Poverty, Inequality, and Social Policy

May 10 and 11, 2013
Phillip Levine of Wellesley College and Melissa Schettini Kearney of the University of Maryland, Organizers

Marianne Bitler, University of California at Irvine and NBER; Hilary Hoynes, University of California at Davis and NBER; and Elira Kuka, University of California at Davis

Do In-Work Tax Credits Serve as a Safety Net?

The cash and near cash safety net in the United States has undergone a dramatic transformation in the past 15 years. Federal welfare reform has led to the "elimination of welfare as we know it" and several tax reforms have substantially increased the role of "in-work"' assistance. In 2010, we spent more than 5 dollars on the Earned Income Tax Credit (EITC) for every dollar spent on cash benefits through Temporary Assistance for Needy Families (TANF), whereas in 1994 -- on the eve of federal welfare reform -- these programs were about equal in size. Bitler, Hoynes, and Kuka evaluate and test whether the EITC satisfies a defining feature of a safety net program: that it responds to economic need. In particular, tehy explore how EITC participation and expenditures change with the business cycle. The fact that the EITC requires earned income leads to a theoretical ambiguity in the cyclical responsiveness of the credit. They use administrative IRS data from 1996−2008 to examine the relationship between business cycles and the EITC program. The empirical strategy relies on exploiting differences in the timing and severity of economic cycles across states. Their results show that higher unemployment rates lead to higher EITC caseloads and total dollar amounts of credits for married couples. On the other hand, the effect of business cycles on the size of the EITC program is insignificant for single individuals, whether measured by caseloads or expenditures. These patterns are consistent with static labor supply theory, and the way that economic shocks likely affect one-versus-two-earner households.

Bhashkar Mazumder, Federal Reserve Bank of Chicago, and Sarah Miller, University of Michigan

The Effects of the Massachusetts Health Reform on Financial Well Being

A major benefit of health insurance coverage is that it protects the insured from unexpected medical costs. Mazumder and Miller use detailed credit report information on a large panel of individuals to examine the effect of health insurance coverage on a broad set of financial outcomes. To explore this relationship, they use exogoneous variation in insurance coverage generated by a major health care reform that occurred in Massachusetts in 2006, a reform that in many ways served as the basis for the Affordable Care Act that followed in 2010. They exploit variation in the impact of the reform across counties and age groups using levels of pre-reform insurance coverage as a measure of the potential effect of the reform. They find that the reform reduced the total amount of debt that was past due and reduced personal bankruptcies.They also find suggestive evidence that the reform lowered the total amount of debt and improved credit scores. The effects are most pronounced for individuals who had limited access to credit markets before the reform. These results show that health care reform has implications that extend well beyond the health and health care utilization of those who gain insurance coverage.

Joanne Hsu, Federal Reserve Board, and David Matsa and Brian Melzer, Northwestern University

Unemployment Insurance and Consumer Credit

Hsu, Matsa, and Melzer examine the impact of unemployment insurance (UI) on credit markets. Exploiting heterogeneity in the generosity of unemployment insurance across U.S. states and over time, they find that UI helps the unemployed avoid defaulting on their debt. For every $1,000 increase in maximum UI benefits, mortgage delinquency drops by 2 percent and the eviction rate drops by 10 percent among unemployed homeowners. They also find that lenders respond to this decline in default risk by expanding credit access for low-income households who are at risk of being laid off. For every $1,000 increase maximum UI benefits, low-income households are offered $900 (4 percent) more in credit card debt, as well as lower interest rates on credit cards and mortgages (0.5 percent reduction). These results show that the poor benefit from the insurance provided by a stronger social safety net, even without experiencing a negative shock.

Patricia Anderson, Dartmouth College and NBER; Kristin Butcher, Wellesley College and NBER; Hilary Hoynes; and Diane Whitmore Schanzenbach, Northwestern University and NBER

Understanding Food Security Over the Great Recession

Hannes Schwandt, Princeton University

Unlucky Cohorts: Income, Health Insurance and AIDS Mortality of Recession Graduates

Recent studies have found that the unemployment rate that graduates face when entering the labor market has a strongly negative and persistent effect on subsequent income. Schwandt investigates whether this arguably exogenous variation in income and socioeconomic status is related to health insurance coverage and subsequent mortality. Using data from the CPS, he first shows that graduating in a recession is not only associated with lower subsequent income but also with worse health insurance coverage. These effects are similar across gender, but much stronger for non-whites than for whites. Next, he shows that results carry over when using the unemployment rate at age 18 instead of at the actual graduation age. This allows him to analyze effects on mortality in the Vital Statistics that does not report graduation age. For the baseline period, 1979 to 1991, there are strong positive effects of the unemployment rate at age 18 on mortality at ages 28-33. These effects are driven by AIDS deaths; they are strongest for non-whites; and they are less pronounced for females. When adding more years to the analysis, AIDS-related effects decline but overall disease-related mortality remains significantly affected. These results suggest that recession graduates face higher mortality rates, in particular during the outbreak of a deadly epidemic. Schwandt argues that the negative effects on income and health insurance coverage might be a plausible mechanism underlying this finding.

