(FORTUNE Magazine) – ''Hey, what's everybody lining up for?'' asks the dapper young New Yorker, stepping out of a taxi. It is 10 P.M. on a Monday night, and across the street from Grand Central, Manhattan's Beaux Arts railroad terminal, 40 men stand single file. ''Free food,'' mumbles one of the homeless. Embarrassed, the young man does a quick about-face and hurries off. Affluent America is rediscovering the poor. The poor are not just homeless and hungry men in New York City, but also 18-year-old welfare mothers in Texas, unemployed blue-collar workers in dying Washington State lumber towns, illegal immigrants in the Southwest, and Iowa farmers applying for food stamps. Despite 20 years of rising prosperity, millions of Americans are poor. In his February State of the Union speech President Reagan declared, ''After hundreds of billions of dollars in poverty programs, the plight of the poor grows more painful.'' How can this be? Presidential commissions, congressional hearings, and academic studies are trying to figure out what can and cannot be done to reduce poverty. As the pitch of national debate mounts, the key question becomes whether past policy has made poverty worse. Critics of the antipoverty programs of the 1960s argue that they created a more intractable social problem by promoting unstable families and eroding the work ethic. In this two-part report, FORTUNE analyzes U.S. poverty as it exists in 1986, explains why it is not as pervasive as government statistics indicate -- properly measured, about one American in ten is poor, down sharply from one in five in 1964 -- and evaluates factors other than welfare disincentives that have contributed to the changed structure of poor families. The story on page 82 suggests how social policies can be refocused to lift many of the remaining poor out of poverty and into the mainstream of working America. Americans have defined being poor as not having sufficient resources to pay for the essentials of life -- food, shelter, and medical care. It does not just mean having less than average. Poverty had no official definition until 1964, when the Johnson Administration created the poverty line. A 1955 survey had found that the average family of three or more spent about one-third of its income on food. So the poverty line was set at three times the cost of the cheapest nutritionally sound diet the Department of Agriculture could devise, the Thrifty Food Plan. Thereafter, the Bureau of the Census counted as poor anyone whose pretax cash income, including Social Security, welfare, and any other so-called transfer payments from the government, was less than the poverty line. After 1968 the poverty line was adjusted upward annually to reflect inflation. Since the poverty line has not changed in real terms even though the real income of average U.S. families has risen, the poverty line has become progressively lower in relative terms. The 1985 poverty line equals about 33% of median family income, vs. 44% in 1964. In 1985 a family of four with a pretax cash income of less than $10,650 was classified as poor. That is about what two minimum wage workers, one full time and the other working 20 hours a week, would earn. Also counted among the poor: a three-person family with $8,850 in pretax income, a couple with $7,050, a single person with $5,250. According to popular stereotypes, most poor are black, live in northern ghettos, and remain poor for life, a permanent underclass mired in a welfare culture. In fact, two-thirds of the poor are white, and less than one-fifth live in inner-city ghettos. Only half the poor live in households headed by someone physically able to work but not fully employed. And only 40% of households under the poverty line receive welfare, officially known as Aid to Families with Dependent Children (AFDC). Another 40% of the poor get by without food stamps. Less than 10%, those who do not qualify for federal cash aid, receive locally funded public assistance grants. Contrary to popular notions of poverty as an ever worsening cycle, being poor is mainly a temporary condition. The University of Michigan Panel Study of Income Dynamics, which followed the fortunes of a representative sample of American families from 1969 to 1978, found that while 25% of Americans are likely to be poor at some point in their lives, the overwhelming majority are poor for only a year or two. Fewer than 2% are chronically poor. The study shows that most of those who grew up poor and on welfare are not indigent as adults.

Life at the poverty line is just-get-by existence. James C. Richardson, 33, an Army veteran, husband, and father of four, has been drifting in and out of poverty since 1981, when he lost his $22,000-a-year, nonunion job at Tiger Industries, a specialty-steel maker in McKeesport, Pennsylvania. His family has moved seven times in four years, and Jim has had six jobs, paying $125 to $200 a week. With Jim and his wife, Barbara, 32, both working odd jobs, the Richardsons lived just about at the poverty line. The bank foreclosed on their house, so the family of six ended up with Jim's parents in a twobedroom house. The Richardsons receive no AFDC benefits and have little medical coverage. They own a $200 used Dodge Diplomat; their clothes are secondhand. ''When you get money,'' says Barbara Richardson, ''it goes first to the bills, and the rest to food. At the end of some months, we may have been eating peanut butter and jelly sandwiches.'' Barbara gave up