Tag Archives: poverty

Undermining the Fed Through Minimum Wage

While reading The Wall Street Journal yesterday, I actually laughed at the content of one particular article.  The title was both intriguing and promising: “Just One Large City Saw Unemployment Rise From Last Year.”  Upon opening the article, I saw the graph shown below, with the title “Not Always Hot in Cleveland.”  As a Michigan fan, I laughed – just another reason why Ohio is an awful place.

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But while my biases made this article funny, the content of the article was actually quite inspiring.  On a national scale, unemployment fell over 1% from January 2013 to January 2014.  And in bustling metropolitan areas like Charlotte, unemployment dropped by more than 2.5%.  This data seems to suggest that while the Fed’s easy money policy has been slow, it is indeed working.  Slowly but surely Bernanke, and now Yellen, are pulling America out of its hole.

Unfortunately, I believe the federal government is on track to undermine all the hard work that the Federal Reserve has put in since 2008.  By raising minimum wage to $10.10 from its current rate of $7.25, the federal government will likely slam the brakes on the Fed’s steady progress.  A recent survey by Express Employment professionals shows that of the businesses currently paying minimum wage, more than 50% would slow hiring in the event of a minimum wage hike.  Furthermore, 38% of these businesses would lay off currently employed workers.  According to the Congressional Budget Office, the proposed $2.85 minimum wage hike will cost the United States 500,000 jobs by Q3 2013.  At a time when employment is really starting to recover (except for in Cleveland), I am fearful that an increase in minimum wage will cause the economy to stagnate, thereby undoing the Fed’s hard work.

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It is true that the Congressional Budget Office also predicts that an increase in minimum wage will help pull 900,000 Americans out of poverty by boosting income levels.  And certainly, reducing poverty is an extremely important goal.  However, I believe there are alternative ways to address income inequality that are less likely to undermine the stimulus enacted by the Federal Reserve.

I have already written numerous posts on addressing income inequality, and what I believe is a more important issue – income mobility.  (See “Using Skilled-Trade and Manufacturing to Rebuild the Middle Class,” “Drill Baby Drill: Addressing Income Mobility With Energy Production,” “Forget Minimum Wage – Let’s Talk about Wage Subsidies,” and “How New Immigration Policy Can Save America’s Economy“)

The majority of these posts focus on increasing the economic mobility of the poor so that they can have access to higher paying jobs.  I believe this type of policy is significantly better for the US economy because it avoids the level of deadweight loss that raising minimum wage will have.  Indeed, a boost to minimum wage is very similar to a tax, and the policies proposed in the articles above behave much more like subsidies.  While it is true that a subsidy, by definition, will cost the federal government more money than a tax, it is also true that a subsidy results in significantly less deadweight loss.  And at a time when the economy is just beginning to see the light of day, leaving any economic value on the table seems like a terrible idea to me.  For this reason, I strongly oppose raising minimum wage, at least currently, as doing so will undermine the efforts of the Fed, cause stagnation in employment rates, and hinder this country’s economic recovery.

The minimum wage can have major effects (revised)

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Last time I wrote about how in reality, the minimum wage in America is so low that it can’t even get the average person working full time earning it out of poverty.  It is low enough that some think it may be acting as a barrier to social mobility, a defining trait of the United States.  By considering what has happened in the past after wage increases, it will be clear that the only negative effects of increasing the minimum wage is on measurements of poverty.

While It seems obvious that increasing the minimum wage would decrease poverty (the wages increased, not the poverty level), there are those that argue it will have a negligible affect, since many poverty stricken people don’t work for the minimum wage.  Even though the increase can’t end poverty, as we will see, it can have an effect on it, and can therefore be an effective tool for addressing it.  Economic theory also predicts that with an increase in the price of labor the demand for labor would decrease, resulting in lost jobs.  This notion is not consistent with past results of minimum wage increases.

First, Consider Washington, the state with the highest minimum wage in the country at $9.32/hr., with future increases tied to the consumer price index.  Surely such an extreme example should support the assertion that increasing the minimum wage results in lost jobs.  In the 16 years since the law went into effect, Washington has been above the national average with respect to job growth.

