Poverty In America: Consequences for Individuals and the Economy 
(24-JAN-07, GAO-07-343T).					 
                                                                 
In 2005, 37 million people, approximately 13 percent of the total
population, lived below the poverty line, as defined by the	 
Census Bureau. Poverty imposes costs on the nation in terms of	 
both programmatic outlays and productivity losses that can affect
the economy as a whole. To better understand the potential range 
of effects of poverty, GAO was asked to examine (1) what the	 
economic research tells us about the relationship between poverty
and adverse social conditions, such as poor health outcomes,	 
crime, and labor force attachment, and (2) what links economic	 
research has found between poverty and economic growth. To answer
these questions, GAO reviewed the economic literature by academic
experts, think tanks, and government agencies, and reviewed	 
additional literature by searching various databases for	 
peer-reviewed economic journals, specialty journals, and books.  
We also provided our draft report for review by experts on this  
topic.								 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-343T					        
    ACCNO:   A65104						        
  TITLE:     Poverty In America: Consequences for Individuals and the 
Economy 							 
     DATE:   01/24/2007 
  SUBJECT:   Data collection					 
	     Disadvantaged persons				 
	     Economic analysis					 
	     Economic growth					 
	     Economic indicators				 
	     Economic research					 
	     Education						 
	     Health insurance					 
	     Income statistics					 
	     Labor force					 
	     Statistical data					 
	     Temporary Assistance for Needy Families		 
	     Program						 
                                                                 

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GAO-07-343T

   

     * [1]Summary
     * [2]Background

          * [3]Measuring the Nation's Well Being: Economic Growth and Other
          * [4]How Is Poverty Defined in the United States?
          * [5]U.S. Poverty Rates
          * [6]The Role of the Federal Government

     * [7]Economic Research Links Poverty with Adverse Outcomes for In

          * [8]Individuals Living in Poverty Experience Higher Rates of Adv
          * [9]Economic Research Shows an Association between Poverty and C
          * [10]Adverse Outcomes, Such as Poor Health and Low Educational At

     * [11]Economic Research Suggests a Negative Association between Po
     * [12]Concluding Observations
     * [13]GAO Contact
     * [14]Acknowledgments
     * [15]GAO's Mission
     * [16]Obtaining Copies of GAO Reports and Testimony

          * [17]Order by Mail or Phone

     * [18]To Report Fraud, Waste, and Abuse in Federal Programs
     * [19]Congressional Relations
     * [20]Public Affairs

Testimony before the Chairman, Committee on Ways and Means, House of
Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EST

Wednesday, January 24, 2007

POVERTY IN AMERICA

Consequences for Individuals and the Economy

Statement of Sigurd R. Nilsen, Director Education, Workforce, and Income
Security Issues

GAO-07-343T

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss the important topic of poverty
and its effects on individuals and our economy. My testimony is drawn from
our report Poverty in America: Economic Research Shows Adverse Impacts on
Health Status and Other Social Conditions as well as the Economic Growth
Rate ( [21]GAO-07-344 ), being released this morning. Our work looks at
what the economic research tells us about the relationship between poverty
and adverse social conditions, such as poor health outcomes, crime, and
labor force attachment; and what links economic research has found between
poverty and economic growth.

According to the Census Bureau, approximately 37 million people in the
United States--nearly 13 percent of the total population--lived below the
poverty line in 2005.^1 This percentage was significantly larger for
particular population groups, specifically children, minorities, and those
living in certain geographic areas such as inner cities. The federal
government spends billions of dollars on programs to assist low-income
individuals and families.^2 These programs included Medicaid, food stamps,
Temporary Assistance for Needy Families (TANF), and the Earned Income Tax
Credit (EITC), to name some of the largest. While some have taken issue
with Census' official poverty measure and proposed alternative measures,
it is generally recognized that poverty imposes costs on the nation as a
whole, not merely in terms of programmatic outlays but also through lost
productivity that can affect the overall economy.

In conducting our work, we reviewed the economic literature by academic
experts, think tanks, and government agencies, which we collected from
searches of various databases, peer-reviewed economic journals, specialty
journals, and books. We also provided our draft report to four external
reviewers. They are recognized experts who have conducted research and
published on the topic of poverty and economic growth and whose work has
recommended a variety of approaches and strategies to policymakers. We
limited the scope of our work by looking at recent studies published since
1996, excluding anything older, with exceptions made for work that was
considered seminal. Thus, our results are not an exhaustive or historical
treatment of the topic. Our review was primarily driven by the economic
literature focused on the United States either exclusively or including
other developed nations; studies from other disciplines were excluded
unless they were captured in either the economic study under review or its
bibliography. When we refer to poverty in the report, we are using an
absolute measure, not a relative one. This means that, for the most part,
the studies we reviewed typically used the official poverty line published
by the Census Bureau as its benchmark. A few of the studies we reviewed
used relative measures such as the poorest 10 percent of the population.

^1In 2005 the poverty threshold for a family of four was $19,971.

^2Congressional Research Service, Cash and Noncash Benefits for Persons
with Limited Income: Eligibility Rules, Recipient and Expenditure Data,
FY2002-FY2004 (Washington, D.C.: Mar. 27, 2006).

Our work was conducted between October 2006 and January 2007 according to
generally accepted government auditing standards. Because we did not
evaluate the policies, operations, or programs of any federal agency to
develop the information presented in this report, and because we are not
making any recommendations, we did not seek agency comments. However, we
met with agency officials from the Departments of Commerce, Health and
Human Services, Justice, and Labor to obtain information on research they
or others had conducted related to our work objectives.

