheses by performing counterfactual simulations in a multisector model.....This measurement reveals a striking discrepancy in the long-term behavior of gross and net shares, echoing the claims of Bridgman (2014); and it shows that the net capital share generally fell from the beginning of the sample through the mid-1970s, at which point the trends reversed. In the long run, there is a moderate increase in the aggregate net capital share, but this owes entirely to the housing sector—where, since ownership is less concentrated, the consequences for inequality may be less severe.In the shorter run, there is both the U-shaped pattern in capital income and a strong cyclical element...It starts by disaggregating net capital income in the corporate sector into components that reflect the return on fixed assets—equipment, structures, and land—as well as a residual term reflecting “pure” profits. Although the decomposition between return on assets and this residual can be somewhat ambiguous, both crude and more sophisticated approaches indicate that the residual plays a central role.To some extent, this residual reflects cyclical variation in markups, but its long-term pattern—which parallels the U-shaped pattern in capital income as a whole—may hint at broader changes in market power and the importance of monopoly profits....I note some intriguing shifts in composition: for instance,there has been a long-term shift in net capital income from land in the non-housing sector to land in the housing sector....Motivated by the limitations of a one-sector model, I construct a multisector model that reflects the disaggregation performed in section 3, and use this model (with a tentative calibration of elasticities) to perform counterfactual simulations that study the influence of key forces on the net capital share—including the observed changes in the relative price of various kinds of investment, and also changes in the real interest rate....For instance, in an industry where most of the output is produced by short-lived software, the gross capital share will be high, evincing the centrality of capital’s direct role in production. At the same time, the net capital share may be low, indicating that the returns from production ultimately go more to software engineers than capitalists—whose return from production is offset by a loss from capital that rapidly becomes obsolete.Both measures are important: indeed, a rise in the gross capital share in a particular industry is particularly salient to an employee whose job has been replaced by software, and it may proxy for an underlying shift in distribution within aggregate labor income— for instance, from travel agents to software engineers. The massive reallocation of gross income in manufacturing from labor to capital, documented by Elsby et al. (2013), has certainly come as unwelcome news to manufacturing workers. But when considering the ultimate breakdown of income between labor and capital, particularly in the context of concern about inequality in the aggregate economy, the net measure is likely more relevant. This point is accepted by Piketty (2014), who uses net measures; the general rationale for excluding depreciation is pithily summarized by Baker (2010), who remarks that “you can’t eat depreciation....As we increase capital relative to labor, the net marginal product of capital declines more rapidly than the gross—in short, capital is less substitutable for labor from a net perspective....” Mobile908.303.9747
Office212.404.4646

DeLong, Brad, "DRAFT: Discussion of Matthew Rognlie: “Deciphering the Fall and Rise in the Net Capital Share”"Washington Center for Equitable Growth, March 18, 2015. Available at: http://equitablegrowth.org/2015/03/18/draft-discussion-matthew-rognlie-deciphering-fall-rise-net-capital-share/"....Matt’s focus on the net capital share is surely right.....As Matt stressed, the big news in the post-World War II net capital share is the surge in housing: from 3% to 8% of private domestic value added. How much of this is a real increase in housing intensity? How much reflects congestion driven by exhaustion of the low-hanging superhighways? How much is rent-extraction via NIMBYism? How much trust do we give to these “imputed rent” imputations anyway?There has always been a problem with using our GDP estimates as social accounts. In GDP, we measure each unit’s contribution to production at the final unit’s marginal cost and each unit’s contribution to societal well-being at the final unit’s money-metric marginal utility. In the presence of anything like near-satiation in consumption, or of near-exhaustion in productive capacity, this does not convey a true picture. Hard questions. No very good answers....the secondary big news in his numbers is the pre-1990 fall in the net capital share, a fall driven by a very real rise in depreciation is real. Our capital stock has seen the replacement of long-lasting machines to perform Wellman-Lord desulfurization reactions with video editing machines rapidly obsoleted by Moore’s Law.....But it is puzzling that the pre-1990 fall in the net capital share not matched by a decline in the relative capitalization of the corporate sector. Matt points out a steady rise in capitalization up to the late 1960s, followed in the 1970s by a “negative bubble”-truly absurdly high earnings yields on equities-that lasts well into the 1980s. Then we see a bubbly rise in the relative capitalization of the corporate sector since the start of the 1990s-a rise that persists in spite of sub-par business-cycle performance. Very puzzling....et me end by strongly endorsing what I take to be Matt Rognlie’s bottom line.I take it to be that post-WWII variation in the observed net capital share is not explainable via returns on the underlying assets. Instead, the decomposition in section 3 attributes most of the variation to pure profits, or markups… Accumulation and returns play, outside of housing, a distinctly secondary role, if they play any role at all. But it is equally hard to find any role for the race between education and technology, and there should be if we think the factors of production are labor, education skills, and machines....Likewise, variation in income inequality, is hard to attribute to wealth ownership or to human capital investment or to differential shifts in rewards to factors like raw labor, experience-skills, education-skills, and machines. Matt thus concludes that: "Concern about inequality should be shifted away from the split between capital and labor, and toward other aspects of distribution, such as the within-labor distribution of income."The nly caveat I wish to make is: This is true now. This may not be true in 50 years, if Piketty is right.And Matt’s conclusion is bad news for us economists, for it leaves us in the same position as those trying to explain an earlier large puzzle in the production function, the twentieth-century retardation of the British economy...."