Perhaps Washington was a fluke.  An even more extreme example can be found in San Francisco, which has gone to an inflation adjusting $10.74/hr., the highest minimum in the country at any level.  In addition it has laws requiring paid sick leave and health care spending.  What it doesn’t have is the predicted job loss. This can be seen in the following graph, which tracks the effect on the San Francisco restaurant industry, which employs the largest amount of minimum wage employees.

2023116010_t670As can be seen, it tracks the surrounding counties quite well, showing no large deviation, except perhaps a small increase of hiring after the addition of paid sick leave. Since San Francisco’s minimum wage laws don’t bind the surrounding counties, it is clear that the increased minimum wage, along with other benefits, have not resulted in job losses.  If two of the most extreme cases of minimum wage increases have not resulted in less jobs, there is little support to think that lesser hourly rates would result in any significant losses.

There are less surprising results for the economy, government spending, and businesses.  In this letter from the Chicago FED the effects of a $1.75 hike in the minimum wage are analyzed.  It finds that such an increase could lead to an increase in aggregate household spending, even after accounting for spending that was lost to increased costs.  Additional research also estimates that an increase in the minimum wage could result in a decrease in government spending for the SNP program (food stamps).   A growing collection of research shows that businesses that pay a higher wages receive less theft, higher productivity, and increased worker retention.

Having seen that increasing the minimum wage won’t harm society, we consider the economic outcomes of the workers themselves.  Research by Dube provides insight into how such increases have affected workers in the past.  Tracking the effects of the minimum wage on the distribution of family income from 1990 to 2012, he finds that the coefficient on the elasticity of the poverty rate is a statistically significant -.24.  Also statistically significant (at the 1% level) is the -.32 and -.96 coefficients on the poverty gap and gap squared terms, measures of how poor the poorest families are.  This provides evidence that “…minimum wage increases do not reduce poverty by merely pushing some families above the poverty line, but rather by increasing incomes substantially and further below the poverty line.”  More concisely, increasing the minimum wage decreases the portion of the population in poverty, as well as the depth of poverty.

Increasing the minimum wage is one of the most effective tools the federal government has to fight poverty.  The minimum wage should be increased to at least the same $10.10 an hour earned by federal contractors.  Past experience has shown that this will not result in the job loss that is threatened by businesses.  It is time for the United States to take the steps needed to guarantee that a full time worker makes a wage they can live on.

 

Poor man’s game theory

Happy St. Patrick’s Day!  Due to the holiday, I am holding off revising a previous post for when I can give it a more thorough treatment, and will instead motivate that post with this one.  The report “Work vs. Welfare” from the Cato Institute tries to assert that the welfare system in the United States provide such lucrative benefits that there is a disincentive to work.  This couldn’t be more inaccurate.  After correcting some of the paper’s mistakes, it will be clear that the solution is not to cut welfare benefits, but raise the minimum wage.

The 2013 report inflates the figures as much as possible; every number is the maximum possible award for that program.  More over, it assumes that every program is qualified for.  I am not sure if such a person exists!  There is also no mention of the time limits on some of the benefits.  While SNAP (food stamps), and many of the other programs have no limits, the much-maligned TANF (cash assistance) is limited to 24 months consecutively, and a lifetime limit of 60 months.  This cash assistance can’t be a significant incentive not to work, as it truly is temporary (Thats what the “T” stands for!).  It is also questionable to consider Medicaid, since even if they where working they may still receive it. Also, no other measures of income (hourly wage, salary, ect.) include healthcare.

Adjusting for these values, we get a more accurate picture.  Using the same family of three used in the paper, and taking Michigan as an example, we see that the amount available to entice people away from work is 5868(TANF) + 8344(Housing) +980 (WIC) + 750(utility credits) =15,942.  The poverty level is 19530.  Adding back in the temporary cash benefits of $6,312 provides $22,254.  In actuality the Cato’s Institute’s typical welfare family is spending time falling in and out of poverty with the availability of their cash benefits, assuming of course they qualify for the maximum in every single program.