Summary

Economic research shows that poverty is associated with a number of
adverse outcomes for individuals, such as poor health, crime, and reduced
labor market participation, and has a negative impact on the economic
growth rate. Some research suggests that adverse health outcomes are due,
in part, to limited access to health care as well as exposure to
environmental hazards and engaging in risky behaviors. The economic
research we reviewed also suggests that poverty is associated with higher
levels of certain types of crime. The relationship between poverty and
adverse outcomes for individuals is complex, in part because most
variables, like health status, can be both a cause and a result of
poverty. Regardless of whether poverty is a cause or an effect, however,
the conditions associated with poverty can work against the development of
human capital--that is the ability of individuals to remain healthy and
develop the skills, abilities, knowledge, and habits necessary to fully
participate in the labor force. Human capital development is considered
one of the fundamental drivers of economic growth. An educated labor
force, for example, is better at learning, creating, and implementing new
technologies. Economic theory suggests that when poverty affects a
significant portion of the population, these effects can extend to the
society at large and produce slower rates of growth. Though limited,
empirical research has demonstrated that higher rates of poverty are
associated with lower rates of growth in the economy as a whole.

Background

Economic growth is one of the indicators by which the well-being of the
nation is typically measured, although recent discussions have focused on
a broader set of indicators, such as poverty. Poverty in the United States
is officially measured by the Census Bureau, which calculates the number
of persons or households living below an established level of income
deemed minimally adequate to support them. The federal government has a
long-standing history of assisting individuals and families living in
poverty by providing services and income transfers through numerous and
various types of programs.

Measuring the Nation's Well Being: Economic Growth and Other Indicators

Economic growth is typically defined as the increase in the value of goods
and services produced by an economy; traditionally this growth has been
measured by the percentage rate of increase in a country's gross domestic
product, or GDP. The growth in GDP is a key measure by which policy-makers
estimate how well the economy is doing. However, it provides little
information about how well individuals and households are faring.

Recently there has been a substantial amount of activity in the United
States and elsewhere to develop a comprehensive set of key indicators for
communities, states, and the nation that go beyond traditional economic
measures. Many believe that such a system would better inform individuals,
groups, and institutions on the nation as a whole. Poverty is one of these
key indicators. Poverty, both narrowly and more broadly defined, is a
characteristic of society that is frequently monitored and defined and
measured in a number of ways.^3

3GAO, Informing Our Nation: Improving How to Understand and Assess the
USA's Position and Progress, [22]GAO-05-1 (Washington, D.C., November
2004).

How Is Poverty Defined in the United States?

The Census Bureau is responsible for establishing a poverty threshold
amount each year; persons or families having income below this amount are,
for statistical purposes, considered to be living in poverty.^4 The
threshold reflects estimates of the amount of money individuals and
families of various sizes need to purchase goods and services deemed
minimally adequate based on 1960s living standards, and is adjusted each
year using the consumer price index. The poverty rate is the percentage of
individuals in total or as part of various subgroups in the United States
who are living on income below the threshold amounts.

Over the years, experts have debated whether or not the way in which the
poverty threshold is calculated should be changed. Currently the
calculation only accounts for pretax income and does not include noncash
benefits and tax transfers, which, especially in recent years, have
comprised larger portions of the assistance package to those who are
low-income.^5 For example, food stamps and the Earned Income Tax Credit
could provide a combined amount of assistance worth an estimated $5,000
for working adults with children who earn approximately $12,000 a year.^6
If noncash benefits were included in a calculation of the poverty
threshold, the number and percentage of individuals at or below the
poverty line could change. In 1995, a National Academy of Sciences (NAS)
panel recommended that changes be made to the threshold to count noncash
benefits, tax credits, and taxes; deduct certain expenses from income such
as child care and transportation; and adjust income levels according to an
area's cost of living.^7 In response, the Census Bureau published an
experimental poverty measure in 1999 using the NAS recommendations in
addition to its traditional measure but, to date, Census has not changed
the official measure.^8

^4The U.S. Department of Health and Human Services (HHS) establishes
poverty guidelines that are similar to the poverty thresholds but are used
by HHS and other agencies for administering programs, such as determining
program eligibility.

^5Congressional Research Service, Poverty in the United States: 2005
(Washington, D.C.: Aug. 31, 2006).

^6Danzinger, Sheldon, "Fighting Poverty Revisited: What Did Researchers
Know 40 Years Ago? What Do We know Today?" Dec. 4, 2006.

^7For a summary of the NAS panel recommendations see Congressional
Research Service Report 95-539, Redefining Poverty in the United States:
National Academy of Science Panel Recommendations, by Thomas R. Gabe
(archived) (Washington, D.C.: 1995).

^8U.S. Census Bureau, Poverty among Working Families: Findings from
Experimental Poverty Measures (Washington, D.C.: Sept. 2000).

U.S. Poverty Rates

In 2005, close to 13 percent of the total U.S. population--about 37
million people--were counted as living below the poverty line, a number
that essentially remained unchanged from 2004. Poverty rates differ,
however, by age, gender, race, and ethnicity and other factors. For
example,

           o Children: In 2005, 12.3 million children, or 17.1 percent of
           children under the age of 18, were counted as living in poverty.
           Children of color were at least three times more likely to be in
           poverty than those who were white: 34.2 percent of children who
           were African- American and 27.7 percent of children who were
           Hispanic lived below the poverty line compared to 9.5 percent of
           children who were white.^9 African-American children represented
           15.2 percent and Hispanic children represented 19.9 percent of all
           children under the age of 18 in 2005.
           o Racial and ethnic minorities: African-Americans and Hispanics
           have significantly higher rates of poverty than whites. In 2005,
           24.9 percent of African-Americans and 22 percent of Hispanics
           lived in poverty compared to 8.3 percent for whites.
           African-Americans made up 12.5 percent of the total population
           while Hispanics accounted for 14.7 percent.
           o Elderly: The elderly have lower rates of poverty than other
           groups. For example, 10.1 percent of adults aged 65 or older lived
           in poverty. The elderly represented 12.1 percent of the total U.S.
           population in 2005.

