The fact that trade protection hurts the economy of the country that imposes it is one of the oldest but still most startling insights economics has to offer. The idea dates back to the origin of economic science itself. Adam Smith’s The Wealth of Nations, which gave birth to economics, already contained the argument for free trade: by specializing in production instead of producing everything, each nation would profit from free trade. In international economics, it is the direct counterpart to the proposition that people within a national economy will all be better off if they specialize at what they do best instead of trying to be self-sufficient. It is important to distinguish between the case for free trade for oneself and the case for free trade for all. The former is an argument for free trade to improve one nation’s own welfare (the so-called national-efficiency argument). The latter is an argument for free trade to improve every trading country’s welfare (the so-called cosmopolitan-efficiency argument). Underlying both cases is the assumption that free markets determine prices and that there are no market failures. But market failures can occur. A market failure arises, for example, when polluters do not have to pay for the pollution they produce (see externalities). But such market failures or “distortions” can arise from governmental action as well. Thus, governments may distort market prices by, for example, subsidizing production, as European governments have done in aerospace, as many other governments have done in electronics and steel, and as all wealthy countries’ governments do in agriculture. Or governments may protect intellectual property inadequately, leading to underproduction of new knowledge; they may also overprotect it. In such cases, production and trade, guided by distorted prices, will not be efficient. The cosmopolitan-efficiency case for free trade is relevant to issues such as the design of international trade regimes. For example, the General Agreement on Tariffs and Trade (GATT), incorporated into the World Trade Organization (WTO) in 1995, oversees world trade among member nations, just as the International Monetary Fund oversees international macroeconomics and exchange rates. The national-efficiency case for free trade concerns national trade policies; it is, in fact, Adam Smith’s case for free trade. Economists typically have the national-efficiency case in mind when they discuss the advantage of free trade and the folly of protectionism. This case, as refined greatly by economists in the postwar period, admits two main theoretical possibilities in which protection could improve a nation’s economic well-being. First, as Adam Smith himself noted, a country might be able to use the threat of protection to get other countries to reduce their protection against its exports. Thus, threatened protection could be a tool to pry open foreign markets, like oysters, with “a strong clasp knife,” as Lord Randolph Churchill put it in the late nineteenth century. If the protectionist threat worked, then the country using it would gain doubly: from its own free trade and from its trading partners’ free trade. However, both Smith and later economists in Britain feared that such threats would not work. They feared that the protection imposed as a threat would be permanent and that the threat would not lower the other countries’ trade barriers. U.S. trade policy today is premised on a different assessment: that U.S. markets can, and should, be closed as a means of opening new markets abroad. This premise underlies sections 301–310 of the 1988 Omnibus Trade and Competitiveness Act, which permit, and sometimes even require, the U.S. government to force other countries to accept new trade obligations by threatening tariff retaliation if they do not. But those “trade obligations” do not always entail freer trade. They can, for instance, take the form of voluntary quotas on exports of certain goods to the United States. Thus, they may simply force weak nations to redirect their trade in ways that strong nations desire, cutting away at the principle that trade should be guided by market prices. The second exception in which protection could improve a nation’s economic well-being is when a country has monopoly power over a good. Since the time of Robert Torrens and John Stuart Mill—that is, since the mid-1800s—economists have argued that a country that produces a large percentage of the world’s output of a good can use an “optimum” tariff to take advantage of its latent monopoly power, and thus gain more from trade. This is, of course, the same as saying that a monopolist will maximize his profits by raising his price and reducing his output. Two objections to this second argument immediately