Breaking this down to hourly rates, we see that on cash assistance, working 40 hours a week (the national average is 34.2), and working every week in the year, the family make $10.70/hr, and when they are without the TANF money, the family makes $7.66/hr.  The minimum wage in Michigan at $7.40/hr.

The minimum wage is far to low in the United States.  While the above analysis shows that it is technically possible to beat the minimum wage with benefits, even at the maximum amount it is only by 16 cents an hour, which is not much of an incentive.  What it does show however is a drastic shortcoming in the minimum wage.  Franklin Roosevelt championed a minimum wage as a living wage, proclaiming “No Business which depends for existence on paying less than a living wage to its workers has any right to continue in this country.”  In my next post, I will consider the economic ramifications of a minimum wage that would ensure the average full-time working American at such a wage would exceed the poverty threshold.

Increase the minimum wage to preserve social mobility

Greg Mankiw’s post this past Thursday regarding the minimum wage begs for discussion.  Perhaps it is because the post is nothing more then two links.  The issue of raising the minimum wage however is not that simple. Those that support an increase point to all the people that it could help, and argue that it wouldn’t cause damage to the recovery and may even help it.  Those that oppose the increase marginalize the effect and worry about distortions of the labor market.  While there is research to support the case that no negative effects would come from the increase, I feel there is a stronger case to be made.  While many are troubled by income inequality, I feel that a certain amount of inequality is both good and necessary.  What is far more important is social mobility.  The Federal Government should increase the minimum wage in order to maintain the social mobility that is critical to the United States economy.

Increasing the minimum wage can increase social mobility directly.  There is a lot of research to support the claim that an increased minimum wage results in things like increased productivity, higher employee morale, and increases employee retention.  Happy employees that are more productive and work at a job longer don’t stay entry level for very long.  By increasing the minimum wage, you can increase the workers chance of gaining the skills they need to command a bigger wage.  More money also makes it easier for them to make the decisions needed to get out of poverty, as research shows that those living in poverty actually suffer cognitive impairment because of it.  A little bit more of a margin for error could be all someone needs to be able to consistently make the decisions necessary to improve their life.

The current federal minimum wage is at $7.25/hr.  $7.25/hr. is low, representing roughly $15,000 a year, which is barely more then the federal poverty level for an individual of $11,670, before taxes.  Increasing the minimum wage to the requested $10.10/hr. may prove to have too much opposition, as the Congressional Budget Office predicts that could cost up to a million jobs through 2016.  In order to expedite the process by removing such arguments against an increase, an increase to $9/hr. could be implemented.  As the CBO paper shows, this would result in far fewer predicted losses.  It would also raise the annual income to $18,720/year, which provides a little breathing room above the poverty level.  It should be noted that states would still be able to increase their minimum wage if they felt conditions warranted an increase.  For instance, San Francisco has a rate of $10.74 (and an unemployment rate of 4.8%, well below the national average).  This reflects both the higher cost of living in the city, as well as the lack of negative effects of increasing the minimum wage, despite serious income inequality.

The opponents of the increase are right about something though. Increasing the minimum wage will not fix is poverty.  But this shouldn’t be the revelation that the opposition makes it out to be.  If minimum wage laws fixed poverty, then why are we still dealing with it?  Poverty is a complex social issue that depends on more then just income.  Increased social mobility can aid in the fight against poverty, by making it easier to better oneself and rise out of poverty.

The minimum wage in 1960 was $1.60/hr.  Adjusted for inflation, today that is $10.56/hr.  Increasing the minimum wage, and the benefits that come with it like worker retention and increased productivity increase social mobility by creating paths out of poverty.  Even though you can’t make someone take such a path, it must be available to everyone.  To encourage this, the minimum wage should be increased to at least $9/hr. in order to preserve the social mobility that has been a hallmark of the United States since it was founded.

CBO’s Ambiguous Minimum Wage Statistics

The Wall Street Journal, New York Times and Washington Post all reported about the CBO’s recent minimum wage report. There is one important piece of information to take away from it. If the government were to raise the minimum wage to $10.10, 16.5 million people, who work low-wage jobs will have better salaries, but 500,000 people will lose their jobs. Annie Lowrey of the Times mentions that it would bring 900,000 families out of poverty.

