Slides from my talk at the Luxembourg Income Study conference on “Inequality and the Middle Class.”
The conference papers are available online.
Archive for the 'Poverty' Category
The politics of helping the poor
July 1, 2010Social spending and poverty
June 7, 2010It’s commonly thought that a market-liberal political economy is best for the rich while a social-democratic one is best for the poor. Some recent research suggests reason to question this. Analyses by Willem Adema of the OECD, by Adema and Maxime Ladaique, and by Price Fishback conclude that the quantity of social expenditures in the United States is similar to or greater than in Denmark and Sweden, two nations long considered large-welfare-state exemplars.*
How so? Government social transfers account for a much larger share of GDP in Sweden and Denmark. But the U.S. government distributes more benefits in the form of tax breaks rather than transfers than do the two Nordic countries; Denmark and Sweden tax back a larger portion of public transfers than the United States does; private social expenditures, such as those on employment-based health insurance and pensions, are greater in the U.S.; and America’s per capita GDP is larger.
The standard indicator of social policy effort is gross public social expenditures as a percentage of GDP. Denmark and Sweden are much higher than the United States on this measure.
Now shift to net (rather than gross) public and private (rather than public alone) expenditures per person (rather than as a percentage of GDP, with purchasing power parities used to convert Danish and Swedish kroner into U.S. dollars). According to the calculations by Adema and Ladaique (Fishback’s are similar), we get a very different picture. By this measure the U.S. is the biggest spender.
This looks like good news for the poor in the United States. Is it? Unfortunately, no. These adjustments change the story with respect to the aggregate quantity of resources spent on social protection in the three countries, but they have limited bearing on redistribution and on the living standards of the poor.
Begin with tax breaks. Researchers count as “social” those designed to provide support in circumstances that adversely affect people’s well-being. In the United States these disproportionately go to the affluent and the middle class. The chief ones are tax advantages for employer and employee contributions to private health insurance and private pensions. These do little to help people at the low end of the distribution, who often work for employers that don’t provide health or retirement benefits. One valuable tax benefit for low-income households is the Earned Income Tax Credit (EITC), but it is already included in the standard OECD data on government social expenditures. Another is the child tax credit, but it is non-refundable and so of limited value to low-income households, many of whom don’t owe any federal income tax.
Next consider tax “clawbacks” in the Nordic countries. Public transfer programs in Denmark and Sweden tend to be “universal” in design: a large share of the population is eligible for the benefit. This is thought to boost public support for such programs. But it renders them very expensive. To make them more affordable, the government claws back some of the benefit by taxing it as though it were regular income. All countries do this, including the United States, but the Nordic countries do it more extensively. Does that hurt their poor? Very little. The tax rates tend to increase with household income, so much of the tax clawback hits middle- and upper-income households.
What’s the impact of private social spending? In the U.S. this accounts for roughly two-fifths of all social expenditures. It consists mainly of employer contributions to health insurance and employment-based pension benefits. Here too the picture changes a great deal on average, but not much for the poor. Employer-based health insurance and pension plans reach few low-income households.
So how well-off are the poor in the United States, with its “hidden welfare state,” compared to social-democratic Denmark and Sweden? One measure is average posttransfer-posttax (“disposable”) income among households in the bottom decile of the income distribution. Here are my calculations using the best available comparative data, from the Luxembourg Income Study (LIS). (The numbers are adjusted for household size. They refer to a household with a single adult. For a family of four, multiply by two.)
This is a pretty big difference, not in America’s favor.
In his paper, Fishback cites similar numbers from the OECD. He cautions, though, that “One advantage the poor Americans would have had in spending their disposable income is that they face consumption tax rates in the 4 to 7 percent range, while consumption taxes in the Nordic countries are above 20 percent.” Actually, consumption tax rates are incorporated in the purchasing power parities (PPPs) used to convert incomes to a common currency, so these income figures already adjust for differences in consumption taxes.