Recycling is the process of converting waste products into reusable materials. Recycling differs from reuse, which simply means using a product again. According to the Environmental Protection Agency (EPA), about 30 percent of U.S. solid waste (i.e., the waste that is normally handled through residential and commercial garbage-collection systems) is recycled. About 15 percent is incinerated and about 55 percent goes into landfills. Recycling is appealing because it seems to offer a way to simultaneously reduce the amount of waste disposed in landfills and save natural resources. During the late 1980s, as environmental concerns grew, public opinion focused on recycling as a prime way to protect the environment. Governments, businesses, and the public made strenuous efforts to recycle. By 2000, the recycling rate had nearly doubled the 1990 rate of 16 percent. A big portion of the increase has been in yard trimmings and food scraps collected for composting. Recycling, however, is not always economically efficient or even environmentally helpful. The popular emphasis on recycling stems partly from misconceptions. One misconception is that landfills and incinerators are environmentally risky. It is true that at one time landfills were constructed to fill in swamps (sometimes to reduce insect infestation). If material leaked out from the landfill, it could contaminate nearby waters. But today landfills are sited away from wetlands. They are designed to keep their contents dry, and monitoring programs ensure that any leakage that does occur is caught before it causes harm. Another misconception is that we are running out of landfill space. The truth is that landfills today are large enough to accommodate the solid waste produced by the United States until 2019, even if no new ones are established. Economist Daniel Benjamin (2003) reports that the fear of running out of landfill space stems from an EPA study in the 1980s that counted landfills rather than landfill capacity. In fact, the report omitted the fact that landfill space was actually increasing because sites were getting larger. Indeed, the EPA continues to publish a chart showing the declining number of landfills even while stating that “at the national level, capacity does not seem to be a problem, although regional dislocations sometimes occur” (EPA 2002, p. 14). People also tend to overestimate how much space is required to bury our trash. Numerous studies have shown that it is not all that much. Statistician Bjørn Lomborg has calculated that a ten-mile-square, 255-foot-deep landfill could contain all the trash produced in the United States over the next century. The Economics of Recycling In the absence of government regulation, the economics of each material determines how much of it is recycled. For example, about 55 percent of all aluminum cans were recycled in 2000. Recycling of beverage cans goes back to 1968, when the Reynolds Metals Company started a pilot project. The chief motivation was to respond to public concerns about litter, which were spurring laws that required deposits on beverage containers. But energy prices began to rise during the 1970s and, because producing new aluminum from bauxite requires large amounts of energy, recycling aluminum cans became economically attractive. About 56 percent of paper and cardboard was recycled

One of the most fundamental requirements of a capitalist economic system—and one of the most misunderstood concepts—is a strong system of property rights. For decades social critics in the United States and throughout the Western world have complained that “property” rights too often take precedence over “human” rights, with the result that people are treated unequally and have unequal opportunities. Inequality exists in any society. But the purported conflict between property rights and human rights is a mirage. Property rights are human rights. The definition, allocation, and protection of property rights comprise one of the most complex and difficult sets of issues that any society has to resolve, but one that must be resolved in some fashion. For the most part, social critics of “property” rights do not want to abolish those rights. Rather, they want to transfer them from private ownership to government ownership. Some transfers to public ownership (or control, which is similar) make an economy more effective. Others make it less effective. The worst outcome by far occurs when property rights really are abolished (see tragedy of the commons). A property right is the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals. Society approves the uses selected by the holder of the property right with governmental administered force and with social ostracism. If the resource is owned by the government, the agent who determines its use has to operate under a set of rules determined, in the United States, by Congress or by executive agencies it has charged with that role. Private property rights have two other attributes in addition to determining the use of a resource. One is the exclusive right to the services of the resource. Thus, for example, the owner of an apartment with complete property rights to the apartment has the right to determine whether to rent it out and, if so, which tenant to rent to; to live in it himself; or to use it in any other peaceful way. That is the right to determine the use. If the owner rents out the apartment, he also has the right to all the rental income from the property. That is the right to the services of the resources (the rent). Finally, a private property right includes the right to delegate, rent, or sell any portion of the rights by exchange or gift at whatever price the owner determines (provided someone is willing to pay that price). If I am not allowed to buy some rights from you and you therefore are not allowed to sell rights to me, private property rights are reduced. Thus, the three basic elements of private property are (1) exclusivity of rights to choose the use of a resource, (2) exclusivity of rights to the services of a resource, and (3) rights to exchange the resource at mutually agreeable terms. The U.S. Supreme Court has vacillated about this third aspect of property rights. But no matter what words the justices use to rationalize such decisions, the fact is that