Poverty rates also differ depending on geographical location and for urban
and nonurban areas. Poverty rates for urban areas were double those in
suburbs, 17 percent compared to 9.3 percent. Poverty rates in the South
were the highest at 14 percent; the West had a rate of 12.6 percent,
followed by the Midwest with 11.4 percent and the Northeast at 11.3
percent.^10

9Beginning in March 2003, the Census Bureau allowed survey respondents to
identify themselves as belonging to one or more racial groups. In prior
years, respondents could select only one racial category. Consequently,
poverty statistics for different racial groups for 2002 and after are not
directly comparable to earlier years' data. The term "blacks and white"
refers to persons who identified with only one single racial group. The
term "Hispanic" refers to individuals' ethnic, as opposed to racial,
identification. Hispanics may be of any race.

^10Congressional Research Service, Poverty in the United States: 2005
(Washington, D.C.: Aug. 31, 2006).

The Role of the Federal Government

The U.S. government has a long history of efforts to improve the
conditions of those living with severely limited resources and income.
Presidents, Congress, and other policymakers have actively sought to help
citizens who were poor, beginning as early as the 1850s through the more
recent efforts established through welfare reform initiatives enacted in
1996.

Over the years, the policy approaches used to help low-income individuals
and families have varied. For example, in the1960s federal programs
focused on increasing the education and training of those living in
poverty. In the 1970s, policy reflected a more income-oriented approach
with the introduction of several comprehensive federal assistance plans.
More recently, welfare reform efforts have emphasized the role of
individual responsibility and behaviors in areas such as family formation
and work to assist people in becoming self-sufficient. Although
alleviating poverty and the conditions associated with it has long been a
federal priority, approaches to developing effective interventions have
sometimes been controversial, as evidenced by the diversity of federal
programs in existence and the ways in which they have evolved over time.

Currently, the federal government, often in partnership with the states,
has created an array of programs to assist low-income individuals and
families. According to a recent study by the Congressional Research
Service (CRS), the federal government spent over $400 billion on 84
programs in 2004 that provided cash and noncash benefits to individuals
and families with limited income. These programs cover a broad array of
services: Examples include income supports or transfers such as the Earned
Income Tax Credit and TANF; work supports such as subsidized child care
and job training; health supports and insurance through programs like the
State Children's Health Insurance Program (SCHIP) and Medicaid; and other
social services such as food, housing, and utility assistance. Table 1
provides a list of examples of selected programs.

Table 1: Selected Examples of Federal Cash and Noncash Assistance to
Low-Income Families and Individuals, Fiscal Year 2004

                                           Federal                 
                                           cash                    
Purpose     Program                     outlay     Program description
Cash aid    Temporary Assistance for    $10.4      Permits a state to give
               Needy Families (TANF)       billion^a  ongoing basic cash aid
                                                      to families that
                                                      include a minors or a
                                                      pregnant woman. Work
                                                      and other requirements
                                                      must be met. 
               Earned Income Tax $37.9     Provides a refundable credit to
               Credit (EITC)     billion^b workers with and without children.
Food and    Food Stamp Program          $27.2      Provides certain
nutrition                               billion^c  allotments to
                                                      individuals for
                                                      purchasing of food
                                                      items, based upon the
                                                      individual's level of
                                                      eligibility/need.
               Special           $4.5      Provides benefits for low-income
               Supplemental      million   mothers, infants, and children
               Nutrition Program           considered to be at "nutritional
               for Women,                  risk."     
               Infants and                            
               Children (WIC)                         
Medical     Medicaid                    $176       Provides payments to
                                           billion    health care providers
                                                      in full or via co-pay
                                                      for eligible low-income
                                                      families and 
                                                      individuals and for
                                                      long-term care to
                                                      eligible individuals
                                                      who are aged or
                                                      disabled.    
               State Children's  $4.6      Provides federal matching funds
               Health Insurance  billion^d for states and territories to
               Program (SCHIP)             provide health insurance to
                                           targeted low-income children.
Educational Federal Pell Grant Program  $12        Provides assistance to
                                           billion    undergraduate students
                                                      who meet a certain
                                                      needs test and are
                                                      enrolled in an eligible
                                                      institution of
                                                      postsecondary
                                                      education.   
               Head Start        $6.8      Provides comprehensive services to
                                 billion^e targeted low-income children.
                                           Services include educational,
                                           medical, dental, nutritional, and
                                           social services.
Housing     Section 8 Low-Income        $22.4      Provides rental
               Housing Assistance          billion    assistance through
                                                      vouchers or rental
                                                      subsidies to eligible
                                                      low-income families or
                                                      single persons.
Services    Child Care and Development  $6.9       Provides funding to
               Block Grant (CCDBG)         billion    low-income parents for
                                                      child care.  
               Social Services   $1.7      Provides funding to assist states
               Block Grant       billion   in providing social services to
               (SSBG) (Title XX)           eligible low-income individuals or
                                           families.  
Jobs        Job Corps                   $1.5       Provides no-cost
                                           billion    training and education
                                                      to low-income
                                                      individuals ages 16-24
                                                      while providing a
                                                      monthly allowance
                                                      payment.     
Energy      Low-Income Home Energy      $1.9       Provides assistance to
               Assistance Program (LIHEAP) billion    low-income home owners
                                                      and renters to help
                                                      meet energy needs such
                                                      as heating and cooling.

