Charity, Welfare, Inequality, and Doom

Public debate of welfare and charity of late seems to come near-exclusively from two viewpoints: (1) the poor are poor by circumstance and must be helped by society; and, (2) the poor are poor because they are sub-par decision makers.  Poor by circumstance implies that poverty is not only inevitable, but that it will of itself perpetuate poverty and inequality.  Poor by choice appears to be an argument allowing the non-poor to “wash their hands” of the condition by laying it at the feet of those who practice it.  The former claims the condition of poverty finds remedy in government, while the latter professes that poverty is something to be dealt with by charity and moral encouragement.  If we combine Nouriel Roubini‘s dystopian future with the defenses of social charity and welfare of Elizabeth Bruenig, we find the argument of poor by circumstance well elucidated.  The poor by choice narrative is ascribed to “conservative America,” a place reportedly occupied by the uncaring.  The arguments of poor by choice are most soundly made and defended by Thomas Sowell, who entreats people to take responsibility for themselves.  These are gross over-simplifications of complex arguments; but, let it be noted that the two sides can hardly agree on not only the causes or remedies of poverty, but even what constitutes poverty.

Here is the government’s basic definition of poverty:

the Census Bureau uses a set of money income thresholds that vary by family size and composition to determine who is in poverty. If a family’s total income is less than the family’s threshold, then that family and every individual in it is considered in poverty. The official poverty thresholds do not vary geographically, but they are updated for inflation using Consumer Price Index (CPI-U). The official poverty definition uses money income before taxes and does not include capital gains or noncash benefits (such as public housing, Medicaid, and food stamps).

Here are the government thresholds for poverty in America based on total family income.

Size of family unit Weighted average thresholds
One person (unrelated individual)……. $11,888
  Under 65 years………………………… $12,119
  65 years and over……………………… $11,173
Two people……………………………….. $15,142
  Householder under 65 years……….. $15,679
  Householder 65 years and over…….. $14,095
Three people……………………………… $18,552
Four people………………………………. $23,834
Five people……………………………….. $28,265
Six people…………………………………. $31,925
Seven people…………………………….. $36,384
Eight people……………………………… $40,484
Nine people or more…………………….. $48,065
Source:  U.S. Census Bureau, 2013.

These dollar amounts are before taxes and, importantly, do not include transfers or government benefits.  (Transfers, as defined by the Congressional Budget Office, are “cash payments and in-kind benefits from social insurance and other government assistance programs.  Those transfers include payments and benefits from federal, state, and local governments.)  Here is what the income and tax distribution looks like in America, from the Congressional Budget Office (CBO) (with special thanks to Greg Mankiw):

These two tables show something insightful – transfers from the top two income quintiles, plus transfers from government borrowing, spread significant wealth to the lower three income quintiles.  What can we say now about poverty in America?  How about this: the US government has worked hard to make poverty less onerous for those in it.

To provide some historical context, imagine what poverty looked like in 1950’s America.  The National Poverty Center at the University of Michigan gives us some data:

In the late 1950s [sic], the poverty rate for all Americans was 22.4 percent, or 39.5 million individuals. These numbers declined steadily throughout the 1960s [sic], reaching a low of 11.1 percent, or 22.9 million individuals, in 1973. Over the next decade, the poverty rate fluctuated between 11.1 and 12.6 percent, but it began to rise steadily again in 1980. By 1983, the number of poor individuals had risen to 35.3 million individuals, or 15.2 percent.

For the next ten years, the poverty rate remained above 12.8 percent, increasing to 15.1 percent, or 39.3 million individuals, by 1993. The rate declined for the remainder of the decade, to 11.3 percent by 2000. From 2000 to 2004 it rose each year to 12.7 in 2004.

Since the late 1960s [sic], the poverty rate for people over 65 has fallen dramatically. The poverty rate for children has historically been somewhat higher than the overall poverty rate. The poverty rate for people in households headed by single women is significantly higher than the overall poverty rate.

The media in America insist that poverty is persistent, inequality is increasing, and intergenerational income mobility is declining.  In 2013, the CBO provides the official poverty rate as 14.5 percent, down from 15 percent in 2012.  In total, this data illuminates something critical about poverty: it correlates heavily to the business cycle.

