Poverty Trap and Emerging Underclass in the Land of Opportunity

In August 29, 1977, Time published a cover story about impoverished urban Blacks, labeling them as the American Underclass. Those were people who were stuck in an environment of "psychological and material destitution despite 20 years of civil rights gains and 13 years of antipoverty programs" and robust job recovery after the end of 1973-75 recession. Since 2001 the poverty problem has worsened, and the severe recession of 2007-08 has accelerated the downward spiral in income opportunities for many Americans. It is making it more difficult, especially for Blacks and Hispanics and a significant proportion of Whites, to extricate themselves from the lower end of the income scale.

There is greater propensity for an increasing proportion of families and their future generations to end up at the bottom of the income distribution. American Community Survey, Bureau of Census, September 2013, found that the poverty rate increased from 12.2 percent in 2000 to 15.9 percent in 2012. In addition, the percentage of people with income below 50 percent of the poverty threshold increased from 5 percent in 2000 to 7 percent in 2012. The rates vary across racial groups, where Blacks and Hispanic rates are more than twice the poverty rates for Asians and Whites.

The study by Elizabeth Kneebone at the Brookings Institution, July 31, 2014, found that from 2000 to the peak period 2008-12 of the great recession poverty is becoming more concentrated. The 100 largest metro areas have 70 percent of the distressed areas with poverty rates of 40 percent or more. The share of poor people in cities increased from 18.2 percent in 2000 to 23 percent during the peak of the severe recession 2008-12. Suburban share has increased from 4 percent in 2000 to 6.3 percent during 2008-12. Hence, the poverty problem has worsened over time despite economic growth during 2003-2006 and 2010-2012, and it has affected all ethnic groups.

The increased concentration of poverty is especially worrisome in light of a study's finding by Harvard researchers Raj Chetty et al., August 2015. They found that children below age 13 in families given housing subsidy vouchers have significantly higher college attendance rates and earnings in mid-twenties, when they moved to lower poverty neighborhoods, as opposed to the same age children in families in the control group (with no housing subsidy vouchers).

One could argue that high poverty rates may not be of much concern if poor people have more opportunities for intergenerational income mobility. But the findings of studies that have rigorously examined the issue are not encouraging. In a book Unequal Chances (2005), edited by Samuel Bowles et al., a study by Tom Hertz found that, adjusting for household size, a rich child born in a household in the top income decile (top 10 percent of the income distribution), has 26.7 percent chance of remaining in that decile. However, a poor child born in a household in the bottom decile has only 0.5 percent chance of ending up in the top income decile. Hence, a rich child, as opposed to a poor child, is 53 times more likely to remain rich as an adult. Persistence of poverty is much more severe for Blacks and Hispanics than for Whites.

Therefore, the question arises: what can be done about it, given the fact that, to some extent, parental education, traits and income determine their children's educational attainment and incomes? Another study by Professor Raj Chetty et al., June 2014 (http://www.rajchetty.com/chettyfiles/mobility_geo.pdf )is instructive. They found that children have a high probability of moving up the income ladder in cities that have less residential segregation, less income inequality, better primary schools, greater social capital and family stability. Hence, intergenerational mobility is local.

Although income inequality in the current period affects intergenerational inequality, families stuck in the poverty trap cannot change income inequality in the short run. But they can take the initiative to improve their own skills, better their public schools, demand pre-kindergarten education, provide family stability, and create an environment for disciplined growth of children to foster love for education. There is increasing evidence in psychological and behavioral studies that the interaction of environmental experiences and personal traits, such as impulse control, determine educational and economic success of children in adulthood. The Washington Post story of December 20, 2015, on Jennings School District, MO., points out the success in educating primarily Black children. In addition to requiring high academic standards, Superintendent Tiffany Anderson has recognized and is dealing with issues related to poverty and fostering a disciplined approach to academic excellence among poor children.

Changes in the labor markets due to globalization and emerging new technologies have created a skills gap. The skills gap, and therefore poverty, will persist if policy makers and families at the lower end of the income distribution do not respond by taking deliberate actions to remedy the problem. Families facing prospects of sliding down the income ladder must also recognize the limitations of government income support programs and poverty policies. Hence, their own initiatives in concert with public policy assistance will be the path for economic success for themselves, as well as for their children.

A nation with persistence poverty over a period of time suffers human capital loss in perpetuity and other adverse social and cultural consequences. Former Prime Minister of India, Atal Behari Vajpayee, once remarked, "Poverty is multidimensional. It extends beyond money incomes to education, health care, political participation and advancement of one's own culture and social organization."

Mathur is former chair and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He resides in Ogden, Utah.