Source: For a full list of federal programs, see Cash and Noncash Benefits
for Persons with Limited Income: Eligibility Rules, Recipient and
Expenditure Data, FY2002-FY2004; Washington D.C. 2006.

aFederal outlay figures in table 1 are from fiscal year 2004, as reflected
in the CRS report from which they are taken, sourced above. Some
exceptions apply and are noted. The TANF figure, $10.4 billion, is the
estimated total of federal and state expenditures combined for only TANF
cash aid in fiscal year 2004. This figure does not include other combined
federal and state funding for the following: TANF child care, estimated at
$2.5 billion in fiscal year 2004; TANF work programs and activities,
estimated at $2.2 billion in fiscal year 2004; and TANF services estimated
at $6.3 billion in fiscal year 2004.

bEITC federal outlay total of $37.9 billion is for fiscal year 2003 as
reported in GAO, Means Tested Programs: Information on Program Access Can
Be an Important Management Tool, [23]GAO-05-221 (Washington, D.C. March
2005).

cFor more on the Food Stamp Program, see [24]GAO-05-839R , (Washington,
D.C.: June 30, 2005).

dFor more on SCHIP federal outlay figure of $4.6 billion, see
[25]GAO-05-839R .

eHead Start federal outlay total of $6.8 billion is for fiscal year 2005.

Economic Research Links Poverty with Adverse Outcomes for Individuals Such as
Poor Health and Crime

Economic research suggests that individuals living in poverty face an
increased risk for adverse outcomes, such as poor health, criminal
activity, and low participation in the workforce. The adverse outcomes
that are associated with poverty tend to limit the development of skills
and abilities individuals need to contribute productively to the economy
through work, and this in turn, results in low incomes. The relationship
between poverty and outcomes for individuals is complex, in part because
most variables, like health status, can be both a cause and a result of
poverty. The direction of the causality can have important policy
implications. To the extent that poor health causes poverty, and not the
other way around, then alleviating poverty may not improve health.

Individuals Living in Poverty Experience Higher Rates of Adverse Health
Outcomes, in Part because of Limited Access to Health Care, Environmental
Hazards, and Risky Behaviors

Health outcomes are worse for individuals with low incomes than for their
more affluent counterparts. Lower-income individuals experience higher
rates of chronic illness, disease, and disabilities, and also die younger
than those who have higher incomes.^11 As reported by the National Center
on Health Statistics, individuals living in poverty are more likely than
their affluent counterparts to experience fair or poor health, or suffer
from conditions that limit their everyday activities (fig.1). They also
report higher rates of chronic conditions such as hypertension, high blood
pressure, and elevated serum cholesterol, which can be predictors of more
acute conditions in the future. Life expectancies for individuals in poor
families as compared to nonpoor families also differ significantly. One
study showed that individuals with low incomes had life expectancies 25
percent lower than those with higher incomes.^12 Other research suggests
that an individual's household wealth predicts the amount of functionality
of that individual in retirement.^13

^11Centers for Disease Control and Prevention, Health, United States, 2006;
1998 (Hyattsville, Maryland).

^12Deaton, Angus, "Policy Implications of The Gradient of Health and
Wealth," Health Affairs, Vol. 21., No.2, March 2002.

Figure 1: Selected Health Indicators by Poverty Status

Research suggests that part of the reason that those in poverty have poor
health outcomes is that they have less access to health insurance and thus
less access to health care, particularly preventive care, than others who
are nonpoor. Very low-income individuals were three times as likely not to
have health insurance than those with higher incomes, which may lead to
reduced access to and utilization of health care (fig. 2).

^13Smith, James, and Raynard Kington, "Demographic and Economic Correlates
of Health in Old Age." Demography, Vol. 34, No. 1, 1997.

Figure 2: Percentage of Population with No Health Insurance (Private or
Medicaid) by Poverty Status

Data show that those who are poor with no health insurance access the
health system less often than those who are either insured or wealthier
when measured by one indicator of health care access: visits to the
doctor. For example, data from the National Center on Health Statistics
show that children in families with income below the poverty line who were
continuously without any type of health insurance were three to four times
more likely to have not visited a doctor in the last 12 months than
children in similar economic circumstances who were insured (fig. 3).
Research also suggests that a link between income and health exists
independent of health insurance coverage. Figure 3 also shows that while
children who are uninsured but in wealthier families visit the doctor
fewer times than those who are insured, they still go more often than
children who are uninsured but living in poverty.

Figure 3: No Visits to Any Health Provider in the Past 12 Months (Children
under 18 Years of Age) by Level of Insurance

Some research examining government health insurance suggests that
increased health insurance availability improves health outcomes.
Economists have studied the expansion of Medicaid, which provides health
insurance to those with low income. They found that Medicaid's expansion
of coverage, which occurred between 1979 and 1992, increased the
availability of insurance and improved children's health outcomes. For
example, one study found that a 30 percentage point increase in
eligibility for mothers aged 15-44 translated into a decrease in infant
mortality of 8.5 percent.^14 Another study looked at the impact of health
insurance coverage through Medicare and its effects on the health of the
elderly and also found a statistically significant though modest
impact.^15 There is some evidence that variations in health insurance
coverage do not explain all the differences in health outcomes. A study
done in Canada found improvements in children's health with increases in
income, even though Canada offers universal health insurance coverage for
hospital services, indicating that health insurance is only part of the
story.^16

14Currie, Janet, and Jonathan Gruber, "Saving Babies: The Efficacy and
Cost of Recent Changes in the Medicaid Eligibility of Pregnant Women," The
Journal of Political Economy, Vol. 104, No. 6, December 1996.

Although there is a connection among poverty, having health insurance, and
health outcomes, having health insurance is often associated with other
attributes of an individual, thus making it difficult to isolate the
direct effect of health insurance alone. Most individuals in the United
States are either self-insured or insured through their employer. If those
who are uninsured have lower levels of education, as do individuals with
low income, differences in health between the insured and uninsured might
be due to level or quality of education, and not necessarily insurance.^17

Another reason that individuals living in poverty may have more negative
health outcomes is because they are more likely to live and work in areas
that expose them to environmental hazards such as pollution or substandard
housing. Some researchers have found that because poorer neighborhoods may
be located closer to industrial areas or highways than more affluent
neighborhoods, there tend to be higher levels of pollution in lower-income
neighborhoods.^18 The Institute of Medicine concluded that minority and
low-income communities had disproportionately higher exposure to
environmental hazards than the general population, and because of their
impoverished conditions were less able to effectively change these
conditions.^19

^15Card, David, et. al., "The Impact of Nearly Universal Insurance Coverage
on Health Care Utilization and Health: Evidence from Medicare" National
Bureau of Economic Research, Working Paper 10365. NBER, March 2004.