such limitations as price controls and restrictions on the right to sell at mutually agreeable terms are reductions of private property rights. Many economists (myself included) believe that most such restrictions on property rights are detrimental to society. Here are some of the reasons why. Under a private property system the market values of property reflect the preferences and demands of the rest of society. No matter who the owner is, the use of the resource is influenced by what the rest of the public thinks is the most valuable use. The reason is that an owner who chooses some other use must forsake that highest-valued use—and the price others would pay him for the resource or for the use of it. This creates an interesting paradox: although property is called “private,” private decisions are based on public, or social, evaluation. The fundamental purpose of property rights, and their fundamental accomplishment, is that they eliminate destructive competition for control of economic resources. Well-defined and well-protected property rights replace competition by violence with competition by peaceful means. The extent and degree of private property rights fundamentally affect the ways people compete for control of resources. With more complete private property rights, market exchange values become more influential. The personal status and personal attributes of people competing for a resource matter less because their influence can be offset by adjusting the price. In other words, more complete property rights make discrimination more costly. Consider the case of a black woman who wants to rent an apartment from a white landlord. She is better able to do so when the landlord has the right to set the rent at whatever level he wants. Even if the landlord would prefer a white tenant, the black woman can offset her disadvantage by offering a higher rent. A landlord who takes the white tenant at a lower rent anyway pays for discriminating. But if the government imposes rent controls that keep the rent below the free-market level, the price the landlord pays to discriminate falls, possibly to zero. The rent control does not magically reduce the demand for apartments. Instead, it reduces every potential tenant’s ability to compete by offering more money. The landlord, now unable to receive

In a capitalistic society, profits—and losses—hold center stage. Those who own firms (the capitalists) choose managers who organize production efforts so as to maximize their income (profits). Their search for profits is guided by the famous “invisible hand” of capitalism. When profits are above the normal level, they attract additional investment, either by new firms or by existing firms. New investment enters until profits are competed down to the same level the investment could earn elsewhere. In this way, high profits attract firms to invest in areas where consumers are signaling that they want the investment to occur. Capitalists earn a return on their efforts by providing three productive inputs. First, they are willing to delay their own personal gratification. Instead of consuming all of their resources today, they save some of today’s income and invest those savings in activities (plant and equipment) that will yield goods and services in the future. When sold, these future goods and services will yield profits that can then be used to finance consumption or additional investment. Put bluntly, the capitalist provides

The world’s population increased by 50 percent between 1900 and 1950 and by 140 percent between 1950 and 2000, and is projected by the United Nations to increase by just under 50 percent between 2000 and 2050. Of the 3.44 billion increase in the number of people between 1950 and 2000, only 8 percent was in developed (i.e., rich) countries. The remaining 92 percent of the increase was in less-developed, or poor, countries (LDCs), reflecting the large difference in fertility levels and, to some degree, the different age distributions. Life expectancy in developed countries rose from 66.1 years during the period from 1950 to 1954, to 75.3 years in 2000. For LDCs, life expectancy rose from only 41.0 years during the same period to 63.0 years in 2000. Over that same time, the number of births per woman fell from 2.8 to 1.6 in developed countries and from 6.2 births per woman to 3.0 in LDCs. Birthrates in LDCs remain high enough to contribute substantially to population growth. Population Aging Lower birthrates and longer lives lead to “population aging” (i.e., more elderly people and fewer children). Population aging is most rapid, and has gone furthest, in the developed world. The median age in developed countries rose from 28.6 in 1950 to 37.3 in 2000, while in the United States it rose from 30.0 to 35.2. In LDCs, by contrast, the median age in 1950 was only 21.3, rising to 24.1 in 2000. Of course, individual countries vary. In Japan, Italy, and Switzerland the median age was over 40 in 2000, whereas in Uganda, Yemen, Niger, and Somalia it was under 16. Population aging matters for many reasons, but first and foremost because of the costs of retirement (pensions and health care). In the developed countries, these costs are borne principally by the central government and funded through taxes on the working-age population. The old-age-dependency ratio—that is, the population aged 65 and over divided by the population aged 15 to 64—is a key indicator of population aging. Other things being equal, the tax rate for pensions will be proportional to this ratio.