If one were to analyze these numbers, a few conclusions could be drawn. One of them being that millions of people will have better salaries to live off of. Another conclusion is that 900,000 families will be lifted out of poverty, but 500,000 people will lose their jobs. Let’s assume that the families of the 500,000 people, who would lose their jobs, would sink into poverty. Using simple math, we could conclude that 400,000 fewer families will be under the poverty line. That is the way I see it.

This can be construed in two ways. On one hand, it does seem that this raise in the minimum wage would save more people than it would hurt. It would also reduce poverty in the country. 400,000 fewer families could be saved from poverty. This could mean that consumption would be stimulated and the economy could recover at a better rate than it has recently.

On the other hand, 500,000 people will lose their jobs. This will add to the nation’s existing problem that is unemployment. This has been a problem since the recession, so about five and a half years. The unemployment rate could rise to a dangerous level. It would not be fair to the those 500,000 families who sink into poverty because their breadwinners lost their jobs. It would be reasonable to think that these families would view the results of this new wage to be unfair. Essentially, this could create a vicious cycle of poverty and unemployment. Some people could be saved with a higher wage, while others end up paying the price.

In my opinion, this raise in the wage seems like a bad idea. Although some families are saved, others end up suffering. There is a trade-off between poor families and families to be lifted out of poverty. A family that ends up experiencing negative effects of this wage will wonder something along the lines of “why me?” or “what did I do to deserve this?”. We cannot make people better off without making others worse off.

 

Income Inequality

It seems like as long as America has existed, equality has been a key virtue.  Thomas Jefferson opined in the Declaration of Independence that “all men are created equal“, and I believe that value has stuck in American society as a whole.  Lately, there has been much discussion of the topic of income inequality, namely how income inequality is at an all time high, and also how incomes of the richest people in America are growing substantially faster than poorer people.  However, I believe that much of the discussion of this issue is misguided and misinformed, either by asking the wrong questions or misusing the data.

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Those most opposed to income inequality often point to the fact that the richer someone is, the richer they are getting.  You have probably seen graphic likes the GIF to the right (click to make it work).  The graphic shows how the incomes of the top 1% are skyrocketing compared to the bottom 99%.  However, this GIF is a typical overstatement of the probably for income inequality.  The researcher behind this study, defines income as “pre-tax cash market income — wages and salaries; dividends, interest, rent and other returns on invested capital; business profits; and realized capital gains”.  This is to say, no tax payments are incorporated into the GIF.  However, considering that the top 1% pay a higher tax rate than the the bottom 99%, this graph overstates the problem with income inequality.

after-tax-income-growth201207251048

While it is true that wage growth for that top income earners is far higher than for low wage workers, the more important question to ask is whether low wage workers are better or worse off.  The chart of the left illustrates that while top earners have seen a much larger increase in wage over a 28 year-period, real income growth for the lowest quintile was about 25%.  Is the fact that top incomes increase more rapidly a problem?  Clearly wage increases are not a zero-sum game; the top earners are not necessarily benefitting at the expense of the poor.

Another measure that is used for income inequality is the Gini coefficient, which attempts to fix into one number how wages in a country are distributed, on a scale from 0 to 1, where 0 is perfect equality, and 1 is perfect inequality.  The following chart show 2000’s Gini coefficients:

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The before-tax Gini coefficient of the United States is actually fairly close to places typically well known for high equality, like Sweden, Finland, and Norway.  However, the U.S.’s post-tax Gini coefficient is the highest of any of these nations.  This suggests that through taxes, all these other countries do a better job of redistributing income.  Critics equate this to mean that the U.S. doesn’t have a progressive enough tax system.  However, a 2008 study by the OECD indicated that the U.S. actually has the most progressive income tax system out of the OECD-24 nations, which includes all of the richest European nations (With the recent increase on taxes to the highest income bracket in the U.S., our system can only be more progressive now than previously).  How does this all make sense, one might ask?  Although I’m not entirely sure, one solution is that higher overall taxes, on all people, would create such an effect.  By the government taking, and redistributing a higher percentage of the income of the nation overall, the Gini coefficient will be lower, but could also lead to a less progressive tax system.