What’s the source of this cross-country difference in the incomes of low-end households? It’s entirely a function of government transfers. Again using the LIS data, I’ve calculated mid-2000s averages for households in the bottom income decile for the three chief sources of household income: earnings, net government transfers (transfers received minus taxes paid), and “other” income (money from family or friends, alimony, etc.). Average earnings are virtually identical across the three countries, at about $2,500. The same is true for “other” income, which averages around $500 in each of the three. Where bottom-decile Danish and Swedish households fare much better than their American counterparts is in net government transfers:
Fishback rightly points to one other key difference between these countries: “Public services not counted in disposable income, like health care and education, likely are better for the very poor in the Nordic countries than in the United States.” It’s difficult to measure the impact of services on living standards with any precision. One indirect way to assess their effect is to switch from income to material deprivation. Two OECD researchers, Romina Boarini and Marco Mira d’Ercole, have compiled material deprivation data from surveys in various rich nations as of the mid-2000s. Each of the surveys asked identical or very similar questions about seven indicators of material hardship: inability to adequately heat one’s home, constrained food choices, overcrowding, poor environmental conditions (e.g., noise, pollution), arrears in payment of utility bills, arrears in mortgage or rent payment, and difficulty in making ends meet. Boarini and Mira d’Ercole create a summary measure of deprivation by averaging, for each country, the shares of the population reporting deprivation on questions in each of these seven areas.
Government services — medical care, child care, housing, transportation, and so on — reduce material hardship directly. They also free up income to be spent on other needs. The comparative data, though by no means perfect, are consistent with the hypothesis that public services help the poor more in the Nordic countries than in the United States. The gap between the countries in material deprivation is larger than in low-end incomes.
Helping the poor is not, of course, the only thing we want from social spending. But it surely is one thing. The United States spends more money on social protection than is often thought, yet that spending doesn’t do nearly as much to help America’s poor as we might like.
For those interested, I’m finishing up a book manuscript that looks at this issue and related ones in more detail.
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* Related research: Adema, Garfinkel-Rainwater-Smeeding, Hacker, Howard. Blog commentary: Fishback, Salam, Schulz, Wilkinson, Yglesias.
America and the world
May 13, 2010Lecture slides for the “America and the World” section of my Social Issues in America course:
Prosperity in America
March 8, 2010Lecture slides for the “Prosperity in America” section of my Social Issues in America course this semester:
Public support for poverty reduction
January 12, 2009Ruy Teixeira reports on a recent survey which finds majority support for cutting poverty in half, even if doing so requires higher taxes on the wealthy and new government spending.
Obama’s Antipoverty Agenda
September 24, 2008Much of Barack Obama’s economic policy rhetoric is aimed at middle-class insecurity and anxiety, rather than poverty. On political grounds this is hardly surprising; there are a lot more middle-class voters than poor ones. And in the current economic climate, it seems reasonable. But his platform does include a variety of proposals that are likely to improve living standards for those at the low end of the income distribution. A few highlights (details here):
1. Health care
Obama’s health care proposal would extend affordable coverage to the 15% or so of Americans currently without it, many of whom are just below or a bit above the poverty line. And it would reduce health insurance costs for many who currently have it.
2. Earnings and incomes
He proposes to raise the minimum wage to $9.50 per hour in 2011 and index it to inflation. The following chart shows what that looks like in historical context (in today’s dollars and assuming an inflation rate of 2.5% over the next few years). Obama’s minimum wage would be pretty high, and indexing it would mean no more lengthy periods — such as 1981-1990 and 1997-2007 — of steady decline in its real value.
Obama would increase the Earned Income Tax Credit for working Americans with no children and for those with three or more children, though it isn’t clear by how much. As the next chart shows, the maximum EITC for those without kids is paltry at present, and families with more than two children get the same amount as those with two.
He also proposes a “Making Work Pay” tax credit of up to $500 per person or $1,000 per couple. This would be a rebate on the Social Security payroll tax (6.2%) paid on the first $8,100 of earnings. Like the EITC, a strength of this proposal in both policy and political terms is that it creates no work disincentive.