There is general agreement that we must control pollution of our air, water, and land, but there is considerable dispute over how controls should be designed and how much control is enough. The pollution control mechanisms adopted in the United States have tended toward detailed regulation of technology, leaving polluters little choice in how to achieve the environmental goals. This “command-and-control” strategy needlessly increases the cost of pollution controls and may even slow our progress toward a cleaner environment. In 1970, popular concern about environmental degradation coalesced into a major political force, resulting in President Richard Nixon’s creation of the federal Environmental Protection Agency (EPA) and the first of the major federal attempts to regulate pollution directly—the Clean

The fact of scarcity, which exists everywhere, guarantees that people will compete for resources. Markets are one way to organize and channel this competition. Politics is another. People use both markets and politics to get resources allocated to the ends they favor. Even in a democracy, however, political activity is startlingly different from voluntary exchange in markets. People can accomplish many things in politics that they could not accomplish in the private sector. Some of these are vital to the broader community’s welfare, such as control of health-threatening air pollution from myriad sources affecting millions of individuals or the provision of national defense. Other public-sector actions, such as subsidies to farmers and restrictions on the number of taxicabs in a city, provide narrow benefits that fall far short of their costs. In democratic politics, rules typically give a majority coalition power over the entire society. These rules replace the rule of willing consent and voluntary exchange that exists in the marketplace. In politics, people’s goals are similar to the goals they have as consumers, producers, and resource suppliers in the private sector, but people participate instead as voters, politicians, bureaucrats, and lobbyists. In the political system, as in the marketplace, people are sometimes (but not always) selfish. In all cases, they are narrow: how much they know and how much they care about other people’s goals is necessarily limited. An advocate of the homeless working in the political arena typically lobbies for a shift of funding (reflecting a move of real resources) from other missions to help poor people who lack housing. The views of such a person, while admirable, are narrow. He or she prefers that the government (and other givers) allocate more resources to meet his or her goals, even though it means fewer resources for the goals of others. Similarly, a dedicated professional, such as the director of the National Park Service, however unselfish, pushes strongly for shifting government funds away from other uses and toward expanding and improving the national park system. His or her priority is to get more resources allocated to parks, even if goals espoused by others, such as helping the poor, necessarily suffer. Passionate demands for funding and for legislative favors (inevitably at the expense of other people’s goals) come from every direction. Political rules determine how these competing demands, which far exceed the government’s ability to provide them, will be arbitrated. The rules of the political

Present value is the value today of an amount of money in the future. If the appropriate interest rate is 10 percent, then the present value of $100 spent or earned one year from now is $100 divided by 1.10, which is about $91. This simple example illustrates the general truth that the present value of a future amount is less than that actual future amount. If the appropriate interest rate is only 4 percent, then the present value of $100 spent or earned one year from now is $100 divided by 1.04, or about $96. This illustrates the fact that the lower the interest rate, the higher the present value. The present value of $100 spent or earned twenty years from now is, using an interest rate of 10 percent, $100/(1.10)20, or about $15. In other words, the present value of an amount far in the future is a small fraction of the amount. The fact that a dollar one year from now is less than a