her job a year ago, and Jim is studying full time to be a diesel mechanic in a federally funded job retraining program for veterans. So the family's income is now $500 a month from the Veteran's Administration and $375 in food stamps -- about 80% of the poverty line. Says Jim, ''I'm looking for a job that pays $10 an hour so I can meet my family's needs.'' A 33-YEAR-OLD illegal immigrant from Mexico, living in the Southwest, has similar goals: ''I hope I can have a job where I can have enough for the children.'' But his prospects are bleak. He speaks no English, he works occasionally as a field hand for $18 a day, and he lives in fear that the U.S. Immigration and Naturalization Service will deport him. He has asked that his name not be used. The man, his wife, and three American-born children share a tiny two-room apartment with a family of eight. The kitchen consists of a faucet, a few hot plates, and a nearly empty refrigerator. There is no sink, no bathtub, and the toilet is on the back porch. The walls are crumbling; the rent is $145 a month. Because the children are American citizens, the family gets $278 a month in food stamps and $35 a month in coupons for milk. Their diet consists of tortillas, refried beans, soup, and sometimes chicken. Their food stamps run out before the end of every month. Roughly half the U.S. population was poor in the aftermath of the Great Depression, using the poverty line deflated for 1930s dollars. By 1950, the proportion of poor had fallen to 30%, and by 1964 to 20%. After antipoverty programs were enacted, the poverty rate dropped to 12% in 1969. Then the official poverty rate stopped falling. ; In 1984 the Census Bureau classified 34 million, or 14.4%, of Americans as poor, more than at any time since 1964. But the Census numbers are exaggerated. For one thing the consumer price index, which is used to adjust the poverty line each year, overstated inflation during the high-inflation, high-interest years of the 1970s and early 1980s when the CPI included mortgage costs. The effect in any one year was not large, but the cumulative impact jacked the poverty line 10% over what it would have been had inflation been measured properly, says John C. Weicher, an economist at the American Enterprise Institute, a Washington, D.C., research organization. In addition, food, housing, and Medicaid now account for about two-thirds of transfer payments to the poor, vs. one-fifth when the poverty line was devised. No in- kind benefits count as income in the Census figures, even though they clearly increase the resources of poor households. Finally, poor Americans, like rich ones, don't report all their income to Census takers, especially if the source is welfare, gifts from relatives and friends, or the underground economy. In his studies of poor Detroit neighborhoods, Lou Ferman, professor of social work at the University of Michigan, found ''tons and tons of small off-the- books transactions, between $10 and $50 a job.'' Making adjustments for food and housing benefits and for the vagaries of the CPI -- but not allowing for Medicaid or underreported income -- cuts the number of poor Americans to 26 million, eight million fewer than the official count. That makes the 1984 poverty rate about 11%, more than three percentage points lower than the official rate. Though the poverty rate declined during the 1970s, progress was slower than in earlier decades despite faster growth in government spending on the poor. The economy turned sour and demographic trends undercut family incomes. Real disposable per capita income grew at a 2.2% annual rate, vs. a 2.7% pace during the 1960s. But the real median income of all families edged up at just a 1% rate during the 1970s, less than one-third as fast as in the previous two decades. Family size was 8% smaller than before because the number of children per family declined, and because more families were headed by single women, so family income rose less than per capita income. ''If all families were moving up more slowly, it is not surprising that poor families were too,'' says Lawrence H. Summers, an economist at Harvard University. The adjusted poverty rate climbed from 9% in 1979 to 11% in 1984. Isabel V. Sawhill, an economist at the Urban Institute, a Washington research organization, says that back-to-back recessions and cutbacks in government programs contributed equally to the increase. Though per capita disposable personal income grew somewhat over the period, median family income slipped, unemployment averaged 8%, and real hourly earnings declined. In 1981 the Reagan Administration tightened eligibility requirements for AFDC and food stamps to direct benefits to the most needy. The government removed from AFDC rolls most of those who worked full time, even if they earned less than the poverty line. It also eliminated from the food stamp program those whose incomes were near or above the poverty line, and those with assets such as insurance policies and cars worth more than $1,500. The average annual growth of federal food programs slowed from 20% during the 1970s to 2%, and cash transfers fell 3% a year, causing total transfers to the poor to decline. MAJOR WELFARE PROGRAMS are aimed at specific groups, mainly the elderly, the disabled, and single women with children. At their peak in 1980, federal transfers for the poor equaled 2.4% of GNP, vs. 2.2% of GNP in 1984. One- half of such transfers go to the elderly and disabled through Medicaid