My preference would be for a bit smaller increase in the federal minimum wage and that the “Making Work Pay” tax credit money instead be used for an across-the-board increase in the EITC. Still, there is little indication from the historical record that a minimum-wage hike to $9.50 would reduce employment. And the “Making Work Pay” tax credit is attractive politically because it’s easier to pitch as a tax cut and because all middle-class earners will be eligible for it, whereas the EITC is available only to households with incomes up to about $40,000.
3. Paid sick leave
According to the Obama campaign, about three-quarters of low-paid private sector employees get no (zero) paid sick days from their employer. He proposes to require all employers to provide seven paid sick days per year.
4. Education
Obama proposes $10 billion in federal government spending to encourage and assist state efforts to expand early education for kids age zero to five. High-quality preschool is doubly beneficial from an antipoverty perspective: it facilitates employment by parents in low-earning households, and it tends to improve cognitive ability and noncognitive skills in kids from poor families.
A refundable (available even to those who don’t owe federal income taxes) tax credit would provide $4,000 toward college tuition, in exchange for 100 hours of public service work per year. This is about two-thirds of the average cost of tuition at a four-year public university.
There is more, including money for job placement, career pathways, transportation to work, community revitalization, and others. But the proposals I’ve highlighted would, if actually enacted in the next four (or eight) years, represent considerable progress in addressing poverty in America.
John McCain’s proposals? Well, search his campaign’s website and see what you find.
More on Inequality and Prices
May 21, 2008Will Wilkinson defends the notion of separate price indexes for the poor and the rich. I don’t have a problem with that per se. The point I tried to make in my previous post concerns its relevance for our assessment of how much inequality has increased.
In his original post on this, Wilkinson writes “If you think economic inequality matters, that’s because you think relative economic well-being matters. If you think economic well-being matters, then what you care about is consumption, not income.” I disagree. We should care about inequality of income not simply because it contributes to inequality of well-being, but also because it contributes to inequality of capability.
Even if consumption inequality has increased only a little, the rise in income inequality has produced a noteworthy increase in inequality of capability. The rich aren’t forced to purchase goods and services whose prices have increased more rapidly; they could switch to the same consumption bundle as the poor if they wished.
In my view the Broda and Romalis analysis is important for our understanding of (absolute) poverty, rather than inequality. They find that the prices of goods poor Americans tend to purchase have risen less rapidly than the overall inflation rate. I can’t assess whether they’ve accurately analyzed the data and how much measurement error the data contain. But if the finding is correct, it suggests that the trend in living standards for America’s poor was more favorable (or less unfavorable) between 1994 and 2005 than income data imply.
Has Ireland’s Rising Tide Benefited Its Poor?
May 18, 2008I’ve just returned from a week in Ireland. Since the mid-1980s the Irish economy has achieved rates of growth not seen in a rich nation since Japan in the 1960s. Ireland’s GDP per capita grew at more than 6% per year from 1987 to 2000, and at better than 3% per year in the 2000s so far.
Has this rising tide lifted all Irish boats?
One way to judge is by examining how the incomes of those at the bottom of the distribution have changed. The standard way to do this is via the poverty rate — the share of persons living in households with an income below the poverty line. The following chart shows poverty rates in 1987 and 2000 in Ireland and two comparison countries — Sweden and the United States. The data are from the Luxembourg Income Study database.
While the poverty rate in Sweden and the U.S. fell slightly over this period, it increased in Ireland. Really? Can it be that despite massive economic growth, things got worse for Ireland’s poor?
Well, it’s true that a large chunk of the economic growth during this period was due to multinational companies. Maybe most the proceeds of the growth went to their foreign owners. Yet even if that were the case, it’s hard to imagine how the Irish poor could have been left worse off than before. Lots more people were working; the employment rate jumped from 52% in 1987 to 66% in 2000. And this didn’t just consist of adding second earners in already-high-earning households; the share of working-age households with no employed member dropped by more than half. Moreover, wage levels among low-end workers rose (the statutory minimum wage is now €8.65 per hour).