The United States produces more per capita than any other industrialized country, and in recent years governments at various levels have spent about $350 billion per year, or about 3.5 percent of gross domestic product, on programs serving low-income families.1 Despite this, measured poverty is more prevalent in the United States than in most of the rest of the industrialized world. In the mid-1990s, the U.S. poverty rate was twice as high as in Scandinavian countries, and one-third higher than in other European countries and Japan.2 Poverty is also as prevalent now as it was in 1973, when the incidence of poverty in America reached a postwar low of 11.1 percent. According to the Census Bureau, 37 million Americans were poor in 2005, just over 12.5 percent of the population.3 These official figures represent the number of people whose annual family income is less than an absolute “poverty line” developed by the federal government in the mid-1960s. The poverty line is roughly three times the annual cost of a nutritionally adequate diet. It varies by family size and is updated every year to reflect changes in the consumer price index. In 2005, the poverty line for a family of four was $19,971.4 Many researchers believe that the official method of measuring poverty is flawed. Some argue that poverty is a state of relative economic deprivation, that it depends not on whether income is lower than some arbitrary level but on whether it falls far below the incomes of others in the same society. But if we define poverty to mean relative economic deprivation, then no matter how wealthy everyone is, there will always be poverty. Others point out that the official measure errs by omission. For example, official poverty figures take no account of refundable tax credits or the value of noncash transfers such as food stamps and housing vouchers, which serve as income for certain purchases. Incorporating these factors into family income would have reduced the measured poverty rate by an estimated 1.9 percentage points (or by approximately 16 percent) in 2002.5 Official poverty figures also ignore work-related expenses that affect families’ disposable incomes. Child care is a case in point. Isabel Sawhill and Adam Thomas estimated that deducting this expense from family incomes would have increased the measured poverty rate by up to one percentage point (or 8 percent) in 1998.6 Also, smaller, more fragmented households are more common today than a few decades ago, suggesting that some poor households were formed for the privacy and autonomy of their members. To the extent that some people have willingly sacrificed their access to the economic resources of parents, spouses, or adult children, some of the increase in poverty may actually represent an improvement in well-being. Another problem with the official measure arises from the dynamic nature of poverty. Most Americans who experience poverty do so only temporarily. In the four years from 1996 through 1999, only 2 percent of the population was poor for two years or more.7 During the same period, 34 percent of the population was poor for at least two months.8 In short, persistent poverty is relatively uncommon. In recent years, income mobility has fallen slightly. According to one estimate, 40 percent of families occupied the same position in the income distribution at the beginning and end of the 1990s, compared with 36 percent in the 1970s.9 Another criticism of the poverty measures is that they are based on income rather than on consumption. Consumption spending may be a better measure of well-being than reported income is, although data from the consumer expenditure survey have their own limitations. Daniel Slesnick found, using consumption spending, that the poverty rate fell from 31 percent in 1949 to 13 percent in 1965 and to 2 percent at the end of the 1980s. One rough indicator of the decline in poverty is the range of items that most poor homes now contain—from color TVs to VCRs to washing machines to microwaves—compared with the relative lack of these items in poor homes in the early 1970s.10 Despite their flaws, the official figures are widely used to measure poverty. According to the Census Bureau, the poverty rate declined from 22.2 percent in 1960 to 12.6 percent in 2005. Most of this decline occurred in the 1960s. By 1970, the poverty rate had fallen to the current level of 12.6 percent. It then hovered between 11 and 13 percent in the 1970s, fluctuating primarily with the state of the economy.11 A longer-term perspective leaves a more positive impression. For example, according to one estimate by Christine Ross, Sheldon Danziger, and Eugene Smolensky, more than two-thirds of the population in 1939 was poor by today’s standards.12 The trend in poverty masks the divergent experiences of poverty among various demographic groups. The poverty rate among the elderly, for example, declined dramatically from 35.2 percent in 1959 to 10.1 percent in 2005 and is now lower than for any other age group. The poverty rate among children declined between 1959 and 1970, increased to 22.7 percent in 1993, and then fell steadily to 17.6 percent in 2005; it remains higher than poverty rates among other age groups. The poverty rate among black households has also declined over the last forty years, but at 24.9 percent in 2005 remains more than twice as high as the rate