Poverty As An Economic Policy Failure

Imagine if we looked at poverty not just as a personal failure or the result of bad luck, but as a sign of malfunction of the economic system, that is, the same way we take fever as a sign of illness.  What if we scrutinized the economic system for its failure to reduce poverty the way we scrutinize it for not yielding higher growth or higher employment. 

These are the questions you take away from reading Matthew Desmond’s book Povery, By America, which I introduced in my last post on this blog.  As the title implies, Desmond argues that poverty in America has some special features because of the way our economy and public policies work which make poverty endemic to our socioeconomic system.

Various statistics on poverty in America describe a very inconvenient picture.  Before covid in 2019, OECD ranked the U.S. worst in poverty among 26 developed nations.  So, Desmond asks why this is happening in the richest nation on earth.  Desmond builds a strong case that poverty in America is not accidental, not due to laziness, and not borne out of reliance on welfare, but rather due to an economy that disadvantages the poor, an ill-designed safety net, and limited opportunities to avoid or exit poverty.

There are many reasons a person can fall into poverty.  Growing in a poor and/or dysfunctional family; dropping out of school; having encounters with the law that escalate to greater economic and social displacement; inability to meet medical bills.  Worse though is what keeps poor people trapped in poverty.  Low wages, no access to affordable housing, unaffordable child care.  The question, therefore, is how we manage so that individuals can either be caught before they fall into poverty or be empowered to jettison themselves out of its orbit. 

Desmond identifies three market sectors that work against the interests of people with limited means and pushes them further into poverty.  One is housing with its insufficient supply that imposes higher than fair rental charges on the poor.  Poor people have to accept high rents for poorly maintained houses in predominantly depressed areas.  Besides spending an inordinate amount of income on rent, poor people are also trapped in communities with limited opportunities for socioeconomic development and advancement. 

The second economic sector that can contribute to poverty is the labor market.  The persistent stagnation of wages since the 1970s is a well-known cause of this reality. A recent Brookings Institution study found that 44% of working age Americans earn low wages.  The frozen federal minimum wage is one reason for this.  The dramatic shrinkage of the number of unionized workers has also deprived them of bargaining power in setting living wages.  In addition, the nature of employed work has changed to the disadvantage of workers.  The fraction of full-time employment with full benefits has been shrinking in favor of part-time and temporary gig jobs that shift the burden of health insurance costs and saving for retirement from employers to workers.  Ironically, Desmond notes, the welfare programs the government offers low-wage people work as complement to the low wages paid by many corporations.  No wonder large corporations are in support of welfare programs. 

Finally, poor people are severely underbanked and left to manage their finances with payday check-cashing and lending outlets.  Even when poor people transact with banks their perennial inability to cover checks and pay debts on time exposes them to overdraft and late-payment fees.  Desmond estimates that poor Americans spend $61 million a day on check-cashing and credit related fees.  With little access to credit their buying power is limited and so are their opportunities to better their lives.

The overall result is that those among us who earn the lowest wages are compelled to pay the highest prices.  Very aptly, in this connection, Desmond quotes James Baldwin who remarked “how expensive it is to be poor.”

Our lack of success on the war against poverty persists despite the fact that funding of welfare and safety net programs has significantly expanded over time.  The reason is, that unlike other Western countries, a great deal of funds nominally earmarked to fight poverty are diverted to other causes.  Most responsible for this are states with a tradition of aversion toward supporting poor people.  A good example is the refusal to expand Medicaid to provide health insurance to low-income people.

Further contributing to pushing poverty to the fringes of economic and public policy are prejudices built on myths divorced from factual reality.  Here are some of these myths that Desmond debunks.  Poverty is deserved because poor people are lazy or have low work ethic.  Both are wrong.  You can work full-time and still be poor in America.  Poor people use welfare funds on non-essential goods like tobacco and alcohol.  Wrong.  Better off people spend twice as much on alcohol than poor people.  Poor people are trapped in welfare programs and stop seeking work.  The evidence shows otherwise.  Poor people desire better lives like the rest of us and grab opportunities to become independent of government assistance.  The poor like to live on the dole.  Also wrong.  Desmond shows that the poor are less successful in utilizing government support programs than middle- and upper-class families.  In other words, poor Americans have lower take-up rates of public benefits than well off Americans.

There is also a wide-spread belief that the poor are a burden to society.  When we account for government funds lost to mortgage interest tax deductions, the untaxed health insurance benefits employees get from employers, various tax breaks and loopholes, and a host of other government support programs, the better off classes cost the government more than the poor.  Thus, in 2018, a middle-class family received $7,100 more in overall government aid than it paid in federal taxes.  More recently, the bottom 20% of the income distribution received $25,733 in government benefits but the top 20% received even more, $35,363!  If anything, we are all on the dole.  We can bemoan the widening budget deficits but we cannot blame the poor. 

If we are serious about reducing or, even better, abolish poverty, we need to treat it as part of a comprehensive economic policy.  Poverty is not inconsequential to the health of a society.  Poverty breeds less educated citizens, less skilled workers, broken households, underdeveloped children, unhealthy social habits, and crime.  Above all, it deprives people of their dignity and pride.  Poverty is a negative externality of the economic system that touches all of us.

It also steals the potential for a better society.  Desmond asks: “How many artists and poets has poverty denied us?  How many nurses and engineers and scientists?  Think of how much more vibrant and forward-moving our country would be?”