DRAFT: Discussion of Matthew Rognlie: “Deciphering the Fall and Rise in the Net Capital Share” By Brad DeLongPosted on March 18, 2015 at 9:27 am SHAREJ. Bradford DeLong:: U.C. Berkeley and NBER:: delong@econ.berkeley.eduFor BPEA Spring 2015 8:30 AM March 20, 2015

To the extent that land is the driver of shifts in our capital share, this is clear a problem to the extent that it is driven by NIMBYism. But is it a problem otherwise?

And as Matt also stressed, the secondary big news in his numbers is the pre-1990 fall in thenetcapital share, a fall driven by a very real rise in depreciation is real. Our capital stock has seen the replacement of long-lasting machines to perform Wellman-Lord desulfurization reactions with video editing machines rapidly obsoleted by Moore’s Law.

But it is puzzling that the pre-1990 fall in the net capital share not matched by a decline in the relative capitalization of the corporate sector. Matt points out a steady rise in capitalization up to the late 1960s, followed in the 1970s by a “negative bubble”-truly absurdly high earnings yields on equities-that lasts well into the 1980s. Then we see a bubbly rise in the relative capitalization of the corporate sector since the start of the 1990s-a rise that persists in spite of sub-par business-cycle performance. Very puzzling.

Let me end by strongly endorsing what I take to be Matt Rognlie’s bottom line. I take it to be that post-WWII variation in the observed net capital share is not explainable

via returns on the underlying assets. Instead, the decomposition in section 3 attributes most of the variation to pure profits, or markups…

Accumulation and returns play, outside of housing, a distinctly secondary role, if they play any role at all. But it is equally hard to find any role for the race between education and technology, and there should be if we think the factors of production are labor, education skills, and machines.

Likewise, variation in income inequality, is hard to attribute to wealth ownership or to human capital investment or to differential shifts in rewards to factors like raw labor, experience-skills, education-skills, and machines. Matt thus concludes that:

Concern about inequality should be shifted away from the split between capital and labor, and toward other aspects of distribution, such as the within-labor distribution of income.

The nly caveat I wish to make is: This is true now. This may not be true in 50 years, if Piketty is right

And Matt’s conclusion is bad news for us economists, for it leaves us in the same position as those trying to explain an earlier large puzzle in the production function, the twentieth-century retardation of the British economy.

It was Robert Solow who said:

Every discussion among economists of the relatively slow growth of the British economy compared with the Continental economies ends up in a blaze of amateur sociology…

I really would like for us to be able to do better.

Notes:

These big worries are:

Worries about depreciation allowances in these accounts. Mine are perhaps bigger than most.

Worries about how much of the value that comes from installing capital comes from (local) learning about how to handle the technology, and is something that does not depreciate from the point of view of the individual firm. That is not captured.

Worries about, from the societal point of view, how much of the value that comes from installing capital comes from global learning about how to handle the technology.