The problem here lies in the poverty measure. In cross-country comparisons, poverty typically is measured in a “relative” manner: the poverty line used for each country is 50% of that country’s median income. That’s the mesure I’ve used here. Although this type of measure has some value, I don’t think it should be the headline indicator of poverty (more here and here). It depends too heavily on the distribution of income and too little on the absolute level of income. The reason Ireland’s relative poverty rate increased between 1987 and 2000 is not that households at the bottom became worse off in an absolute sense, but rather that the incomes of those households increased less rapidly than the incomes of households in the middle of the distribution.
The following chart offers a more useful way of gauging trends in poverty. It shows incomes at the tenth percentile of the distribution in the three countries. They’re adjusted for inflation and converted into U.S. dollars. (The incomes also are adjusted for household size. They represent those for a single adult; for a household of four, multiply by two.) These data indicate a sharp improvement in the incomes of Irish households at this low point in the distribution. In 1987 they were well below their Swedish and American counterparts, but by 2000 the gap had narrowed considerably.
The rising tide does appear to have lifted most Irish boats. One might, perhaps, complain that the degree of improvement has been disappointing given all that economic growth. But that’s quite different from suggesting, as the relative poverty measure does, that things have gotten worse.
This very helpful book has more discussion and analysis.
Absolute Poverty
February 20, 2008Paul Krugman suggests, using calculations by Tim Smeeding (see table 2), that the United States is second-worst among affluent countries on absolute poverty. I don’t think that’s quite right.
Smeeding calculates absolute poverty rates as of 2000 using two poverty lines — the official U.S. line and 125% of that line. The U.K. is higher than the U.S. using either line. Krugman suggests that the U.K. rate may be lower than ours by now due to the Blair government’s anti-poverty initiatives. That is possible — we won’t know until more recent data are available — but the U.K. rate as of 2000 was significantly higher than ours, so the progress would need to have been dramatic.
Sweden and Finland have lower absolute poverty rates than the U.S. using one of Smeeding’s lines, but higher rates using the other.
According to my calculations, using the same Luxembourg Income Study data, five additional countries that Smeeding does not include — France, Australia, Ireland, Italy, and Spain — have higher absolute poverty than the U.S.
Here are my calculations. They’re from this paper. I use absolute income levels at the tenth percentile of the income distribution (so higher is better) rather than poverty rates. I prefer P10 incomes because poverty rates ignore the depth of poverty, but the two approaches yield very similar results.
This is not to suggest that we should be satisfied with our absolute poverty ranking. Given our nation’s economic wealth, incomes for Americans at the low end of the distribution are far lower than they could be. And as Krugman rightly points out, and I discuss in detail here and here, an exclusive focus on income overlooks the relevance of work hours and of public services such as health care, schooling, and child care for the well-being of the poor.
Addendum: Contra Tyler Cowen’s suggestion, the data for the U.S. used here do include the Earned Income Tax Credit and Food Stamps (though not Medicaid).
Is Poverty Highest in the U.S.?
February 19, 2008No, it isn’t.
Poverty comparisons across affluent nations typically use a “relative” measure of poverty. For each country the poverty line — the amount of income below which a household is defined as poor — is set at 50% (sometimes 60%) of that country’s median income. In a country with a high median, such as the United States, the poverty line thus will be comparatively high, making a high poverty rate more likely. Measured this way, the U.S. does indeed have the most poverty among the rich nations. That leads to statements such as Paul Krugman’s in his otherwise insightful op-ed in Monday’s New York Times: “Poverty rates are much lower in most European countries than in the United States.” (See also here and here.)
Though widely used, and not without merit, a relative measure should not be the principal basis for poverty comparisons. It focuses too heavily on the distribution of income and too little on the absolute income level of those at the bottom. Using a relative measure, the U.S. poverty rate is higher than Romania’s and only slightly lower than Mexico’s (see here). Similarly, Mississippi’s relative poverty rate is the same as Connecticut’s.
I’ll say more about this in a future post. For now, if you’re interested there’s more in this paper and in this one (both pdf).