However, the most important issue with income inequality is “Is it necessarily bad?”  For a long time, many economists theorized that inequality was good for growth (because inequality might boost investment).  I think such a theory has some truth to it; I believe that an economy with perfect income equality would stagnate quickly because incentive to work would plummet.  In it’s recent revision of the long-term effects of the ACA, the CBO essentially admitted that an increase in the marginal tax rate makes people want to work less.  Recently, many economists have started to believe that perhaps income inequality hinders growth, but have had difficultly proving this empirically.

I think that much of the ire directed towards income inequality is actually misdirected.  For example, the problem of poverty is not the same thing as income inequality.    As I explained earlier, real incomes can rise both for the poor and the rich, even if income inequality is increasing. If the total amount of income in the economy was fixed, then income inequality would “cause” poverty, but this is not the case.  Income inequality does not cause poverty; low wages, not enough jobs, and many other factors cause poverty.

(Revised) Time to Raise the Minimum Wage

It has been over four years since the last time there was an increase in the hourly minimum wage for workers in the United States. And it now seems like the time has come for the government to raise this amount from the $7.25 at which it currently stands. President Barack Obama among others believes that a minimum wage increase up to about $10.10 per hour can have an effect of lifting a sizable group of low-income workers above the poverty line. “Americans overwhelmingly agree that no one who works full time should ever have to raise a family in poverty,” Mr. Obama said. I, of course, am on board with this sentiment, but in my opinion, this would not be the only beneficial result of raising the minimum wage. Raising the minimum wage to $10.10 would not only be helpful for the poor, but for the lower middle-class as well. Such an increase would not hurt anyone in terms of loss of employment, and would have significant earnings effects.

Starting from my first point though, “an hourly minimum of $10.10, for example, as Democrats have proposed, would reduce the number of people living in poverty by 4.6 million, according to widely accepted researchwithout requiring the government to tax, borrow or spend.” So clearly this minimum wage increase would benefit a substantial group of people and significantly change their lives. Moreover, evidence from over the years utilizing wage effects across states demonstrates that minimum wage increases do not result in job losses. This alone would be convincing enough for me to hop on board with this policy change. However, as I mentioned, there would be at least one other favorable outcome from a minimum wage increase. Overall, an increase from $7.25 to $10.10 could total in a $4.0 billion monthly benefits yield. And while only about 11% of these benefits would be received by the working poor, and 25% by the poor (or near-poor) families, 62% would be received by households with incomes over two times the poverty level, and 40% by those with incomes over 3 times the poverty level. There are certainly people who would use this to argue against a minimum wage raise because the benefits are not mainly reaped by the lowest-income workers (those who the policy is meant to help). However, I see this as an even more advantageous result of such a wage increase.

If raising the minimum wage at this point in time would help out the broader working class as well as those living in near-poverty (or poverty), then that is all the more reason to put this increase into effect. It is not like those households with incomes just over two or three times the poverty level are living a life of luxury. They are still not making a ton of money and could certainly use these potential benefits as well. Furthermore, going by the most significant economic benchmarks (purchasing power, wage growth, and productivity growth), the current $7.25 minimum is much too low and even the proposed $10.10 minimum is still not high enough. That being said, the increase to at least $10.10 is necessary, if not to an even higher minimum.

Looking at it from a purely economical point of view, the extra money that households with incomes below three times the poverty level (60% of the monthly benefits would be received by this group) receive is very likely to be spent, which is obviously a good thing for everyone involved. This group of people get to have a bit of extra spending money (whether immediate, or a portion for the future to be spent on things like a college education) and the economy benefits as a whole from the extra money being injected into it. Certainly, the debate over whether to raise the minimum wage is a nasty one with no clear cut answer, but I truly believe that these main effects of an increase are reason enough to do so; nobody gets hurt, and many people benefit. It will definitely be interesting to see how this unfolds in the near future.

