Tuesday, March 30th, 2010

Megan Cottrell: Don’t Fall in the Poverty Trap – You May Never Get Out

[ Megan Cottrell’s One Story Up blog might be one of the most important in the United States. It is certainly a must-read for anyone in Chicago. She covers housing and poverty, two un-glamorous subjects that have all but been abandoned by newspapers. These aren’t topics beloved of urbanist blogs either, but they are critical to understanding our cities and building successful lives for all citizens. As Megan notes, the phenomenon she describes affects up to 40% of all Chicagoans. I encourage you to check out her work. ]

Until you earn about $40,000 a year, you’re pretty much stuck in poverty, an economist’s numbers show.

In fact, until you get past $40,000 a year, any raise or higher paying job you get might actually sink you deeper into poverty.

Take a look at this story from economist Jeff Liebman, who now works in the Obama Administration.

The poverty trap is still very much a reality in the U.S.

A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs, etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000.

Take a look at this chart by economist Clifford Thies, via Greg Mankiw’s blog.

The Dead Zone

From the green dot, you can see that earned income rises… for a while. Then there’s this screwy wavy line. That’s the mother making a little more, but earning a little less.

$40,000 a year is about $19 an hour. Over 40 percent of Chicagoans don’t earn that much.

There aren’t that many jobs out there that make $19 an hour. Bank Teller? $13.33 an hour. Office clerk? $15.60. Retail salesperson? $11.80. Security guard? $16.14. (Statistics via Chicago Rehab network).

Our tax incentives work… initially. Then they only serve to hurt people. They say the poor don’t work hard enough, but that single mother sounds like a pretty hard working person to me. The story goes on to say that she got a weekend job, to try to make ends meet. Except after childcare and gas, it didn’t help at all.

So if working harder means people might actually earn less, how is it that we expect people to work harder?

This article originally appeared in One Story Up. Reprinted with permission of the author.

18 Comments
Topics: Economic Development, Public Policy

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18 Responses to “Megan Cottrell: Don’t Fall in the Poverty Trap – You May Never Get Out”

  1. Eric says:

    The HCR act may help substantially. There are significant subsidies up to 400% of the poverty line. HCR will also improve job flexibility and the burden of health care costs, which impact the lower-middle class disproportionately. I’m pretty upbeat about HCRs positive impact in this regard.

  2. Steven Vance says:

    This sounds kind of like the Medicare “donut hole” for senior citizens’ prescription medicine expenditures.

    You can buy so much prescription medicine but once you hit a certain threshold, the subsidies plateau until you hit a second, higher threshold.

  3. Andrew Lane says:

    Eric, the HCR Act would merely create the same effect as shown in the graph above. As you earn more, the subsidies under the HCR Act are decreased, making you no better off. This effect will also be extended to cover even more households (those making up to $88,000).

  4. Paul Souders says:

    This is really interesting and squares with the experience of many college-educated Americans as well (who are presumably and more generally on a path out of the trap). You’ll often hear such people say “it’s not what you earn, it’s what you save.” Heck I’ve said this myself many times.

    But the truth is that most Americans don’t begin saving at positive rates until their salaries pass about $40k. It’s a lot easier to put aside 10% a month when 10% a month is no longer the choice between heat or food. The difference is that for college-educated Americans, most of your sub-$40k earning life is spent in college, where student housing and financial aid (and, OK, credit cards and your parents) ease some of those choices.

  5. Pete from Baltimore says:

    I can understand it being hard to raise a family on $40 ,000 a year.But $40 ,000 a year for an individual isnt bad.I usually make around $15 -17 thousand a year and while its tough its doable.I should add that im not recieving government money of any kind.And that i saved up enough to buy a $45,000 house.

    It all depends on where you live .Obviously Chicago is very expensive to live in. But i would imagine that you could do allright in many other places for 40 grand.

    I dont mean to say that people shouldnt make more than $39,000[ i wish that i could].Simply that its unrealistic to expect everybody to make more than 40 grand.And while i work hard for my money[ i worked all day in the rain today] i dont consider myself in poverty.

