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Sunday, May 14, 2006

Poverty-level income is irrelevant

Poverty has been defined as income below a certain amount for several decades. Several commentators have pointed out that despite rising GDP and per capita income, the number of those in poverty has changed little. This essay will concern how our policies have perpetuated poverty in fact, leaving aside whether we have perpetuated poverty by the current widely-used, income-based definition. The argument doesn't not follow traditional Democrat/Republican paths, but is more holistic. I will argue that addressing poverty as an income problem is self-defeating, that addressing it systemically from the expense side is healthier in several senses, and that our political system makes this relative health improbable to achieve in the near term.

Poverty comes in several guises. There is an economic poverty, which I define as low income-minus-expenses, and on which I will concentrate. There is a status poverty, that Indians understand well (caste distinctions), and that fascinates Tom Wolfe in our own culture. There is an emotional, perhaps even moral, poverty, which would define the underclass as Charles Murray's writings suggest. I mention these different forms to acknowledge that poverty is multi-dimensional, endemic, and will probably "always be with us" due to genetic and social variation. We have little direct control over non-economic poverty, because we have little control over the driving forces that cause it in either other people or, most importantly, ourselves.

Economic poverty, defined as low income-minus-expense, is caused by our actions via government.

The problem starts with our solution: if poverty is cause by lack of income, let's give the poor money. For people who are less poor, let's give them less money. While money is good at least as a short-term medicine for poor people, doing so traps them in poverty. Why is that?

People trying to rise out of poverty face high marginal tax rates. Current, these rates are on the order of 15-30% when all taxes are considered. The exact rate varies depending on whether the person is married or has children. That is, for every dollar they earn, they pay high portions of that extra dollar in taxes. There is an additional higher marginal expense that has the effect of higher marginal taxes, in the form of reduced subsidies for expenses. Higher income causes reduced rent, food, and medical subsidies, for an additional effective tax rate of another 40-50%. Only when income reaches about $25,000, does the total marginal effective tax rate come down to normal.

There is thus an incentive not to increase one's income. Two actions cause this result: 1) giving a subsidy, together with 2) taking it away as income increases. Now let's look at the rent , food, and medical subsidies. Why do we have these?

Rent subsidies are part of a larger system. Every renter has a landloard, who bought the building, pays the mortgage, and pays for repairs, marketing, etc. Every landlord has a real estate market s/he bought the building in, and in which s/he will eventually sell the building back into. As homeowners we, too, are part of that real estate market. Rent subsidies have the immediate effect of helping the poor afford an apartment, and also have the effect of keeping the landlord profitable The landlord is thus willing to hang to his building for a higher price, because commercial real estate prices tend to be a multiple of the income derived from it. In turn, this tends to keep all real estate prices higher, since "comps," that is the prices of comparable properties, strongly affects prices. This begs the question of who exactly we are helping by subsidizing housing.

Food subsidies are part of a larger system. One of the relics of depression efforts to keep all prices high is food price supports. In addition to price supports, there are billions of dollars of agricultural subsidies. Thus food stamps are a grand bargain between agricultural states and the advocates for the poor. Food is more expensive than it needs to be, thus the poor need subsidies to afford it. Because the poor can now afford food, there is no moral or financial need to reduce food prices.

Medical subsidies are part of a larger system. Although this is starting to change in a small way (e.g. health savings accounts) we have a veterinarian system of medicine. That is, the patient isn't the payer. Since it is someone else's dollars paying for care, we care less about the price. Paradoxically, while the cost of health care is increasing, the income of physicians is stagnating or decreasing, because the intermediaries between doctors and us have significant control of the flow of care and dollars. As long as our care is subsidized, prices will remain high, thus providing a moral justification for medical subsidies for the poor (Medicaid). We pay taxes to keep the poor healthier, so we can justify our own subsidies for health insurance.

The solution is to reduce everyone's cost, both for us and the poor. The kinds of solutions that do this have been discussed ad nauseum, for over a century. There are focused constituencies who have prevailed in the political marketplace to maintain high prices at everyone's expense. This is called corporate welfare. This is called plain old welfare. The public choice people have shown how broad interests with low concern cannot defeat narrow interests with critical concern. The problem is endemic.

No society has solved the problem of poverty in free, developed economies anywhere on the planet. No one has solved the problem of complicity of the non-poor in poverty in free, developed economies anywhere on the planet. It isn't clear whether these two problem are 1)insoluble (perhaps Tom Wolfe's view, or perhaps he merely observes), or 2) correctible through the power of government (Liberal view for 100 years), or 3) correctible through greater freedom from government (Hayek, Von Mises view), or 4) correctible through better legal systems or other social engineering (i.e. not invented yet).


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