Robert Rector’s Misplaced Criticism

Robert Rector, a senior research fellow at the Heritage Foundation, has a piece in the Wall Street journal today attacking Lyndon B. Johnson’s War on Poverty (to see my response to Paul Ryan’s attack on the War on Poverty, click here). Rector goes a bit hay-wild, essentially saying that the War on Poverty was worthless:

LBJ promised that the war on poverty would be an “investment” that would “return its cost manifold to the entire economy.” But the country has invested $20.7 trillion in 2011 dollars over the past 50 years. What does America have to show for its investment? Apparently, almost nothing: The official poverty rate persists with little improvement.

Rector uses some very sneaky rhetoric here: he’s right that the poverty rate hasn’t improved in a good while, but he presents that as evidence that the War on Poverty was ineffective. To test this claim, let’s take a look at the data from the U.S. Census Bureau tracking poverty rates (the red line indicates the announcement of the War on Poverty by Johnson; some of today’s well-known programs like Medicaid were introduced in 1965):

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Contrary to Rector’s view, poverty rates fell significantly in the years following the introduction of the War on Poverty. That’s certainly not nothing. True, the poverty rate was declining even before the introduction of the War on Poverty, but the rate of decline clearly increased after 1964/1965. The stagnation of the poverty rate did not happen until ten years after the program was introduced. If you really wanted to blame a political institution for this, you could look into the administrations of Nixon, Ford, Carter, and Reagan, all of whom took office in the years surrounding 1975. A better approach, I think, would be to realize that the War on Poverty had its limits, and it is time we  think of innovative ways to alleviate poverty.

Rector suggests the following:

As the economy improves, the government should require able-bodied, non-elderly adult recipients in federal welfare programs to work or prepare for work as a condition of receiving benefits.

What exactly Rector means by “prepare for work” is unclear. If he means attending school, it is a misguided recommendation — there are plenty of worthwhile careers whose training is on-the-job.

I know, I know — I’ve done a lot of criticizing on this blog, but very little in the way of suggesting ideas better than the ones I (attempt to) confront. Perhaps continuing with my poverty theme I’ll investigate some innovative, potential solutions.

(Revised) World Poverty- Better Than We Think

It is very common for us to hear, and say, that the world’s most pressing issues are war, disease, poverty, etc. Indeed, these are problems humanity faces today, and has been facing for all of history. Complex, far-reaching complications like these deserve our attention always. But the focus of this post is on poverty, in which we have made colossal improvements, despite popular belief.

The kind of poverty with which we are concerned is absolute poverty, not relative (which measures well-being compared to others in the same area). The World Bank defines poverty as “pronounced deprivation in well-being. The conventional view links well-being
primarily to command over commodities, so the poor are those who do not
have enough income or consumption to put them above some adequate minimum
threshold.” That threshold has been defined as $1.25 per day (although $1.50 or $2.00 per day are at times used instead).

First, people tend to focus on the negative statistics of poverty. Of course the fact that in 2010 21% of households in developing countries lived below the extreme poverty line ($1.25 per person daily), deserves our attention and is not to be understated. But the usually-overlooked side of the statistic reveals that just 30 years earlier (in 1980) the figure was at 52%. That is quite an astonishing improvement in such a short period of time. An article from the New York Times has a very optimistic take on this issue. It quotes that “In April, the Development Committee of the World Bank set the goal of ending extreme poverty by the year 2030. More recently, the United Nations General Assembly working group on global goals concluded that “eradicating poverty in a generation is an ambitious but feasible goal.””

Many popular myths about poverty often undermine the potential to eradicate it. An article from the WSJ explains the three main ones: that poor countries are doomed to stay poor, foreign aid is a waste, and saving lives leads to overpopulation. To say that poor countries are doomed to stay poor is to have a very ignorant take on history. Many of the world’s richest, and fastest-growing countries today were once very poor (such as South Korea, China, Thailand, Brazil, Peru, Mexico, and India). This is not to say that poverty traps are not real, they very much are. But it is quite possible to overcome them. The article predicts that “by 2035, there will be almost no poor countries left in the world.” This is a very ambitious prediction, of which I too am skeptical, but experts seem to agree with the general positive trend of eradicating poverty in the 21st century.