^16Currie, Janet, and Mark Stabile, "Socioeconomic Status and Child
Health: Why Is the Relationship Stronger for Older Children." American
Economic Review, Vol. 93, No. 5, December 2003.

^17Additionally, differences in individual health outcomes can sometimes
be explained by other factors that may be associated with poverty, but are
difficult to detect, such as risk aversion.

The link between poverty and health outcomes may also be explained by
lifestyle issues associated with poverty. Sedentary life-style: the use of
alcohol and drugs; as well as lower consumption of fiber, fresh fruits,
and vegetables are some of the behaviors that have been associated with
lower socioeconomic status.^20 Cigarette smoking is also more common among
adults who live below the poverty line than among those above it, about 30
percent compared to 21 percent.^21 Similarly, problems with being
overweight and obese are common among those with low family incomes,
although most prevalent in women: Women with incomes below 130 percent of
the poverty line were 50 percent more likely to be obese than those with
incomes above this amount.^22 Figure 4 shows that people living in poverty
are less likely to engage in regular, leisure-time physical activity than
others and are somewhat more likely to be obese, and children in poverty
are somewhat more likely to be overweight than children living above the
poverty line. In addition, there is also evidence to suggest a link among
poverty, stress, and adverse health outcomes, such as compromised immune
systems.^23

^18While much of the specific biological mechanism by which air pollution
might affect health is still unknown, some recent research by economists
has noted a link between pollution and health, especially for infants.
Currie and Neidell (2005) find that the decrease in the level of carbon
monoxide in California in the 1990s had a significant effect on reducing
infant mortality. See Currie, Janet, and Matthew Neidell, "Air Pollution
and Infant Health: What Can We Learn From California's Recent Experience?"
Quarterly Journal of Economics, 120 (3), 2005. Similarly, Chay and
Greenstone (2003) find that the reduction in total suspended particulates
due to the 1970 Clean Air Act had a significant impact on infant
mortality. See Chay, Kenneth, and Michael Greenstone, "Air Quality, Infant
Mortality, and the Clean Air Act of 1970." National Bureau of Economic
Research, Working Paper No. 10053. NBER, 2003.

^19Institute of Medicine, Committee on Environmental Justice, "Toward
Environmental Justice: Research, Education, and Health Policy Needs",
(Washington, D.C.: 1999), p.6.

^20Adler, Nancy E., and Katherine Newman, "Socioeconomic Disparities in
Health: Pathways and Policies." Health Affairs, Vol. 21 No. 2, 2002. See
also Deaton, Angus. "Policy Implications of the Gradient of Health and
Wealth." Health Affairs, Vol. 21, No.2: 2002.

^21Centers for Disease Control and Prevention, Tobacco Use among
Adults-United States, 2005. Morbidity and Mortality Weekly Report , 2006;
55(42): 1145-1148. Some research suggests that part of the reason why
smoking rates are higher may be peer effects, especially among youth
smokers. See DeCicca, Phillip, Donald Kenkel, and Alan Mathios, "Racial
Difference in the Determinants of Smoking Onset." Journal of Risk and
Uncertainty. Boston: 2000. Vol. 21, Iss. 2/3; p311. Other studies have
shown that educational attainment can affect smoking use as well. See
DeCicca, Philip, Donald Kenkel, and Alan Mathios,"Putting Out the Fires:
Will Higher Taxes Reduce the Onset of Youth Smoking?" Journal of Political
Economy. Chicago 2002.Vol.110, Iss.1; p. 144.

^22U.S. Public Health Service, Surgeon General's Call To Action to Prevent
and Decrease Overweight and Obesity 2001, Washington, DC, pp. 13-14.

Figure 4: Percentage of Population Who Have a Sedentary Lifestyle, Are
Overweight, or Are Obese, by Poverty Status

^23While access to care, behavior, and environmental factors are some of
the most commonly offered reasons for the relationship between poverty and
health, recent literature has suggested other alternative theories, of
which there is less of a research tradition. These include the effect of
short exposures to health shocks as a result of poverty, such as poor
nutrition or increased adrenalin due to higher levels of stress, and
psycho-social stress that leads to problems with the immune system. See
Smith, James P., "Healthy Bodies and Thick Wallets: The Dual Relation
between Health and Economic Status." The Journal of Economic Perspectives,
Vol. 13, No. 2, 1999.

While evidence shows how poverty could result in poor health, the opposite
could also be true. For example, a health condition could result, over
time, in restricting an individual's employment, resulting in lower
income. Additionally, the relationship between poverty and health outcomes
could also vary by demographic group. ^24 Failing health, for example, can
be more directly associated with household income for middle-aged and
older individuals than with children, since adults are typically the ones
who work.

Economic Research Shows an Association between Poverty and Crime

Just as research has established a link between poverty and adverse health
outcomes, evidence suggests a link between poverty and crime. Economic
theory predicts that low wages or unemployment makes crime more
attractive, even with the risks of arrest and incarceration, because of
lower returns to an individual through legal activities.^25 While more
mixed, empirical research provides support for this. For example, one
study shows that higher levels of unemployment are associated with higher
levels of property crime, but is less conclusive in predicting violent
crime.^26 Another study has shown that both wages and unemployment affect
crime, but that wages play a larger role.^27

Research has found that peer influence and neighborhood effects may also
lead to increased criminal behavior by residents. Having many peers that
engage in negative behavior may reduce social stigma surrounding that
behavior.^28 In addition, increased crime in an area may decrease the
chances that any particular criminal activity will result in an arrest.
Other research suggests that the neighborhood itself, independent of the
characteristics of the individuals who live in it, affects criminal
behavior. ^29 One study found that arrest rates were lower among young
people from low-income families who were given a voucher to live in a
low-poverty neighborhood, as opposed to their peers who stayed in
high-poverty neighborhoods. The most notable decrease was in arrests for
violent crimes; the results for property crimes, however, were mixed, with
arrest rates increasing for males and decreasing for females.^30

^24It is not clear whether these adverse outcomes occur with greater
frequency among all individuals living in households below the poverty
line or only among those experiencing extreme poverty; those who
experience poverty during critical development stages, such as infancy or
early childhood; or those who experience long bouts of poverty.