and Supplemental Social Security. These programs, which together account for $42 billion annually, have helped produce a rapid decline in poverty among the elderly in the past decade. The per capita income of Americans over 65 is 7% higher than the national average. Social Security benefits are politically sacred. Less politically secure are transfers to the able-bodied poor, mainly AFDC and food stamps. Established by the Social Security Act of 1935, AFDC was intended to be a small program to support widows with children. By the 1960s, however, AFDC had evolved into a very large program for single mothers, most of whom were not widows. By that time, such families were increasing sharply and suffering poverty rates far higher than two-parent families. The AFDC program, administered by the federal government and the states, cost $15 billion last year; $8 billion came from Washington. AFDC requirements and benefits vary from state to state. In 26 states the father's presence in the household makes a family ineligible for welfare. Monthly benefits for a family of three, the average size of AFDC families, range from $118 in Alabama to $740 in Alaska. The median benefit is $346 a month, less than half the poverty line for a family of three. Adding food stamps brings it up to 73% of the poverty line. Since 1972, median benefits have declined 33% in real terms. In 1984 one in three families headed by a woman was poor. Critics such as Charles Murray, author of Losing Ground: American Social Policy 1950-1980, contend that welfare for single mothers provides an easy alternative to work. They argue that AFDC creates single-parent families by encouraging illegitimacy and the abandonment of families by fathers. ''We do not know how to help certain classes of people with government programs,'' says Murray. ''AFDC is one of the destructive forces.'' But most AFDC recipients apparently do not regard the benefits as an annuity. While 20% of women who go on welfare depend on AFDC for ten years or more, about half stay on the rolls for four years or less. At greatest risk of long-term dependency are women with little education or work experience, especially unmarried high school dropouts with children. THE CORRELATION between increased welfare benefits and the rise in single- parent households is not high. The trend toward female-headed households, which started to appear in the 1950s, speeded up when AFDC benefits became more generous in the 1960s. But the trend also accelerated during the 1970s when benefits available to single-parent families were declining in inflation- adjusted terms. And while the number of families receiving AFDC leveled off, and states were dropping the man-in-the-house prohibition, the number of single-parent families still increased by one-third between 1975 and 1985. In 1983 the U.S. Department of Health and Human Services commissioned David T. Ellwood, a Harvard economist, and Mary Jo Bane, now the Executive Deputy Commissioner of Social Services for New York State, to study the effect of benefit levels on family structure. They found that welfare affects the rate at which marriages break up. Young married mothers are more likely to dissolve bad marriages because of the economic support offered by welfare. Ellwood and Bane found no link between AFDC benefit levels and the rate of out-of-wedlock births. Contrary to popular notions, the percentage of unmarried women having children has generally been falling in the past 15 years, including the period from the late 1960s to the early 1970s when AFDC + benefits and enrollment soared. For black teenagers, the out-of-wedlock birthrate peaked in 1970; since then the gap between black teenagers' illegitimacy rates and those of white teenagers has narrowed. The fast-rising ratio of illegitimate births to all births reflects the fact that fertility rates of married women have fallen faster than those of unmarried women. However, higher benefits encourage single mothers to establish separate households. In low-benefit states they tend to live with relatives. William Julius Wilson, a sociologist at the University of Chicago, offers another explanation for family breakups and declining marriage rates among the poor. He argues that the increase in female-headed families among whites occurred mostly in response to the increasing earning power of white women, while the precipitous rise of female-headed households among blacks probably stemmed from the worsening fortunes of black men in the labor market. During the 1970s, the employment rates for black men, especially young adults, declined sharply. Some analysts attribute this decline to both the contraction of manufacturing jobs traditionally held by young blacks and the increased competition for entry-level jobs from white women and immigrants. The ratio of gainfully employed black men to all black women declined some 50% from 1960 to 1980. Marriage rates also fell sharply during the same period, and divorce and separation rose. Says Wilson, ''Welfare is not a primary cause of female-headed households.'' Nor can welfare be blamed for declining employment among poor black men; the only form of government assistance for which they are generally eligible is food stamps. The federal food stamp program provides grocery vouchers for about 20 million people, all with incomes below the poverty line. The maximum benefit, the full cost of the Thrifty Food Plan, is $80 a month for a single person with no cash income, $268 