    Maybe its just me, but i think that she is setting the bar too high at $40,000 a year for a single person or a couple. A family of 4 would be different of course.

  6. Haven says:

    As a former Welfare-to-work case manager I saw this on a consistent basis. As my clients made more they took home less. A jump from $8 to $11 an hour would really wreck havoc with their budgets we worked on. Daycare shot through the rough, rent shot up, and their food stamps decreased. It was really a dis-incentive for them to work. Some of my clients quit their jobs because they were falling further behind. The ones that tried to stick it out had to find other means of daycare and transportation to make it work. But they still couldn’t save as much as they use to. A lot of them traded a higher standard of living for a better paying job.

    Even some of my buddies who have college degrees and don’t make anywhere near 40k are really struggling. I have several married friends who their combined income is around 70K and they really struggle. Childcare and healthcare is eating them a live. Not to mention the slow creep of gas and food prices.

    This is a subject that really deserves study. It’s hard to revitalize a city or neighborhood when large segments of the population are falling further behind.

  7. Yeah, and if you get there due to major injury or illness it is even more of a trap no matter how hard one works to rebuild their life!

  8. AmericanDirt says:

    Not surprisingly, this largely parallels the structural barriers keeping people from leaving subsidized housing: just as the incomes improve to the point that they can afford market-rate, the cost of housing/take-home pay/standard of living suddenly plummets. What, then, is the incentive for a person to earn more, when his/her relationship to social welfare becomes a negative punishment upon achieving economic independence?

  9. Alon Levy says:

    Bear in mind, the graph comes from the disreputable Mises Institute; even Mankiw says to take it with a grain of salt.

    But the problem is that US welfare is not coherent. It’s a patchwork of programs that taper off at different income levels, all based on the idea that welfare should be enough to survive but nothing more. The biggest, Medicaid, has now moved away from this model because of HCR, but there are so many others, especially college and housing subsidies. When you design welfare to humiliate instead of uplift (for example: education doesn’t count as work in workfare arrangements, even though it’s about the most effective way out of welfare dependency), don’t be surprised that it doesn’t lift people out of poverty.

  10. cdc guy says:

    For a 2-minute basic understanding of the concept behind EITC (and the logic of replacing all forms of welfare with a coordinated NIT), go to:

    http://en.wikipedia.org/wiki/Negative_income_tax

    Coincidentally, the article chooses $40K as the sweet spot where government assistance ends and tax-paying begins.

  11. nevins says:

    Why work harder? Is it all about you only? Below 40k when the subsidies from my family via the government to you begin to kick in, you are not pulling your own weight. While I have 4 children of my own, I am supporting at least 6 others through these direct government handouts.
    So why work harder? So that you can have some self respect and stop being a leach on society.

  12. thundermutt says:

    Not everyone in a bad place is there because of bad choices. Not everyone with a low income who needs help is a leech.

    Two can play at your blame game, and nothing will happen except to harden positions and more toss verbal bombs. It’s all about “point of view”. For example:


    Why should I pay for your kids? Is it all about your family only? The government is supporting your four kids with direct handouts: tax exemptions and credits for your children and home mortgage and real estate taxes.

    Framing arguments in that offensive way solves nothing, helps no one, and pisses off everyone (including our host, if he perceives this post as a firebomb).

    Caricatures and over-the-top rhetoric sound good on radio and TV, but just look foolish when people are attempting to discuss issues reasonably.

  13. Patriot Henry says:

    “Framing arguments in that offensive way solves nothing, helps no one, and pisses off everyone (including our host, if he perceives this post as a firebomb).”

    It can help point out the truth which otherwise people will avoid confronting.

    I don’t eat enough food, but I do pay taxes to pay for other people’s food, and for the corporate welfare for the food I won’t eat.

    I can’t afford to save for retirement, but I do pay taxes for other peoples retirements, and while I would never force young people to pay for my old age, that government run option won’t even be available to me to refuse.