Also, as the article outlines, foreign aid is a significant factor in getting countries out of poverty traps. The issue of corruption is evident, but it is not significant enough to stop helping these countries altogether. The article states “we’ve heard plenty of people calling to shut down aid programs if one dollar of corruption is found. But four of the past seven governors of Illinois went to prison for corruption, and no one is demanding that Illinois’s schools be shut down or its highways closed.” It is also not the case that countries become dependent on aid- Brazil, Mexico, Chile, Costa Rica, Peru, Thailand, Mauritius, Botswana, Morocco, Singapore and Malaysia have grown so much that they barely receive aid today. This being said, there is much debate about whether aid is actually helpful. Kenneth Rogoff summarizes the argument against foreign aid, stating that it is often misdirected, misused, it puts a strain on local resources, and that most of today’s biggest economies grew without the help of aid. (Thanks mhupp for the link to this). Unfortunately, it is difficult to know the effects of aid with certainty. However, it is true that under-developed countries today are trying to emerge into existing global markets, whereas growing countries in the past basically created the global markets.

Lastly, the idea that saving people will lead to overpopulation is, in my opinion, the most ridiculous one. Not only is it inhumane, but it is entirely wrong. As countries develop, their death rates fall and birth rates fall soon after. The general trend indicates that development leads to a sharp decrease in population growth. Many of the world’s richest countries today are in fact headed in a negative population-growth direction (like Germany). It is simply not true that feeding poor people will just produce more poor people. Education, medicine, and contraception are the key to reducing birth rates, for which aid is often necessary.

In sum, the eradication of poverty is much more feasible than we tend to think. The myths we often use to disprove the idea of eradication, are found to be completely wrong. Looking at the vast improvement in poverty over the past 50 years is not reason to sit back and feel accomplished, it is reason to work harder to eradicate it because the end is in sight. Of course, there will always be “poor” people compared to others (i.e. inequality)- which is a separate issue. But the poor we are concerned with (for now) are ones who cannot eat enough to work, and live. Putting an end to this kind of poverty will propel countries into development, and make everyone in the world better off.

(Revised) The War on Anti-Poverty (Slightly Mathy)

Paul Ryan has a column in the Wall Street Journal attacking anti-poverty programs of the type President Johnson introduced 50 years ago, saying that they encourage people to stay poor:

And because these programs are means-tested—meaning that families become ineligible for them as they earn more—poor families effectively face very high marginal tax rates, in some cases over 80%. So the government actually discourages them from getting ahead.

The first problem with his argument goes back to econ 101: the marginal benefit of money tends to be very high at low income levels. That means that even if poor families face an effective marginal tax rate of 80%, the extra 20% that they do get by earning above the poverty line is worth a lot — probably enough to incentivize the extra effort . After all, when your cupboards are empty or your child needs new shoes, taking home an additional $20 is really important; if you have to do $100 worth of labor to obtain it, so be it.

What is more, even if the marginal tax rate were 100%, it’s still a hard sell to say that people would choose to stay impoverished. To see why, consider a poor family of three, just at the threshold of poverty: they make $19,530 per year, and their actual income is $19,530 + B where B is benefits received from the government. A Ryan-type argument is that people are discouraged from earning $19,530 + B before benefits because their net income would not change: it would be $19,530 + B + B – B = $19,530 + B. They would have put in extra work for no real gain. The problem with that argument is that after the initial loss of benefits, the effective marginal tax rate for this family is much smaller again. When they earn $19,530 + B + 1, they get to keep much more of that extra dollar because they don’t have benefits to be taken away this time.

So, with little exception, no one has an incentive to stay poor. And is that really so surprising?

Anyway, let’s take a look at the actual effects of the War on Poverty. It’s definitely a debatable topic, but this data from the US Census Bureau tells us a lot:

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The decline in the poverty rate indeed seems to have accelerated after 1964 (when the War on Poverty was announced), but whether Johnson’s programs caused that is up for debate. But this graph does tell us that the War on Poverty didn’t cause greater or stagnant poverty rates.

So, this whole War on Anti-Poverty thing is really quite unfounded.