among white households. The poverty rate for households headed by women declined from 49.4 percent in 1959 to 28.7 percent in 2005, but is still much higher than for other types of house-holds. This higher incidence of reported poverty, together with the rising share of households headed by women, has led to what researchers call the “feminization of poverty.” Between 1959 and 2005, the proportion of the poor in female-headed households rose from 17.8 percent to 31.1 percent.13 Some of these women (about 13 percent) live with unrelated men or have unreported income from casual jobs that enable them to cope, but there is little doubt that the growth of single-parent families has contributed importantly to the rise in poverty. Researchers have suggested a number of plausible explanations for both positive and negative trends in poverty. These explanations include changes in the composition of households, economic growth, immigration, efforts to increase the education and skills of the poor, and the structure and generosity of the welfare system. The rapid growth of households headed by women and unrelated individuals, who typically cannot earn as much as married-couple families, has left a larger share of the population in poverty. This demographic trend has increased poverty rates among children. The proportion of children living in female-headed households doubled between 1970 and 2003, rising from 11.6 percent in 1970 to 23.6 in 2003.14 Had that proportion remained constant since 1970, the child poverty rate would have been about 4.4 percentage points lower in 1998.15 The ebb and flow of the economy also influences the incidence of poverty. Researchers have found that recessions have a disproportionate impact on the poor because they cause rising unemployment, a reduction in work hours, and stagnant family incomes. The relationship between the changes in the unemployment rate and the poverty rate was stronger during the 1960s and 1990s than during the 1970s and 1980s.16 But economic downturns have been accompanied by rising poverty rates during each of the six recessions in the past thirty years.17 Increased immigration and the characteristics of immigrants also affect poverty. Immigration increases the poverty rate because newly arrived immigrants are, on average, poorer than native-born citizens. Of the foreign-born population in 1999, 16.8 percent were poor, compared with 11.2 percent of native-born citizens.18 After declining during the 1930s and 1940s, the foreign-born population surged from 4.7 percent of the American population in 1970 to 10.4 percent in 2000.19 Immigration may also indirectly influence the incidence of poverty, because a surge in immigrants with minimal training tends to depress incomes among native workers at the bottom. For example, George Borjas attributed half of the drop in the relative wage of high school dropouts between 1980 and 1995 to immigration.20 Training and compensatory education programs such as the Job Corps and Head Start, designed as part of the War on Poverty to increase the skills of the poor, may also have reduced poverty. Many of these programs have not been carefully evaluated, but some of those that have are modestly successful. For example, some early education programs have had a positive effect on poor children, helping them to complete school, avoid crime, and achieve higher test scores.21 Some employment and training programs have raised earnings for adult women, although these programs have been less helpful to adult men and young people.22 Finally, safety-net programs have contributed to the decline. These are typically divided into two categories: public assistance programs, such as Temporary Assistance for Needy Families, food stamps, and Medicaid, which were designed to help people who are already poor; and social insurance programs such as Social Security, unemployment insurance, and Medicare, which were designed to prevent poverty when events such as layoff or retirement threaten a household’s well-being. Expenditures on these programs totaled roughly $1,279 billion in 2002, up 160 percent in real terms since 1975.23 However, much of this spending was for noncash assistance (especially health care) that improves the well-being of the poor but has no effect on measured poverty. The antipoverty effectiveness of these programs is typically measured by counting the number of people with pretransfer incomes below the poverty line whose incomes are raised above the poverty line by income transfers. According to government estimates, social insurance and public assistance programs moved nearly half of the pretransfer poor above the poverty line in 2002. This implies that these programs reduce the poverty rate by ten percentage points.24 By ignoring the incentive effects these programs have on