^25Criminal behavior has been measured by reports to the police in an
area, self-reported crime by individuals in surveys or arrests, as well as
other measures. See also Freeman, Richard, "Why Do So Many Young American
Men Commit Crimes and What Might We Do About It?" Journal of Economic
Perspectives, Vol. 10, No. 1: Winter 2006.

^26Raphael, Steven, and Rudolf Winter-Ebner, "Identifying the Effect of
Unemployment on Crime." Journal of Law and Economics, Vol. XLIV. 2001.

^27Gould, Eric D., Bruce A. Weinberg, and David B. Mustard, "Crime Rates
and Local Labor Market Opportunities in the United States: 1979-1997.
Review of Economics and Statistics, 84 (1): 2002.

^28Katz, Lawrence F., Jeffrey R. Kling, and Jeffrey B. Liebman, "Moving to
Opportunity in Boston: Early Results of a Randomized Mobility Experiment."
Quarterly Journal of Economics, May 2001.

Adverse Outcomes, Such as Poor Health and Low Educational Attainment, Lead to
Reduced Participation in the Labor Market

Regardless of whether poverty is a cause or an effect, the conditions
associated with poverty limit the ability of low-income individuals to
develop the skills, abilities, knowledge, and habits necessary to fully
participate in the labor force, in turn leading to lower incomes.
According to 2000 Census data, people aged 20-64 with income above the
poverty line in 1999 were almost twice as likely to be employed as
compared to those with incomes below it.^31 Some of the reasons for these
outcomes include educational attainment and health status.

^29However, a challenge that researchers face is that, almost by
definition, many individuals share the same characteristics in a
neighborhood. Therefore, it is difficult to determine whether it is the
characteristic of the individual or the neighborhood that is the source of
the behavior.

^30 http://www.huduser.org/publications/fairhsg/MTODemData.html and
http://www.hud.gov/prodesc/mto.cfm . Some economists have used data
from the Moving-to-Opportunity experiment as a way to attribute causality.
Moving-to-Opportunity is a research demonstration in which a number of
families, chosen randomly, within five public housing authorities were
given housing vouchers to be used in low-poverty neighborhoods. Another
group of families acted as the control, and were not given the vouchers.
Using these data, some economists have compared the outcomes for children
whose families received the vouchers and those that did not. To some
extent, the results have confirmed that neighborhood, independent of
individual characteristics, affects criminal behavior, but the results
have also been mixed. Using data from the randomized housing experiment,
Ludwig, Duncan, and Hirschfeld (2001) found that the housing vouchers
reduced violent arrests by teens, but may have increased the number of
property arrests. Kling, Ludwig, and Katz (2005) also used the
Moving-to-Opportunity data, but looked for differential effects by gender.
The authors found that for females, there were large reductions in the
amount of arrests for both property and violent crime, when compared to
those for the control group. For males, there were reductions in violent
arrests, but proportionally smaller than the drops for females. In
addition, there were significant increases in the rate of property
arrests.

^31U.S. Census Bureau, Employment Status: 2000, Census 2000 Brief
(Washington, D.C., August 2003), p.4

Poverty is associated with lower educational quality and attainment, both
of which can affect labor market outcomes. Research has consistently
demonstrated that the quality and level of education attained by
lower-income children is substantially below those for children from
middle- or upper-income families. Moreover, high school dropout rates in
2004 were four times higher for students from low-income families than
those in high-income families.^32 Those with less than a high school
degree have unemployment rates almost three times greater than those with
a college degree, 7.6 percent compared to 2.6 percent in 2005. And the
percentage of low-income students who attend college immediately after
high school is significantly lower than for their wealthier counterparts:
49 percent compared to 78 percent.^33

A significant body of economic research directly links adverse health
outcomes, which are also associated with low incomes, with the quality and
quantity of labor that the individual is able to offer to the workforce.
Many studies that have examined the relationship among individual adult
health and wages, labor force participation, and job choice have
documented positive empirical relationships among health and wages,
earnings, and hours of work.^34 Although there is no consensus about the
exact magnitude of the effects, the empirical literature suggests that
poor health reduces the capacity to work and has substantive effects on
wages, labor force participation, and job choice, meaning that poor health
is associated with low income.

^32National Center for Education Statistics, U.S. Department of Education,
Dropout Rates in the United States: 2004, (Washington, D.C. November
2006), p. 4.

^33Choy, Susan, "College Access and Affordability," Education Statistics
Quarterly, Vol. 1, Issue 2, Topic: Postsecondary Education.

^34Several methodological challenges exist in this literature: For
example, many of these findings could reflect the effect of income on
health rather than vice versa. In addition, results are highly sensitive
to the measures of health that are used, with self-reported health status
subject to several forms of bias, some of which could overstate the
relationship between income and health, and others of which could
understate the relationship. For example, individuals who have reduced
their hours of work or left the labor force may be more likely to report
poor health, in order to justify their reduced labor supply or because
government programs provide incentives to report disability; this would
lead to an upward bias in the estimated relationship between income and
health. On the other hand, it is possible that higher-income individuals,
who on average have greater health care utilization, may be more likely to
be diagnosed with certain conditions simply because of their greater
access to health care. This would lead to a downward bias in the estimated
relationship between income and health.

