- Poverty in the United States fell dramatically before the War on Poverty, driven primarily by rising wages and economic growth rather than government transfers
- The expansion of welfare programs reduced poverty through redistribution but increased dependency and weakened incentives for work over time
- Long-term poverty reduction is most effectively achieved through free market growth that expands opportunity, raises productivity, and increases overall incomes
For decades, American policymakers have debated how best to reduce poverty. The dominant policy response since 1964 and the launch of the War on Poverty under President Lyndon B. Johnson has been redistribution, expanding government programs designed to transfer incomefrom higher earners to low-income households. Now the United States spends well over a trillion dollars annually on antipoverty programs.
Nevertheless, poverty persists in America.
A recent NBER working paper, originally published with the American Enterprise Institute, by economists Richard V. Burkhauser and Kevin Corinth sheds new light on how poverty has actually changed over the past eight decades. The study provides the most comprehensive poverty data yet, stretching back to 1939. Their findings challenge the conventional narrative. Poverty in the United States fell substantially before the War on Poverty, and it fell primarily because of rising incomes, not government transfers.
The lesson is clear: free markets, not redistribution, have been the most powerful antipoverty tool in American history.
Poverty declined dramatically before the War on Poverty
According to the study, nearly half (48.5 percent ) of Americans lived in absolute poverty in 1939, the tail end of the Great Depression. Most of that Great Depression recovery, was guided by market-based growth instead of welfare programs according to the working paper. By 1963, that figure had fallen to just 19.5 percent. In other words, the poverty rate had dropped by almost 30 percentage points in the quarter century before the War on Poverty even began.
In fact, it was one of the most dramatic improvements in living standards in U.S. history. Crucially, it occurred during a time when government transfer programs were far smaller than they are today. During that period, only about 2–3 percent of working-age adults were dependent on the government for at least half their income. After the War on Poverty, however, dependency rates rose to between 7 and 15 percent.
In other words, poverty fell rapidly in an era when Americans were becoming more self-sufficient through work and rising wages rather thanthrough government social safety nets.
The period was defined by rapid economic growth, expanding industries, and rising productivity. Real incomes climbed across the income distribution, allowing millions of families to achieve a standard of living that would have been unimaginable just decades earlier.
This is exactly the mechanism that classical economists predicted.
Growth lifts the poor
In The Wealth of Nations, Adam Smith explained that prosperity arises from specialization, voluntary exchange, and capital accumulation. When individuals are free to pursue economic opportunities, productivity rises. Higher productivity leads to higher wages and more employment opportunities, which ultimately raises living standards throughout society. Economists often refer to this as the “rising tide” effect.
The data from 1939 to 1963 reflect precisely this “rising tide” effect. Real median income rose by roughly 76 percent during that period. The post-war economic expansion created jobs, raised wages, and expanded opportunity across the income distribution. Market-driven growth shifted the entire income distribution upward, lifting tens of millions above poverty.
This is consistent with what modern economists call the “growth elasticity of poverty”: sustained economic growth is the most reliable way to reduce poverty over time. Redistribution can change who receives income; growth changes how much income exists to be distributed in the first place.
As Milton Friedman argued, capitalism is not merely a system of profits, it is a system that harnesses voluntary exchange to create widespread prosperity. Historically, countries that embrace economic freedom experience faster income growth and larger reductions in poverty than those that rely on state planning.
The expansion of welfare changed the pattern
After the War on Poverty began in the 1960s, the United States built a vast network of social programs. Medicaid, food assistance, housing subsidies, and refundable tax credits all expanded dramatically over the following decades.
These programs did reduce poverty when measured using post-transfer income. According to the AEI study, poverty, after consideringincome post-tax and post-transfer, fell by another 15.7 percentage points between 1963 and 2023.
But the source of poverty reduction changed. Instead of being driven primarily by rising market income, reductions increasingly came from government transfers.
Dependency among working-age adults rose significantly after the War on Poverty. The authors find that market-income poverty stagnated from the late 1960s through the early 1990s, even as transfer programs expanded. Only during the 1990s welfare reform era, when policy shifted toward encouraging work, did poverty and dependency fall together.
This reflects a core principle of labor economics: means-tested transfers often reduce the returns from work at the margin. Basically, whenbenefits phase out as earnings rise, effective marginal tax rates increase. The substitution effect, often called the “benefits cliff” by policy researchers, discourages people from seeking work because they risk losing more in government benefits than they would gain in income. While transfers mechanically raise income in the short run, they can dampen the market processes that generate sustainable upward mobility.
Even President Johnson recognized this risk. He stated that the War on Poverty should not merely “support people” but allow them to “develop and use their capacities.” The pre-1964 period came closer to that vision because poverty reduction was rooted in rising productivity and work.
This does not mean that safety net programs are unnecessary. They can provide important support during economic hardship or temporary job loss. But when transfer programs become the primary driver of poverty reduction, they weaken the very market mechanisms that generate long-term prosperity.
Growth remains the ultimate antipoverty tool
History shows that the most durable reductions in poverty occur when the economy creates more opportunities for productive work.
Free markets encourage investment, entrepreneurship, and innovation. These forces expand the productive capacity of the economy and raise wages over time. Unlike redistribution, which shifts income from one group to another, economic growth increases the total amount of wealth available to everyone.
Policies that strengthen markets, such as reducing barriers to entrepreneurship, protecting property rights, expanding trade, and encouraging labor force participation, are therefore among the most powerful tools policymakers have to fight poverty.
The historical record highlighted in the AEI study reinforces a simple but often overlooked point: Before the expansion of the modern welfare state, the American economy lifted tens of millions of people out of poverty through rising wages and expanding opportunity.
Government programs can supplement that progress, but they cannot replace it.
The greatest antipoverty program ever created was not a government agency or a welfare program. It was the free market economy itself.
