Poverty and Opportunity

Cities, when they work well, are places that make us smarter by being around other smart people
"But urban poverty can create many challenges, the most important of which is to ensure that poor people don’t remain poor."
"But urban poverty can create many challenges, the most important of which is to ensure that poor people don’t remain poor."File

Plato wrote that any city, however small, is divided into two; one, the city of the poor, the other, the rich. These are at war with one another. This may not always be correct, but urban poverty occurs throughout the globe, even in the glittering and generally rich cities of Europe.

Urban poverty does not mean that cities are failing. Cities typically attract poor people by making poverty slightly more bearable. But urban poverty can create many challenges, the most important of which is to ensure that poor people don’t remain poor.

Intergenerational mobility has been extraordinarily well measured by Raj Chetty, Nathan Hendren, and Emmanuel Saez using US income tax records. Parents and children are linked.

And we know that a child born in the bottom fifth of the US income distribution during the early 1980s, had a 7.5% chance of making it to the top fifth of the US income distribution as an adult.

We also know that this differs within the United States. About 13% of poor children born in San Jose, California, made it into the top fifth. Only 4.5% of poor children born in Atlanta, Georgia, during the same years did that well. Across the US, we know that spatial segregation, the geographic isolation of the poor, is highly correlated with remaining in poverty.

We also know that the poor are more likely to stay poor in areas with more single parent families. International comparisons are dicier because they need to be pieced together using different datasets. When the data is less precise, or contains fewer years of income, then mobility may appear higher artificially. Since middle class parents may have had a bad year, and thus appear to be poor, even though their children generally experience a middle class childhood. It does, however, seem clear that absolute income mobility, as measured by how weakly parental income predicts the later income of their children, is higher in Europe than in the US, possibly because of greater US income inequality.

Relative income mobility, as measured by the similarity between the parent’s rank in the income distribution and the child’s rank in the income distribution, is more comparable between the US and Europe. It is certainly fair to say that European countries are generally more equal than the US, and that the US doesn’t make up for its inequality by having greater income mobility. Why do European cities seem to do a better job of avoiding the perpetual pockets of poverty that appear in far too many American cities? Perhaps the simplest view is that the lower levels of European inequality reflect the reach of much larger welfare states. A large welfare state is certainly not an unalloyed good.

There are big costs to taxing the most economically productive members of society, but policies that tax the rich and transfer to the poor can logically reduce income equality. Defining what counts as social welfare spending is contentious. But the estimates show that France and Sweden are spending about double what the US is on social programs. Germany is spending at least 50% more. A vast ocean of literature has documented how education can lead towards upward mobility. And many European countries do a somewhat better job eliminating really bad educational outcomes.

Why the US spent so much less on fighting poverty than most European nations. We found that two factors explain the gap, institutions and ethnic heterogeneity. The American Constitution was designed by wealthy white men during the 18th century.

It was meant to generally limit the powers of government, and specifically to limit the power of the mob. We wanted no ochlocracy in the US. We have not elected centers of power, like the Supreme Court, that have sometimes limited redistributive impulses, including the income tax and the New Deal. We have majoritarian institutions that privilege the median voter who may not care all that much about helping the very poor.

By contrast, many European countries have adopted proportional representation. This means that poor constituencies can readily elect their own dedicated representatives.

Proportional representation is strongly correlated with redistribution across the world. And this is only one of the more progressive institutions of European social democracies. Europe’s pro-redistribution institutions are not ancient.

In 1900, Europe still had monarchies and empowered nobilities. In that year, the US surely seemed like the more progressive place. But over the course of the 20th century, two world wars wiped out the older European parties, and constitutions were rewritten by the left. The emperors were the losers in the First World War and the Second World War discredited a new generation of right wing politicians.

Consequently, old Europe has new institutions, while America has an old republic with old rules designed by a landed gentry to check aggressive government. The other big difference is race. Over and over again in US history, redistributive movements have faced the problem of inducing a white majority to be sympathetic towards a poorer African American minority. In the 1890’s, conservative Southernists stymied populace by playing the race card. Similarly, in 1968, racial frictions made it easier for the Republican Richard Nixon to replace the Democratic Lyndon Johnson.

Generally, countries with more ethnic heterogeneity tend to have less generous welfare systems, and the US is far less homogeneous than Sweden. Race also helps to explain the greater income segregation within US cities. Historically, African Americans have been more geographically isolated than poor urban whites. Until the 1950s, black children even had to go to separate and unequal schools in the South. De facto racial segregation still exists in much of the United States today.

I am not trying to vilify the US. Plenty of white Americans care deeply about reducing poverty for children of all races. But it just seems like a fact of life that it is easier to build support for large welfare states when there are fewer other divisions within society. If anything, recent events in Europe underscore the truth of this claim.

As immigrants have come into the European Union, poverty rates have risen in some cities like Stockholm. Politicians have emerged, who protest any flow of funds to these new, different looking Europeans. As Europe becomes more heterogeneous, European cities are starting to look more like the US, with more segregation, and possibly more entrenched poverty, as well. I love the mixing of cultures and colors in cities. That heterogeneity helps make urban spaces exciting. And while Old Stockholm may have been egalitarian, it was also, well, a bit dull.

Let’s hope that in the future, both European and American cities, will manage to do a better job of combining upward mobility with ethnic heterogeneity, for it is a terrible thing when any talent is lost.

The Department of Housing and Urban Development back in the mid 1990s conducted this moving to opportunity experiment, which gave families the opportunity to move from public housing projects, to a section 8 voucher program that allowed them to choose, basically, a unit to rent at a subsidized rate with a section 8 voucher. There were three types of people. So there was a control arm where nobody got, where they didn’t get anything, and our movers they just got normal Section 8 Housing Vouchers which are aid that enables poor people to actually have their rent paid for by HUD, and then there were specially limited Section 8 housing vouchers which said you could only use them if you moved to a low enough poverty area. So, they were comparing two different treatments.

The experimental group that got this requirement, they were required to use their Section 8 voucher in a census tract that had a low poverty rate. They were also provided with counselors to help them kind of manage that process of finding a unit in a place that they may not be as familiar with relative to standard Section 8 vouchers, which tend to be used in higher poverty neighborhoods. And so the goal here was to, the goal of the Moving to Opportunity experiment was to kind of incentivize families to move into “better neighborhoods” with lower poverty rates. And so we went back to the data and looked at the outcomes of these children who were young, when their families got these vouchers and these opportunities to move to better neighborhoods.

And what we found was quiet striking but consistent with some of our other work. There were large differences between the experimental group and the control group.

On the order of upwards of 30% increases in a child’s earnings for children who are less than 12 years old at the time their families got this voucher to move to a better neighborhood.

It’s absolutely amazing, and it just shows the value of having sort of long term horizons for evaluating this. It also goes along with one of the most important hypothesis about cities today, which is that it’s an old idea; it’s associated with Alfred Marshall. It’s associated with Jane Jacobs.

Then 60 years later, in really well functioning cities, “the mysteries of the trade become no mysteries: but are as it were in the air” as Marshall put it. It’s very much this idea that cities, when they work well, are places that make us smarter by being around other smart people.

Shabir Ahmad is a UPSC aspirant  from Raiyar Doodhpathri, and contributes regularly to GK

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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