Contrary to what you may have heard – governments can always reduce poverty if they choose to

For years, students have been taught that fiscal policy is an ineffective policy tool to regulate fluctuations in national income derived from changes in spending and saving decisions in the non-government sector. This narrative justified the austerity purges that we have become accustomed to pre-pandemic. The elevation of the fiscal surplus to some desired goal has been instilled in our minds and we have voted to support governments that record these surpluses because we have thought they were being fiscally responsible. The GFC, and, more recently, the pandemic has helped undermine that narrative as people have realised that the only thing between them and hunger has been government spending. The ‘market’ hasn’t helped them. The evidence that government spending has reduced poverty and created opportunities for families that were not previously possible is strong. One such measure is the – Supplemental Poverty Measure (SPM) – which was first published by the US Census Bureau in 2011. This blog post records my notes on that data release.

The US government began publishing estimates of official poverty in the 1960s and the topic has sparked many papers, studies and conferences.

The problem with the early measures is that they did not explicitly take into account the impact of “many of the government programs designed to assist low-income families and individuals.”

The SPM was introduced in 2011 to address this shortcoming and it gives us a better guide to the benefits derived by those at the bottom of the income and wealth distributions from well-crafted government spending.

Poverty in the US 2020

The latest data (2020) – Table B-1. People in Poverty by Selected Characteristics: 2019 and 2020 – shows that:

1. The poverty rate rose from 10.5 per cent in 2019 to 11.4 per cent in 2020 (an extra one percent of peple in the US entered poverty over that period). That amounts to 37.2 million Americans living in poverty.

2. In 2020 – 19.5 per cent Black; 17 per cent Hispanic; 8.2 per cent White (not Hispanic); 8.1 per cent Asian.

3. 12.6 per cent female, 10.2 per cent male.

4. 28.8 per cent of those who did not work; 1.6 per cent those who worked full-time.

5. 16.1 per cent of those under 18, 10.4 per cent 18-64, and 9 per cent of 65+.

6. 24.7 per cent No high school diploma; 13.2 per cent High School, No College; 8.4 per cent Some College; 4 per cent Bachelor’s degree or higher.

So the characteristics point to behaviours and circumstances given constraints that will indicate poverty.

And, of course, they are all systematically related through family circumstance, education levels, labour market opportunities, etc.

You can find more detailed information and discussion in the publication – Income and Poverty in the United States: 2020 (published September 14, 2021).

What impact do government spending programs have on recorded poverty in the US?

The latest – The Supplemental Poverty Measure: 2020 (published September 14, 2021) – provides estimates of how the raw poverty data is altered once government programs are taken into account.

This Table from the 2020 SPM Report shows the differences between the Oficial Poverty Measure and the SPM in terms of what is measured, how and when.

One of the important differences is that the official measure include “cash benefit from government (e.g., Social Security, unem- ployment insurance benefits, public assistance benefits, and workers’ compensation benefits)” but ignores “taxes and noncash benefits aimed at improving the economic condition of the population.”

The SPM includes all the income elements and subtracts expenses “such as taxes, medical expenses, and expenses related to work.”

So, usually, the SPM poverty measure is higher than the official measure as a result of the non-discretionary imposts that individuals have to bear.

In 2020, something different happened.

I assembled the next table to help me understand the differences between the Official poverty estimates (by characteristic) and the SPM estimates for 2019 and 2020.

There is a lot of detail in the Table but with patience you start to see what has been happening in the first year of the pandemic with the shift in government assistance.

The main findings using the SPM are:

1. Using the Official poverty measure (unadjusted for government programs) the poverty rate in 2019 was 10.5 per cent rising to 11.4 in 2020, whereas using the SPM measure poverty in 2020 fell sharply from 11.8 per cent in 2019 to 9.1 per cent.

2. All major age categories experienced a decline in poverty using the SPM.

3. “The 2020 SPM rate of 9.1 per cent was the lowest rate since estimates were initially published for 2009”. So even with a raging pandemic, which impacted mostly on lower income individuals and families (not the least due to who got sick and who was most exposed by the restrictions and lockdowns), poverty fell as a result of the fiscal intervention.

4. “Social security continued to be the most important anti-poverty program, moving 26.5 millions inidividuals out of poverty.”

5. “Stimulus payments, enacted as part of economic relief legislation related to the COVID-19 pandemic, moved 11.7 million individuals out of poverty. Unemployment insurance benefits, also expanded during 2020, prevented 5.5 million individuals from falling into poverty.” Read that again.

This graph (Figure 8 in the 2020 SPM Report) shows the change in the number of people in poverty in 2020 as a result of different government programs in the US.

The 2020 SPM Report notes that:

… shows the effect that various additions and subtractions had on the number of people who would have been considered poor in 2020, holding all
else the same and assuming no behavioral changes … This allows us to examine the effects of government transfers on poverty estimates … allows us to compare the effect of transfers, both cash and noncash, and nondiscretionary expenses on numbers of individuals in poverty, all else equal …

When including stimulus payments in resources, 11.7 million fewer people were considered poor, all else constant. On the other hand, when the SPM subtracts amounts paid for child support, income and payroll taxes, work-related expenses, and medical expenses, the number and percentage in poverty were higher.

So we get a very clear picture of how government spending and tax and tax-type imposts impact on the non-government sector poverty rates.

It is very instructive and provides a guide to most effective ways in which the US government can reduce poverty further.

Note the damage that Medical expenses causes – which apart from any other consideration is a reason for having a universal health care system as we have in say Australia (and most nearly everywhere – except the US (plain stupid)).

Looking back at my Table, the reason that SPM poverty is higher in 2019 than the Official rate is because of the

The Census Bureau conclude that given the scale of the stimulus interventions to deal with the Covid pandemic:

… in 2020, for the first time in the history of the SPM, poverty is estimated to be lower using the SPM than using the official pov- erty definition.

That is a telling result.

So while the official poverty measure rose in 2020 as a result of the hardships arising from the pandemic (lost income etc) the SPM fell because the private losses of income were more than offset by the stimulus boost.

That boost included the widening of the social security safety net, and other income payments which more than compensated for the wages lost in the job losses.

Conclusion

The lesson is very clear.

Poverty is a largely a political choice given sufficient real resources. It reflects a mal distribution of those resources and the currency-issuing government can always change that mal distribution as the 2020 evidence from the US shows clearly.

Poverty reduction plans that involve all sorts of supply-side work tests and policies that make it harder to gain access to income support – which have been the hallmark of neoliberal activation policies (designed to ‘incentivise’ people) fail because they fail to understand the basis of poverty.

Poverty is a lack of income and for most people of working age that is due to a lack of work.

The introduction of a Job Guarantee which provides a socially-inclusive wage (above the poverty line) would all but wipe out poverty in advanced nations and significantly reduce it in poorer nations that struggle with overall inadequacy of resources.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.