Perennial worries about what in high-end labor incomes are really incomes earned by raw labor and human capital, and what are rent-extraction and thus sharing in the returns to capital.

In America things are different: the frontier. But in Western Europe one thing going on at the end of theBelle Époqueis the collapse in the value of rents on absentee-owned European farmland.

Downton Abbey-Highclear-was supportable on its entailed rents a generation before World War I. It was not so afterwards. Some of this was taxes. But there was also a steep relative fall in prices of staple foodstuffs. Not just Iowa and Kansas, but Odessa and New Zealand came online.

Western European farmland lost its value as a factor of production at the end of the nineteenth century. To what extent was that it? And to what extent is “it now the rise of housing prices in London, Paris, Rome, Milan, etc.? My teacher the late David Landes, a CUNY graduate, simply bought a Paris apartment as a postdoc post-WWII. Those of our postdocs who could not afford to go to private colleges do not pick up Paris apartments casually in the course of a research trip to take a look at bank records.

The fact that the big news since World War II is a rise in housing as a share of value added raises the question of whether this surge may be in significant part the reversal of story from a century ago-now the rise of valuable urban housing, then the decline of valuable Western European rural farmland.2

Hard questions. No very good answers.

There has always been a problem with using our GDP estimates as social accounts. In GDP, we measure each unit’s contribution to production at the final unit’s marginal cost and each unit’s contribution to societal well-being at the final unit’s money-metric marginal utility. In the presence of anything like near-satiation in consumption, or of near-exhaustion in productive capacity, this does not convey a true picture.

And what hat does this mean, anyway?

How much of this is a real increase in housing intensity? How much reflects congestion driven by exhaustion of the low-hanging superhighways? How much is rent-extraction via NIMBYism? How much trust do we give to these “imputed rent” imputations anyway?

As Matt stressed, the big news in the post-World War II net capital share is the surge in housing: from 3% to 8% of private domestic value added.

I never understood why, in the Solow model, gross savings was supposed to be a function of gross output anyway. There are the big worries over the data.1Let me skip those.

Matt’s focus on the net capital share is surely right.

And this is why it is truly excellent that Matt Rognlie brings well-ordered and insightfully-organized data to these questions.

What about what John Maynard Keynes called the “euthanasia of therentier”? As accumulation proceeds the relative fall in the rate of profit exceeding the relative rise in concentrated wealth? Piketty points to remarkable constancy in the rate of profit at between 4% and 5% per year, but is agnostic as to whether the cause is easy capital-labor substitution, rent-seeking by the rich, or social structure that sets that as the “fair” rate of profit.

He guesses that the real explanation is that 1914-1980 is the anomaly. Without great political disturbances, wealth accumulates, concentrates, and dominates.

Thomas Piketty has a guess.

It is simply not possible to see such an extreme concentration of benefits as in any way a return to a factor of production obtained as the product of “hours spent studying” times “brainpower”.

Relative to 1968 you need 3.5 times the wealth now in the U.S. and 8 times the wealth worldwide. That is an income and wealth an order of magnitude higher than my grandfather ever did.

One of his other grandsons, my first cousin Phil Lord, mighthave a chance of making it into the same financial range-if he can make the transition from co-director to “producer” and “created by” credits-but if he does he will still be breathing much less rarified relative air.

A little family history: My Grandfather Bill was in not just the 1% or the 0.1% but the 0.01% back in the days before the rise in inequality. He sold his chemical construction company to the IMF conglomerate and retired back in 1968.

To get large swings in the income distribution out of small changes in the relative supply of educated workers seems to require less substitutability between formal college and other factors of production then seemed reasonable. Higher experience-skill premiums and sharply higher education-skill premiums, yes. But the action seems to be far, far out in the upper tail.

But, recently, reality does not seem to agree.

I was weaned on the explanation of recent trends in US inequality set out by the very sharp Claudia Goldin, Larry Katz, and company. It was skilled-biased technical change, coupled with the end of the era that had begun in 1636 of making increasing educational levels a priority. That combination greatly raised the return to education-based skills. That was the principal driver of rising income inequality.

Thus I am in an excellent position to, if not add intellectual value, share lavishly in intellectual rents.