recipients, however, the above analysis overstates the success of safety-net programs. Specifically, means-tested cash transfers such as Aid to Families with Dependent Children (AFDC), which decline as the welfare recipient earns more reported income, have long been understood to be antiwork and antifamily. This criticism of the program led to its reform in 1996. Under the revised law, called Temporary Assistance for Needy Families (TANF), welfare mothers are required to work and federal benefits are limited to five years. Aided by a strong economy and more generous assistance for the working poor in the form of an expanded Earned Income Tax Credit and other measures, welfare reform led to a sharp fall in caseloads in the late 1990s. Employment rates among single mothers rose and child poverty fell. In addition, after increasing for decades, the share of births to unmarried mothers has leveled off and teen birth rates have declined. (The reasons for these changes in fertility are not well understood and may or may not be related to welfare reform.) Although some families are worse off as a result of welfare reform, the majority of former welfare mothers have been able to earn enough to improve their economic situation. The longer-term effects of welfare reform, especially those that might be expected in a less robust economy, are more uncertain and are likely to depend, to some extent, on the provision of additional supports such as child care for low-income working families. U.S. poverty, measured by income, ebbs and flows with the state of the economy and with demographic shifts, especially immigration and the growth of single-parent families. Policy measures—whether in the form of direct income support or education and skills training of the poor—have swum against these strong tides and have had a mixed record of success. Since the mid-1990s, policies that have both required and supported work as the best strategy for reducing poverty have had considerable success. About the Author Isabel V. Sawhill is a senior fellow and the Cabot Family Chair at the Brookings Institution and was previously associate director of the Office of Management and Budget during President Bill Clinton’s administration. Further Reading   Blank, Rebecca. It Takes a Nation: A New Agenda for Fighting Poverty. New York: Russell Sage Foundation; Princeton: Princeton University Press, 1997. Citro, Constance, and Robert T. Michael, eds. Measuring Poverty: A New Approach. Washington, D.C.: National Academy Press, 1995. Danziger, Sheldon H., and Robert Haveman, eds. Understanding Poverty. New York: Russell Sage Foundation; Cambridge: Harvard University Press, 2001. Sawhill, Isabel, R. Kent Weaver, Ron Haskins, and Andrea Kane, eds. Welfare Reform and Beyond: The Future of the Safety Net. Washington, D.C.: Brookings Institution, 2002. Slesnick, Daniel T. “Gaining Ground: Poverty in the Postwar United States.” Journal of Political Economy 101, no. 1 (1993): 1–38.   Footnotes * The author is grateful to Melissa Cox for extensive research assistance on this article.   1. Committee on Ways and Means, U.S. House of Representatives, 2004 Green Book: Background Material and Data on Programs Within the Jurisdiction of the Committee on Ways and Means, tables I-5 and K-9, online at: http://waysandmeans.house.gov/Documents.asp?section=813.   2. Michael Forster and Mark Pearson, “Income Distribution and Poverty in the OECD Area: Trends and Driving Forces,” OECD Economic Studies, no. 1 (2002): 13.   3. Carmen De Navas-Walt, Bernadette D. Proctor, and Cheryl Hill Lee, “Income, Poverty and Health Insurance in the United States: 2005,” U.S. Census Bureau, August 2006, p. 6, online at: http://www.census.gov/prod/2006pubs/p60-231.pdf.   4. U.S. Census Bureau, “Poverty Thresholds for 2002 by Size of Family and Number of Related Children Under 18 Years,” online at: http://www.census.gov/hhes/www/poverty/threshld/thresh05.html.   5. Unpublished data supplied by Wendell Primus, Committee on Ways and Means, U.S. House of Representatives.   6. Isabel Sawhill and Adam Thomas, “A Hand up for the Bottom Third: Toward a New Agenda for Low-Income Working Families,” Brookings Institution, 2001, online at: www.brook.edu/views/papers/sawhill/20010522.pdf.   7. John Iceland, “Dynamics of Economic Well-Being: Poverty 1996–1999,” U.S. Census Bureau, July 2003, p. 4, online at: http://www.census.gov/prod/2003pubs/p70-91.pdf.   8. Ibid.   9. Katherine Bradbury and Jane Katz, “Are Lifetime Incomes Growing More Unequal?” Federal Reserve Bank of Boston Regional Review (4th Quarter 2002): 4.   10. W. Michael Cox and Richard Alm, Myths of Rich and Poor (New York: Basic Books, 1999), p. 15.   11. De Navas-Walt, et al., “Income, Poverty and Health Insurance in the United States: 2005,” p. 46.   