Recessions occurred in 1957-1958, ’60-’61, ’69-’70, and ’73-’75.  The only recession to last longer than one year occurred between 1973 and 1975, during which unemployment reached 9 percent, over 1.5 percentage points higher than any other recession from the 1950’s through the end of the 1970’s.  In 1973, poverty reached is lowest point – 11.1 percent.  The following increase and elevated level of poverty from 1973 through the 1980’s correlates with significant inflation.  The early 1990’s marked the beginning of a long expansion of the American economy, during which poverty declined through 2000.  Subsequent to the technology bubble of 2001, poverty stayed relatively constant with small increases until the Great Recession of 2007 through 2009.  From there, poverty increased through 15 percent.  Here is another important note: in 1959 the population of America was just short of 178 million; in 2013, the population reached 317 million, and increase of 78 percent.  The United States added 139 million residents over the period from 1959 to 2013, and poverty as a percentage of the population stayed relatively consistent, fluctuating with the economy.  If the doomsayers of inequality were right, shouldn’t America’s poverty rate be increasing commensurate to population as the wealthy horde money?  Why then did poverty decline between 2012 and 2013?  Even if we accept that inequality is getting more dramatic in America (a difficult proposition to prove), we have no evidence that inequality leads to worse outcomes for those in the lower three income quintiles.

Which brings us back to our original two points of view: poverty as a choice versus poverty as a condition.  The fact that poverty is always with us, even in one of the world’s wealthiest countries, should indicate that poverty is in fact a condition of any economy.  But we can argue from what we now know of American poverty that its condition is better than almost any other country or at any other time in the world’s history.  Impoverished Americans frequently have cars, televisions, phones, social services, access to healthcare, and education for their children.  Americans living in poverty receive significant assistance for food, shelter, transportation, education, healthcare, and more.  This assistance is what leads to the argument that poverty has become a choice.

As social welfare programs piled up at local, state, and federal levels, conservative voices have argued that they fundamentally disincent work; that even those with work requirements can disincent recipients from trying to get better jobs or to work more hours.  It can only be true that income based welfare creates higher marginal tax rates for the poorest as aid is withdrawn at the same time that tax payments increase due to rising income.  Such a situation inevitably results in reduced incentives to work.  To argue that it does not is to make the converse argument that increasing payments for work at the margin do not incentivize more work – a clearly fallacious argument.

What is not clear is how this relates to the choices made by the American poor.  This is where many commentators apply a moral filter – that being a poor, single mother is the result of poor behavior, or that poverty induced by drugs is clearly the fault of the individual.  A word of caution: their ‘lived experience’ (as the phrase goes) does not have less intrinsic value – rather, the consequences of some behaviors are more severe for the poor than they are for the middle and upper classes.  Getting pregnant or arrested for drugs as a young person does more to guarantee poverty for a person from a poor family than for one from the upper two quintiles.  That is the nature of wealth: it can shield us from negative consequences.  Which makes the ‘poor morality’ argument a straw man argument.  Why should poor people be expected to have ‘higher’ morality than any others?  And to dispense with the counter argument that people from higher income families engage in less risky behavior, here is a quote from a paper in the American Journal of Public Health:

…some adolescent health risk behaviors appear to be disproportionately high among youths of color, lower-income adolescents, and those living in poverty, but these demographic factors do not predict youth health risk behaviors well.  Although descriptive analyses are never meant to explain a phenomenon, they often become a vehicle for organizing its understanding…. A small explained variance (R2), as was found in the current analyses, suggests that knowing race/ethnicity, income, and family structure provides little predictive power at the individual level.  Rather, the low R2 indicates tremendous heterogeneity of outcomes within racial/ethnic groups, income strata, and family structures.

This is not to say that income (economic status) has no impact, only that its impact is small and secondary to other factors, given by the same paper as attributes related to the individual in question.  Instead, income is more likely to be a predictor of neighborhood, school, or peer group, all of which have more impact on behavior than income alone.

The ‘choice’ of poverty is therefore an induced choice.  It is one made through many smaller decisions, none of which uniquely lead to or maintained poverty.  The behaviors described as perpetuating poverty among the bottom two income quintiles are frequently induced by the conditions that create high marginal tax rates – from which the top two income quintiles do not suffer.

We can qualitatively state that the argument between poverty as a condition and poverty as a choice is predetermined to make us decide between two contrasting view points.  The reality is more complicated (it always is).  At any individual level, a starting condition and subsequent choices can be used as clear ‘reasons’ for poverty.  At the aggregate level, the conditions are frequently stacked against those in poverty, such that their choices are optimal for their present experience, but may lead to reduced income mobility in the future.  Leaving aside moral or normative arguments, we can work harder to articulate more careful policies.  Policies that reduce high marginal taxes and generate incentives to work (and just as importantly, for employers to hire).  The breadth of possibilities is too much to discuss here – but it starts with rethinking the approach to welfare (which sustains), and potentially shifting it to a ‘charity’ styled approach (which assists) at the government level (although, government programs should never be discussed in the language of charity).

The condition of poverty is clearly going to be with us regardless of our economic system.  We should do more to acknowledge the role capitalism (along with strong institutions) and economic freedom has had in alleviating poverty.  Additionally, it should be acknowledge that government has historically done well to make poverty less onerous to those who are in it.  Future policy should move away from its focus on improving the condition of poverty, and toward reducing the barriers between poverty and the middle class.