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publius’ digest: american poor edition

This post will look at understanding the American poor, and critique some of the efforts to help them. This post will not cover education (my top priority for the American poor), health care, or trade, which I cover under those ‘tags‘ specific to those categories.

I agree with the Dems that alleviating poverty is a moral call which also has positive externalities for all. I depart from the Democratic party line when they talk about relative poverty or inequality. I believe that relative poverty ‘justice’ is not rooted in an objective assessment of the negative consequences of income disparity (though I would love to see such a study of income disparity, not poverty, effects), but an emotional, superficial gut reaction to seeing the wealth of others when many are in need. I am concerned with advancing the condition of those in need, but I believe relative poverty taints the moral imperative of poverty alleviation with jealousy and envy — relative status warfare.

While I am not very concerned with the cries of relative poverty, I am concerned with the decline of wage growth for many Americans. Growing income inequality is caused by the returns to highly-skilled labor outpacing the returns to low-skilled labor, of which there is an abundance outside of America with workers who have much worse options than the American poor. Americans whose labor does not add value over the global poor’s labor are seeing their income and job security decrease. I explore this with the ‘education‘ tag.

People like Barbara Ehreneich do a disservice to the debate on how best to help the American poor with their narrative of class warfare. She is wrong in saying that total compensation has stagnated since 1981, and (more importantly) wrong in linking compensation to class warfare, instead of productivity. She is wrong in implying that the presence of high CEO pay is what is holding back the American poor’s compensation (instead of the value of their skills).

While wage growth has been leveling off, the past 15-20 years made it much cheaper to clothe and feed poor families due to the benefit of global trade (inflation on ‘poor’ goods is less than that of ‘rich’ goods); so income inequality statistics also undervalue the improved well-being of the American poor by ignoring how much further a dollar goes for a poor American in 2008 as compared to 1985.

As I near the end, I’ll look at housing policy and the minimum wage as examples of policies I think are not helpful, and representative of many efforts from the left aimed at helping the American poor.

Housing policy had noble aims, securing the poor by making it easier for them to own homes, but the policies created a huge industry built on taxpayer guarantees of inherently risky lending — a very bad idea. Better plan would be checks/vouchers for putting towards a down payment, if home ownership is really something we want to incentivize in the first place. Rent control is another well-intentioned bad idea; the real solution to low-income housing is making it easier and cheaper to build new housing. Increase the supply, you’ll lower the cost of renting and buying.

Meanwhile, the minimum wage increases the cost of employing low-skilled workers. If a poor person’s labor is worth less than $6.55 an hour, you don’t help that person by making it illegal for anyone to profit from hiring them. Thankfully, the wage floors are low enough that they don’t make a difference one way or another — they are political distractions from real anti-poverty programs like the EITC.

In both cases, I think that assistance that takes the form cash transfers either through tax refunds or through vouchers are preferable. If we want to guarantee a ‘living wage,’ then let’s use the tax system to subsidize their income, not create incentives to buy houses they can’t afford or create a wage floor.

Overall, Americans making $2,000 a year are still in the top 18% in the world, and the great majority of the American poor are doing just fine by world standards. Immigration is by far the number one ‘American poor’ issue. I’ll explore it later, but it trumps every other issue as both a moral imperative and in the interest of the American economy. More generally, global welfare rates higher as a moral cause worthy of investment than the American poor. That said, we should should spend more time thinking creatively about education, as well as slums, or poverty traps, (different than simply low-income areas), which cannot be corrected by providing more money, but still demand attention.

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Filed under: Economic Policy

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