Let me thank Matt for doing some very serious and thoughtful digging. The upshot is that I am in an ideal position for a discussant: There are very interesting and important numbers that have not been put together before, and there is an author who is wise enough not to believe he has with the numbers mean nailed.

Sandbu, Martin, "Free Lunch: Piketty meets his match"Financial Times, March 20, 2015. Available at:http://www.ft.com/cms/s/0/bbf09ba8-cd51-11e4-9144-00144feab7de.html"...Rognlie does two things. In terms of theory, he notes a difference between the concept of substitutability used by Piketty and that commonly measured, depending on whether you measure capital (and output) before or after adjusting for depreciation (the investment needed just to offset the wear of machinery over time). Properly measured, he shows, the empirical evidence overwhelmingly shows that capital cannot substitute for labour to anywhere near the degree needed to fulfil Piketty's prophecies. Empirically, Rognlie looks more closely at capital's share of income, and finds that with the exception of one sector, net shares have remained largely constant aside from short-term fluctuations. (They fell slightly until the 1990s and have caught up since. Gross shares have increased more steadily, but that's because of greater use of capital that depreciates faster - software, for example.) The exception is housing, which accounts for a big part of capital accumulation and for all of the long-term rise in the capital income share. Something has clearly been going on in the housing sector - but as Rognlie points out, since the housing ownership is much more evenly spread than productive capital, it may be less worrying for inequality....."
Free Lunch: Piketty meets his match

Martin Sandbu

How could economists not fawn over Matthew Rognlie? A 26-year-old graduate student has delivered a technical critique of Thomas Piketty's theory of capital-driven inequality that is gaining status as the most devastating yet put forward. What started with a comment on the Marginal Revolution blog has grown into a paper that Rognlie is presenting at the Brookings Panel on Economic Activity today - the prime US conference on applied policy economics.

Recall that Piketty, in addition to adding significantly to our empirical knowledge about how incomes and wealth are distributed, theorises that capital accumulation plays a big role in exacerbating inequality and will continue to do so in the future. The idea is that the return on capital will remain sizeable while GDP growth slows (the famous r > g). This means the stock of capital will grow bigger relative to national income and so the share of capital returns in total income will grow at the expense of labour income.

The objection has always been that as capital accumulates, the return on it will fall. Piketty has shown that the rate of return has been remarkably stable historically, and theorised that it can remain so. Technically, how fast returns to capital fall depends on the "elasticity of substitution", ie the ease with which capital and labour can be substituted for one another in the production process. The more easily workers can be replaced by machines, the more capital the economy can absorb without reducing the reward paid to capital owners. If substitutability is moderate, the incremental capital becomes harder to employ productively, and returns fall.

Rognlie does two things. In terms of theory, he notes a difference between the concept of substitutability used by Piketty and that commonly measured, depending on whether you measure capital (and output) before or after adjusting for depreciation (the investment needed just to offset the wear of machinery over time). Properly measured, he shows, the empirical evidence overwhelmingly shows that capital cannot substitute for labour to anywhere near the degree needed to fulfil Piketty's prophecies.

Empirically, Rognlie looks more closely at capital's share of income, and finds that with the exception of one sector, net shares have remained largely constant aside from short-term fluctuations. (They fell slightly until the 1990s and have caught up since. Gross shares have increased more steadily, but that's because of greater use of capital that depreciates faster - software, for example.) The exception is housing, which accounts for a big part of capital accumulation and for all of the long-term rise in the capital income share. Something has clearly been going on in the housing sector - but as Rognlie points out, since the housing ownership is much more evenly spread than productive capital, it may be less worrying for inequality.

Rognlie's work is impressive, and he is receiving well-deserved star treatment today. His discussants are Robert Solow - the nonagenarian Nobel-winning economist known for his theory of economic growth - and Bradford DeLong. DeLong has posted his comments on Rognlie on his blog; they are entertaining and illuminating, though more for raising questions than giving answers.

The upshot is not that inequality doesn't matter. It is that it's hard to explain rising inequality in terms of capital accumulation. Instead, Rognlie concludes, we should focus on changing (and increasingly unequal) distribution within labour income.