The Institutional Economics of Poverty: An Inquiry into the Causes and Effects of Poverty

By Hill, Lewis E. | Journal of Economic Issues, June 1998 | Go to article overview

The Institutional Economics of Poverty: An Inquiry into the Causes and Effects of Poverty


Hill, Lewis E., Journal of Economic Issues


Remark Upon Receiving the Veblen-Commons Award

The thesis of this essay is that the failure of the American people to invest adequately in the human capital represented by impoverished children is both the most important cause and the most tragic effect of poverty in the United States. Impoverished parents do not have, and the welfare system does not provide them with, adequate means to make the necessary investment in their children to lift them out of a life of poverty. The types of investments in human capital that are both most important and most likely to be inadequate for impoverished children include nutrition, health care, and education. The inadequacy of these kinds of investment in the human capital represented by impoverished children condemns them to lifelong poverty through succeeding generations. Nobel Laureate Gary Becker has investigated this problem and has concluded that "the case is overwhelming that investments in human capital are one of the most effective ways to raise the poor to decent levels of income and health" [Becker 1995, 7].

More than one-fifth of all American children were impoverished in 1993. The rate of childhood poverty was higher in the United States than in most other Western nations [Bergmann 1996, 1; Duncan and Brooks-Gunn 1997, 1]. "American children are twice as likely to be poor as Canadian children, 3 times as likely to be poor as British children, 4 times as likely to be poor as French children, and 7 to 13 times as likely to be poor as German, Dutch, and Swedish children" [Lavelle 1995, 38]. Welfare does not eliminate poverty. In the early 1990s, the combined benefits from Aid to Families with Dependent Children and Food Stamps amounted to only 72 percent of the poverty line for a mother with two children in a median state [Danziger and Gottschalk 1995, 91]. The children of working poor mothers are more endangered than children on welfare because they are not eligible for Medicaid, and the cost of child care averages more than 25 percent of their mother's income [Chase-Lansdale and Brooks-Gunn 1995, 161-168; Lavelle 1995, 104].

Persistent poverty usually causes chronic malnutrition, which produces extremely detrimental consequences for children. The severity of these detrimental consequences is influenced by the intensity and duration of the poverty and by the age of the impoverished child. Malnutrition during infancy and childhood can damage their immune system and produce a wide variety of negative health outcomes [Sidel 1996, 143-147]. Moreover, chronic malnutrition adversely affects the development of the central nervous system and can cause permanent brain damage and mental retardation. Chronically inadequate nutrition inhibits the development of cognitive ability and social skills. Learning disabilities are an almost inevitable result of chronic malnutrition during infancy and childhood. All of these negative physical and mental outcomes of infant and childhood poverty combine to cause learning failure and to limit academic performance [Duncan and Brooks-Gunn 1997, 70-99; Karp 1993, 13-30; Walker 1994, 117-135]. Impoverished children are two to three times as likely to suffer from physical and mental disabilities as children who are not poor [Sidel 1996, 142-144; Lavelle 1995, 131].

These physical and mental disabilities, which have been caused by malnutrition, are greatly exacerbated by the very low quality and the woefully inadequate quantity of health care that impoverished children receive. Only about half of poor children are eligible for Medicaid, but even these children receive health care that is substantially inferior to the health care that children who are not poor receive. Most Medicaid providers are over worked and under paid. The access of poor children to Medicaid care is frequently limited by the inconvenient location of medical facilities and the long waiting time for service. For these and other reasons, Medicaid health care is likely to be piecemeal, discontinuous, uncoordinated, inefficient, and therefore inadequate. …

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