12. Christine Ross, Sheldon Danziger, and Eugene Smolensky, “The Level and Trend of Poverty in the United States, 1939–1979,” Demography 24 (1987): 587–600.   13. De Navas-Walt, et al., “Income, Poverty and Health Insurance in the United States: 2005,” p. 14.   14. U.S. Census Bureau, Historical Poverty Table 10: Related Children in Female Householder Families as a Proportion of All Related Children, by Poverty Status: 1959 to 2003, online at: http://www.census.gov/hhes/poverty/histpov/hstpov10.html.   15. Adam Thomas and Isabel Sawhill, “For Richer or for Poorer: Marriage as an Antipoverty Strategy,” Journal for Policy Analysis and Management 21, no. 4 (2002): 587–599.   16. Robert Haveman, “Poverty and the Distribution of Economic Well-Being Since the 1960s,” in George L. Perry and James Tobin, eds., Economic Events, Ideas, and Policies (Washington, D.C.: Brookings Institution, 2000), p. 281.   17. Proctor and Dalaker, “Poverty in the United States: 2002,” p. 3.   18. U.S. Census Bureau, “Profile of the Foreign-Born Population in the United States: 2000,” December 2001, P23-206, p. 6.   19. Ibid., p. 9.   20. George J. Borjas, ed., Issues in the Economics of Immigration, National Bureau of Economic Research Conference Report (Chicago: University of Chicago Press, 2000), p. 6.   21. James J. Heckman, “Policies to Foster Human Capital,” Research in Economics 54, no. 1 (2000): 3–56.   22. Judith M. Gueron and Gayle Hamilton, “The Role of Education and Training in Welfare Reform,” Welfare Reform and Beyond Policy Brief no. 20, April 2002.   23. Committee on Ways and Means, U.S. House of Representatives, 2004 Green Book, tables I-5 and K-9.   24. Unpublished data supplied by Wendell Primus, Committee on Ways and Means, U.S. House of Representatives.   (0 COMMENTS)

Governments have been trying to set maximum or minimum prices since ancient times. The Old Testament prohibited interest on loans to fellow Israelites; medieval governments fixed the maximum price of bread; and in recent years, governments in the United States have fixed the price of gasoline, the rent on apartments in New York City, and the wage of unskilled labor, to name a few. At times, governments go beyond fixing specific prices and try to control the general level of prices, as was done in the United States during both world wars and the Korean War, and by the Nixon administration from 1971 to 1973. The appeal of price controls is understandable. Even though they fail to protect many consumers and hurt others, controls hold out the promise of protecting groups that are particularly hard-pressed to meet price increases. Thus, the prohibition against usury—charging high interest on loans—was intended to protect someone forced to borrow out of desperation; the maximum price for bread was supposed to protect the poor, who depended on bread to survive; and rent controls were supposed to protect those who were renting when the demand for apartments exceeded the supply, and landlords were preparing to “gouge” their tenants. Despite the frequent use of price controls, however, and despite their appeal, economists are generally opposed to them, except perhaps for very brief periods during emergencies. In a survey published in 1992, 76.3 percent of the economists surveyed agreed with the statement: “A ceiling on rents reduces the quality and quantity of housing available.” A further 16.6 percent agreed with qualifications, and only 6.5 percent disagreed. The results were similar when the economists were asked about general controls: only 8.4 percent agreed with the statement: “Wage-price controls are a useful policy option in the control of inflation.” An additional 17.7 percent agreed with qualifications, but a sizable majority, 73.9 percent, disagreed (Alston et al. 1992, p. 204). The reason most economists are skeptical about price controls is that they distort the allocation of resources. To paraphrase a remark by Milton Friedman, economists may not know much, but they do know how to produce a shortage or surplus. Price ceilings, which prevent prices from exceeding a certain maximum, cause shortages. Price floors, which prohibit prices below a certain minimum, cause surpluses, at least for a time. Suppose that the supply and demand for wheat flour are balanced at the current price, and that the government then fixes a lower maximum price. The supply of flour will decrease, but the demand for it will increase. The result will be excess demand and empty shelves. Although some consumers will be lucky enough to purchase flour at the lower price, others will be forced to do without. Because controls prevent the price system from rationing the available supply, some other mechanism must take its place. A queue, once a familiar sight in the controlled economies of Eastern Europe, is one possibility. When the United States set maximum prices for gasoline in 1973 and