Research also demonstrates that poor childhood health has substantial
effects on children's future outcomes as adults. Some research, for
example, shows that low birth weight is correlated with a low health
status later in life. Research also suggests that poor childhood health is
associated with reduced educational attainment and reduced cognitive
development. Reduced educational attainment may in turn have a causal
effect not only on future wages as discussed above but also on adult
health if the more educated are better able to process health information
or make more informed choices about their health care or if education
makes people more "future oriented" by helping them think about the
consequences of their choices. In addition, some research shows that poor
childhood health is predictive of poor adult health and poor adult
economic status in middle age, even after controlling for educational
attainment.

Economic Research Suggests a Negative Association between Poverty and Economic
Growth

The economic literature suggests that poverty not only affects individuals
but can also create larger challenges for economic growth. Traditionally,
research has focused on the importance of economic growth for generating
rising living standards and alleviating poverty, but more recently it has
examined the reverse, the impact of poverty on economic growth. In the
United States, poverty can impact economic growth by affecting the
accumulation of human capital and rates of crime and social unrest. While
the empirical research is limited, it points to the negative association
between poverty and economic growth consistent with the theoretical
literature's conclusion that higher rates of poverty can result in lower
rates of growth.

Research has shown that accumulation of human capital is one of the
fundamental drivers of economic growth.^35 Human capital consists of the
skills, abilities, talents, and knowledge of individuals as used in
employment. The accumulation of human capital is generally held to be a
function of the education level, work experience, training, and
healthiness of the workforce.^36 Therefore, schooling at the secondary and
higher levels is a key component for building an educated labor force that
is better at learning, creating, and implementing new technologies. Health
is also an important component of human capital, as it can enhance
workers' productivity by increasing their physical capacities, such as
strength and endurance, as well as mental capacities, such as cognitive
functioning and reasoning ability. Improved health increases workforce
productivity by reducing incapacity, disability, and the number of days
lost to sick leave, and increasing the opportunities to accumulate work
experience. Further, good health helps improve education by increasing
levels of schooling and scholastic performance.

^35Economic models that consider human capital to be a fundamental driver
of economic growth are commonly referred to as endogenous growth models,
although the more traditional neoclassical model has also been augmented
to include the role of human capital. Endogenous growth theory posits
technological growth as occurring through dynamics inside the model.
Although there are several competing models, crucial importance in each is
given to the production of new technologies and human capital. While the
major point these models emphasize is that human capital is the driving
force behind growth, the actual modeling of the relationship is still a
controversial issue in the economic literature. Some growth models assert
that the driving force behind economic growth is the rate of accumulation
of human capital, in which the rate of economic growth is proportional to
the rate of accumulation of human capital. Another approach considers that
high levels of human capital, as embodied in the level of the educational
attainment of the workforce, increases the capacity of individuals to
innovate (discover new technology) or to adopt new technology.

The accumulation of human capital can be diminished when significant
portions of the population have experienced long periods of poverty, or
were living in poverty at a critical developmental juncture. For example,
recent research has found that the distinct slowdown in some measures of
human capital development is most heavily concentrated among youth from
impoverished backgrounds. When individuals who have experienced poverty
enter the workforce, their contributions may be restricted or minimal,
while others may not enter the workforce in a significant way. Not only is
the productive capability of some citizens lost, but their purchasing
power and savings, which could be channeled into productive investments,
is forgone as well.

In addition to the effects of poverty on human capital, some economic
literature suggests that poverty can affect economic growth to the extent
that it is associated with crime, violence, and social unrest. According
to some theories, when citizens engage in unproductive criminal activities
they deter others from making productive investments or their actions
force others to divert resources toward defensive activities and
expenditures. The increased risk due to insecurity can unfavorably affect
investment decisions--and hence economic growth--in areas afflicted by
concentrated poverty. Although such theories link poverty to human capital
deficiencies and criminal activity, the magnitude of their impact on
economic growth for an economy such as the United States is unclear at
this time.^37 In addition, people living in impoverished conditions
generate budgetary costs for the federal government, which spends billions
of dollars on programs to assist low-income individuals and families.
Alleviating these conditions would allow the federal government to
redirect these resources toward other purposes.

^36In general, economists regard expenditures on education, training,
medical care, and so on as investments in human capital. Collectively,
theoretical growth models suggest economic growth results from
improvements in human capital as embodied in the skills and experience of
the labor force; from expansion of physical capital in the form of plant
and equipment; and from progress in science, engineering, and management
that generates technological advance. While many variables have been
empirically tested, only a few have been accepted as being statistically
significant in explaining growth. The role of human capital is now almost
universally regarded as being indispensable in this respect.

While economic theory provides a guide to understanding how poverty might
compromise economic growth, empirical researchers have not as extensively
studied poverty as a determinant of growth in the United States. Empirical
evidence on the United States and other rich nations is quite limited, but
some recent studies support a negative association between poverty and
economic growth. For example, some research finds that economic growth is
slower in U.S. metropolitan areas characterized by higher rates of poverty
than those with lower rates of poverty.^38 Another study, using data from
21 wealthy countries, has found a similar negative relationship between
poverty and economic growth.^39

Concluding Observations

Maintaining and enhancing economic growth is a national priority that
touches on all aspects of federal decision making. As the nation moves
forward in thinking about how to address the major challenges it will face
in the twenty-first century, the impact of specific policies on economic
growth will factor into decisions on topics as far ranging as taxes,
support for scientific and technical innovation, retirement and
disability, health care, education and employment. To the extent that
empirical research can shed light on the factors that affect economic
growth, this information can guide policymakers in allocating resources,
setting priorities, and planning strategically for our nation's future.