Lucie Schmidt, Williams College, and Lara Shore-Sheppard and Tara Watson, Williams College and NBER

The Effect of Safety Net Programs on Food Insecurity

Schmidt, Shore-Sheppard, and Watson investigate how the structure of benefits for five major safety net programs - TANF, SSI, EITC, SNAP, and Medicaid - affects low food security in families. They build a calculator for the years 2001-9 to impute eligibility and benefits for these programs in each state, taking into account cross-program eligibility rules. To identify a causal effect of the safety net, they instrument for imputed eligibility and potential benefits using simulated eligibility and benefits for a nationally representative sample. They also perform a two-sample instrumental variables estimation in which they use simulated benefits to instrument for actual reported benefits. Focusing on non-immigrant, single-parent families with incomes below 300 percent of the poverty line, they find that each $1000 in cash or food benefits actually received reduces low food security by 4 percentage points. These estimates imply that moving from the policies of 10th percentile state of Kentucky to the 90th percentile state of Vermont would reduce low food security by 2.1 percentage points on a base incidence of 33 percent. They are unable to reject equivalent impacts of cash and food assistance. The results also highlight the importance of considering a full range of safety net programs.

Ariel Kalil, University of Chicago; Magne Mogstad, University College London; and Mari Rege and Mark Votruba, Case Western Reserve University

Father Presence and the Intergenerational Transmission of Educational Attainment

Positive correlations between the economic, educational, social, and behavioral outcomes of parents and children have been widely documented, yet the mechanisms behind these correlations remain unclear. Kalil, Mogstad, Rege, and Votruba investigate the degree to which a father's presence affects the intergenerational correlation of educational attainment. To do so, they exploit the systematic differences in paternal exposure that arise across older and younger siblings when their father dies. They find that the presence of a father substantially increases the intergenerational transmission of educational attainment. This effect does not seem to operate through parental economic inputs or through maternal labor force participation.

Phillip Levine and Melissa Schettini Kearney

Income Inequality and the Decision to Drop Out of High School

Anna Aizer, Brown University and NBER; Florencia Borrescio Higa, Brown University; and Hernan Winkler, University of California at Los Angeles

Impact of Rising Inequality on Health at Birth

The income distribution has widened significantly over the past 40 years, primarily because of skill-biased technological change which has disproportionately raised the income of the most highly skilled. A major concern over rising inequality is its potential to reduce intergenerational mobility, leading to even greater inequality in the next generation. Aizer, Borrescio Higa, and Winkler estimate the impact of rising inequality over the period 1970-2000 on offspring health at birth, a measure of human capital that has been shown to be highly correlated with future education, IQ, and income. They define inequality three ways: as a group-level measure (the Gini coefficient for each county); as an individual-level measure of relative deprivation; and as an ordinal measure of rank. They find that including a modest set of controls reduces the negative relationship between aggregate measures of inequality and health, and that limiting variation to changes in inequality over time within an area, or instrumenting for inequality, eliminates it completely. However, this null result likely reflects heterogeneity in the effect of rising inequality. When they estimate the impact of relative deprivation or rank on newborn health, they find negative and significant effects. Together these results suggest that increases in inequality in the current generation may lead to reduced intergenerational mobility and greater levels of inequality in the next generation.

Adriana Lleras-Muney, University of California at Los Angeles and NBER; Anna Aizer; Joseph Ferrie, Northwestern University and NBER; and Shari Eli, University of Toronto

The Long Term Impact of Means-Tested Transfers: Evidence from the Mother's Pension Program

Anuj Shah, University of Chicago; Sendhil Mullainathan, Harvard University and NBER, and Eldar Shafir, Princeton University

Poverty Impedes Cognitive Function

The poor often behave in less capable ways, which can further perpetuate poverty. Shah, Mullainathan, and Shafir hypothesize that poverty directly impedes cognitive function, and present two studies that test this hypothesis. First, they experimentally induce thoughts about finances, and find that his reduces cognitive performance among poor but not in well-off participants. Second, they examine the cognitive function of farmers over the planting cycle. They find that the same farmer shows diminished cognitive performance before harvest when poor, compared to after harvest, when rich. This cannot be explained by differences in time available, nutrition, or effort. These studies demonstrated that poverty reduces cognitive capacity. They suggest that poverty-related concerns consume mental resources, leaving less for other tasks. This provides a novel perspective, and helps to explain a spectrum of behaviors among the poor.