for a family of four. The government adjusts the amounts regularly to reflect increases in food costs. Still, hunger has again become a national issue. Although the widespread malnutrition of the early 1960s no longer exists, many of the poor have an increasingly difficult time getting adequate amounts of food. The President's Task Force on Food Assistance reported in 1984 that ''some people -- an immeasurable but surely intolerable number -- are hungry.'' Last year, the third in the economic expansion, the U.S. Conference of Mayors reported that, in 25 major cities, demand at soup kitchens and food pantries run by charities had increased about 30%. SOME POOR DO NOT qualify for food stamps. Efton Hall, 73, and his wife, Irene, 64, are subsistence farmers in southern Iowa. Though they have had no cash income for two years, they own land and equipment and may therefore be too well-off to qualify for food stamps. Some poor people are too proud to apply. A Texas food pantry worker tells of an unemployed father with eight children who had ''no utilities, no money, no food, but was too embarrassed to ask.'' Others find the application process daunting. Applicants may be asked to supply 12 different kinds of verification of everything from salaries to utility bills. The time between filing the application and getting the food stamps is generally 30 days. Christine, 21, and Robert, 18, who arrived in Peoria, Illinois, this spring, are out of work and out of money. While they wait for their food stamp application to be processed, the couple, who refused to give their last names, get groceries and infant formula for their month-old daughter at a food pantry. But formula does not last long on pantry shelves. When the rations run out, Christine says she feeds her infant water and strained vegetables, a diet a nutrition expert says could lead to malnutrition in ten days. Most poor families spend more on food than the Thrifty Food Plan figured, according to Robert Greenstein, director of the Center for Budget and Policy Priorities, a research organization, who analyzed data from a Department of Agriculture survey of national food consumption patterns in the late 1970s. Many who get a full allotment of food stamps -- only 18% of food stamp recipients receive the full amount -- run out of things to eat before the end of the month. Clarissa Bates, a Dallas mother with three children living at home, gets $207 a month in food stamps and a $158 AFDC check. She says, ''At the end of the month, sometimes I don't have anything in the refrigerator.'' THE PRESIDENT'S Task Force on Food Assistance reported in 1984 that as many as two million people in the U.S. are homeless, vs. less than 200,000 in the late 1970s. Partly because of recent state policies to ''deinstitutionalize'' the mentally ill, as many as one-half of the homeless are former mental patients, drug addicts, and alcoholics. Home to Ronald Gonzalez, an unemployed Paterson, New Jersey, roofer, is a big, broken-down yellow truck | owned by a gas station. Says he, ''I have a mattress, ten blankets, a chair, a table, a flashlight, and a can opener.'' Gonzalez, 23, gets a $66.50 check every two weeks from a social service agency he could not name. He eats breakfast and lunch at soup kitchens run by local church groups. When he buys food to eat in his truck, it is likely to be Spam or canned lasagna. About 10% of the homeless are transients seeking jobs. Johnny Johnson, 34, a laid-off oil rig maintenance worker from Louisiana, came to Dallas last year looking for work. He met his new wife, Sarah, 17, at Dallas Life Foundation, a shelter for the homeless. Sarah had also come to Dallas hoping for a job. Roughly 40% of the homeless are families living in large cities. Some have been evicted or burned out of their previous quarters. But many are fleeing situations in which they had doubled up with another family or group. ''Something happens,'' explains Suzanne Trazoff, a public relations representative for New York City's Human Resources Administration. ''One of the women gets pregnant, or they have a fight, or they agree it is just too crowded. And the next thing you know, the family winds up at a shelter.'' The root of the problem, according to Robert M. Hayes, a former Wall Street lawyer who heads the National Coalition for the Homeless, is ''housing, housing, and housing.'' The stock of low-cost housing fell by 2 million units from 1974 to 1983, according to the National Association of Home Builders. Cheap housing is scarcest in large cities such as New York and San Francisco, where homeless job seekers, the mentally ill, and families in need of welfare services tend to migrate. Last year New York City provided emergency shelter to 8,000 single men and women and 4,000 families, nearly double the number only two years earlier. Poverty among the aged and disabled will continue to fall as the number of elderly who began working before the coming of Social Security dwindles. For the working poor, faster economic growth is the main antidote to poverty. But low labor market participation among minority youth, high birthrates among poor teenagers, and the growing number of female-headed families threaten to mire many Americans in chronic poverty even in good times. Evidence does not prove that past antipoverty programs did more harm than good. Social policy should now concentrate on minimizing welfare's less attractive effects by restoring the relationship between work and reward.