^37Human capital deficits experienced by some impoverished individuals
cannot always be attributed to experience of poverty. In some cases, low
education attainment and poor health, although associated with poverty,
may actually be caused by some other factor that is also responsible for
poverty. In this case, poverty would be a symptom rather than a cause
(i.e., poor health, poor choices, or addiction may erode human capital
potential and cause poverty). Similarly, most poor people do not commit
crimes, and those that do may be motivated by forces unrelated to their
incomes.

^38The relationship is not always statistically significant in all
regions. Statistical insignificance in some cases might be more
attributable to data issues such as sample size or multicollinearity
rather than an indication of nonrelationship between poverty and income
growth in various regions. See S. Dev Bhatta, "Are Inequality and Poverty
Harmful for Economic Growth," Journal of Urban Affairs, 22 (3-4): 2001.
This study provides, arguably, a better comparison group than
cross-country studies, since metropolitan statistical areas in the United
States are at relatively similar stages of development.

^39Voitchovsky, S., "Does the Profile of Income Inequality Matter for
Economic Growth? Distinguishing between the Effects of Inequality in
Different Parts of the Income Distribution." Journal of Economic Growth,
Vol.10.: 2005.

Economists have long recognized the strong association between poverty and
a range of adverse outcomes for individuals, and empirical research, while
limited, has also begun to help us better understand the impact of poverty
on a nation's economic growth. The interrelationships between poverty and
various adverse social outcomes are complex, and our understanding of
these relationships can lead to vastly different conclusions regarding
appropriate interventions to address each specific outcome. Furthermore,
any such interventions could take years, or even a generation, to yield
significant and lasting results, as the greatest impacts are likely to be
seen among children. Nevertheless, whatever the underlying causes of
poverty may be, economic research suggests that improvements in the
health, neighborhoods, education, and skills of those living in poverty
could have impacts far beyond individuals and families, potentially
improving the economic well-being of the nation as a whole.

This concludes my statement, Mr. Chairman. I would be happy to respond to
any questions that you or other members of the committee may have.

Contact and Acknowledgments

GAO Contact

Sigurd R. Nilsen, (202) 512-7215 or [email protected]

Acknowledgments

Kathy Larin, Assistant Director, and Janet Mascia, Analyst-in-Charge,
managed this assignment. Lawrance Evans, Ben Bolitzer, Ken Bombara, Amanda
Seese, and Rhiannon Patterson made significant contributions throughout
the assignment. Charles Willson, Susannah Compton, and Patrick DiBattista
helped develop the message for the report and testimony.

In addition, Doug Besharov, Dr. Maria Cancian, Dr. Sheldon Danziger, and
Dr. Lawrence Mead reviewed and provided comments on the report on which
this testimony is based.

(130636)

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Highlights of [36]GAO-07-343T , a testimony before the Chairman, Committee
on Ways and Means, House of Representatives

January 2007

POVERTY IN AMERICA

Consequences for Individuals and the Economy

In 2005, 37 million people, approximately 13 percent of the total
population, lived below the poverty line, as defined by the Census Bureau.
Poverty imposes costs on the nation in terms of both programmatic outlays
and productivity losses that can affect the economy as a whole. To better
understand the potential range of effects of poverty, GAO was asked to
examine (1) what the economic research tells us about the relationship
between poverty and adverse social conditions, such as poor health
outcomes, crime, and labor force attachment, and (2) what links economic
research has found between poverty and economic growth. To answer these
questions, GAO reviewed the economic literature by academic experts, think
tanks, and government agencies, and reviewed additional literature by
searching various databases for peer- reviewed economic journals,
specialty journals, and books. We also provided our draft report for
review by experts on this topic.

Economic research suggests that individuals living in poverty face an
increased risk of adverse outcomes, such as poor health and criminal
activity, both of which may lead to reduced participation in the labor
market. While the mechanisms by which poverty affects health are complex,
some research suggests that adverse health outcomes can be due, in part,
to limited access to health care as well as greater exposure to
environmental hazards and engaging in risky behaviors. For example, some
research has shown that increased availability of health insurance such as
Medicaid for low-income mothers led to a decrease in infant mortality.
Additionally, exposure to higher levels of air pollution from living in
urban areas close to highways can lead to acute health conditions. Data
suggest that engaging in risky behaviors, such as tobacco and alcohol use,
a sedentary life-style, and a low consumption of nutritional foods, can
account for some health disparities between lower and upper income groups.
The economic research we reviewed also points to links between poverty and
crime. For example, one study indicated that higher levels of unemployment
are associated with higher levels of property crime. The relationship
between poverty and adverse outcomes for individuals is complex, in part
because most variables, like health status, can be both a cause and a
result of poverty. These adverse outcomes affect individuals in many ways,
including limiting their development of the skills, abilities, knowledge,
and habits necessary to fully participate in the labor force.

Research shows that poverty can negatively affect economic growth by
affecting the accumulation of human capital and rates of crime and social
unrest. Economic theory has long suggested that human capital--that is,
the

education, work experience, training, and health of the workforce--is
considered one of the fundamental drivers of economic growth. The
conditions associated with poverty can work against this human capital
development by limiting individuals' ability to remain healthy and develop
skills, in turn decreasing the potential to contribute talents, ideas, and
even labor to the economy. An educated labor force, for example, is better
at learning, creating and implementing new technologies. Economic theory
suggests that when poverty affects a significant portion of the
population, these effects can extend to the society at large and produce
slower rates of growth. Although historically research has focused mainly
on the extent to which economic growth alleviates poverty, some recent
empirical studies have begun to demonstrate that higher rates of poverty
are associated with lower rates of growth in the economy as a whole. For
example, areas with higher poverty rates experience, on average, slower
per capita income growth rates than low-poverty areas.

References

Visible links
  21. http://www.gao.gov/cgi-bin/getrpt?GAO-07-344
  22. http://www.gao.gov/cgi-bin/getrpt?GAO-05-1
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-05-221
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-05-839R
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-05-839R  
  36. http://www.gao.gov/cgi-bin/getrpt?GAO-07-343T
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