    So on and so forth. Other people live while I suffer.

    “The government is supporting your four kids with direct handouts: tax exemptions and credits for your children and home mortgage and real estate taxes.”

    Those are not direct handouts. Exemptions and credits only mean that the government won’t steal as much from you. Handouts are when you get that which has already been stolen.

    Two can play at the blame game, and both can walk away convinced they are right, but the one with the loot in their hands is the real loser.

  14. Alon Levy says:

    Hey, I agree with you – it’s much better to masturbate to Atlas Shrugged than Penthouse. I get you. You and I, we’re winners. We live on the East Coast, on land settled by European merchants, not stolen from the Indians by the US government to make room for settlers. We do not have any schooling, as that is communist indoctrination paid off by stealing hardworking people’s money. We do not drive or use roads at all or take public transportation. We are not protected by any police or military or fire department. We keep our dollars under the mattress, instead of depositing it in government-insured banks. And we grow our own food, to avoid participating in the farm aid scam. Forget those other people here sucking on the government’s titties; you and I, we’re true anarchist heroes.

  15. thundermutt says:

    Wow, this is a first. A Tea Party Militia Anti-Tax Truth Crusader posting on The Urbanophile! So glad Patriot Henry showed up to set us all straight on the two different kinds of tax-return welfare.

    Credits and deductions for suburbanites with big houses, big mortgages, high property taxes, college tuition and lots of kids are “good” tax and income policy, and in fact, aren’t welfare at all because the tax breaks subsidize the lives of good honest hard-working Patriots and their many children.

    EITC and child-care credits for working poor city and rural folks are “bad” tax and income policy because those are “handouts” to people who don’t deserve them, “stolen” from the hard-working Patriots, to pay for the unacceptable lifestyles of single parents who will probably just use the money for drugs and abortions anyway.

    Got it. (Wish I could chalk this “reasoning” up to the date.)

  16. kevin says:

    I reall feel for that woman in her situation. I am a young person just out of college that given the economic climate would be unable to support myself without my parents assistance. That being said I would like to make a point to thundermutt. Yes you are going to find some hypocrits in the Teaparty movement, and honetly calling them a militia makes it hard to take your comments seriously, but I will put forward that it is the US tax code as it exists that encourages this kind of behavior. How is Henry’s point of view fundementally different than a ‘Tax the evil rich’ individual? Our tax system is designed in such a way that a person can go “I am paying to many taxes and others aren’t and we need to change it, but I don’t want to change it too much because I like the tax breaks I get.” It obsfucates the real problem that our tax system is anathemic to growth, funds programs that punish indviduals trying to get out of poverty, punishes most businesses as the majority of businesses in the US or sole proprietorships where many are taxed via the income tax schedule and not the corporate tax schedule, and makes it out like someone is getting away with murder, the evil reach/lazy poor. A much simpler tax system, in my own opinion a conumption tax with certain staples exempt, and a much simpler welfare system would benefit everyone.

  17. Alon Levy says:

    Here’s a really simple tax scheme: you get a deduction equal to the national poverty rate. Beyond that, you pay 50% of your income. It’s easy to remember, it’s actually going to lead to lower tax rates for people making less than about $80,000 a year, and it’s hard to game. How is that any less simple than consumption taxes?

  18. Anon says:

    This is a fascinating problem that really has to be fixed. That said, I have three observations:
    1. It looks like the car-dependency of the job is a huge problem for this individual. It’s costing her $3,600 a year just in gas and parking, not to mention the other costs of car ownership. That really eats into the pay raise. Maybe she could move closer to the job or find a comparable job in a more convenient location?
    2. Getting married or getting a roommate to help split rent could save money. If it’s good enough for college kids trying to save money, I don’t see why it won’t help other poor individuals.
    3. Having become a parent a little over a year ago, I can attest that daycare is crazy expensive. I would suggest trying not to have kids if you can’t afford it.

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