Tag Archives: poverty

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.

Starting from that point though, “Increasing the wage to $10.10 raises two million people out of poverty,” Ms. Kugler said. “Stagnation of the minimum wage has led to rising inequality at the bottom end of the pay distribution.” So clearly this minimum wage increase would benefit a substantial group of people and significantly change their lives. 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 would total in a $4.0 billion monthly benefits yield at best (i.e., if no minimum wage workers lose their jobs or have their hours cut). 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 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. 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. It will definitely be interesting to see how this unfolds in the near future.

A More Sensible Food Stamp Policy

If you remember to way back in September, you’ll recall that the House narrowly pushed through a bill that slashed food stamp benefits substantially (thankfully, the bill did not pass through the Senate). The House pointed to the fact that the expenditures were getting out of hand even as the economy was recovering and that the program was highly abused. In contrast, just today the house passed a more moderate bill with bipartisan support that cuts food stamps by only about 1%. This seems to me the much more sensible option because food stamps play an important role in the economy’s health.

But why, in this economy, might we cut food stamps at all? The Republicans were right to point out that there is a lot of abuse in the program — for instance, the USA Today article points out that in the past a person could automatically obtain food stamp benefits if they received as little as a dollar in heating assistance; with the new bill a person will automatically receive benefits if they receive at least $20 in assistance.

That said, the bill the House Republicans passed last year was much too drastic, and we should be glad that a more sensible bill has passed. First and foremost I would suggest this is because we have a duty to be compassionate toward the poor. But if you’re a bit — er — Scroogier, and need some extra convincing, think back to your intro macro days and recall the concept of the Keynesian multiplier.

The multiplier in its simplest form is expressed as 1/(1-mpc), where mpc, a value between 0 and 1, is a group’s marginal propensity to consume. Poor people tend to have a very high mpc because after they buy groceries, pay rent, and take care of other necessities, there is not a whole lot left over for saving. This means that for poor people, the denominator of the above fraction is very small, so the multiplier is particularly large. Thus a dollar given to the poor leads to significantly greater than a dollar of output in the overall economy.

So, big victory today. The next question is whether our legislatures will remain sensible, and whether the passing of this bill is a sign of newfound unity between the parties or a fluke in the political machine. I’m pulling for the former, though I know actually believing that would be optimistic to the point of foolishness. Still, little victories.


The War on Anti-Poverty (Slightly Mathy)

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

And Washington is deepening the divide [between the poor and middle class]. […] 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 here goes back to econ 101: the marginal benefit of money tends to be very high at low income levels and lower at high income levels. That means that even if poor families face an effective marginal tax rate rate of 80% (which I’d like to see evidence on, but whatever), the extra 20% that families do get by earning above the poverty line is worth a lot.

What is more, even if the marginal tax rate were 100%, it seems unlikely that people would choose to stay impoverished. Why? Because even if the effective marginal tax rate for moving from a poverty income to a non-poverty income is very high (presumably because people lose their anti-poverty benefits), it will quickly fall again.

Consider, for instance, an impoverished family of three, just at the threshold of poverty — ie they make $19,530 per year, and their actual income is $19,530 + B where B is benefits received from the government. Ryan’s argument is that people are discouraged from earning $19,530 + B + 1 (before benefits) next year because this will cause their benefits to be taken away, canceling out much of the gain in income. But what Ryan conveniently forgets is that after this point the effective marginal tax rate is much smaller again because people have already lost their benefits (ie they will see much more marginal benefit on any money they make above $19,530 + B + 1). So it doesn’t stand to reason that the impoverished are continually discouraged to climb the income ladder.

Bottom line: with little exception, nobody has an incentive to stay poor.

So what effect has Johnson’s War on Poverty had? That’s definitely debatable, but this data from the US Census Bureau tells us a lot:


The War on Poverty was announced in 1964 and many of the programs we know today came shortly afterward (Medicaid, for instance, was created in 1965). The decline in the poverty seems to have accelerated after 1964, but I don’t have hard data on whether Johnson’s War on Poverty caused that, so I can only speculate here. But what this graph tells us we can’t say is that the War on Poverty that Ryan attacks caused greater poverty rates. Common sense would have us think that, too.


(Revised) False Sense of Insecurity

We see poverty as a problem that is becoming perpetually worse as time progresses. However, Bill and Melinda Gates act as poverty myth busters in their article in the Wall Street Journal. They attack the misinformation by providing rebottles to three myths. The first myth is that poor countries are going to remain poor. Their article provides evidence that multiple measures of human welfare, such as income are rising all over the world. The second poverty myth is that foreign aid is not worth it. Gates and Gates describe foreign aid as a prudent investment. It saves lives, but it also can jump-start an economy towards long term prosperity. Another part of this myth is that foreign aid is a large part of a government’s budget. They falsify this by mentioning that the United States spends more money on farm subsidies than it does on foreign aid. The last myth is that overpopulation will be the result of saving lives. They attack this myth from a more moral standpoint. They shed light on the commonly accepted virtue that letting children starve to death is cold-blooded, and will not produce positive results.

In contrast, Annie Lowrey of the New York Times disputes the first myth in her article about the war on poverty in the United States. She mentions that the poverty rate in the United States is not dropping like it should be and that welfare programs are being cut. This plays a counterpart to multiple problems with the labor market. Poverty is a slippery slope. She also mentions that the private economy has been more helpful to the wealthy as opposed to the poor in the United States.

Jared Bernstein uses multiple visual representations of changes in poverty in his New York Times Article. One graph depicts that the United States Poverty rate was 12.4% in 2004. Another graph shows that how income distribution has become less and less equal in the post-war era.

I have mixed feelings about all of this information. It seems that income and other forms of social welfare seem to be on the rise around the world. However, it seems to be the opposite in the United States. The articles by both Bernstein and Lowrey provide evidence of growth in the inequality of income distribution in the United States. It seems that America is the exception.

As far as foreign aid is concerned, I agree with Gates and Gates. I do think that a country would need to take great care when implementing aid to another country. It is important to know that the money is going into the right areas, otherwise a nation’s government could finance something illegal, such as a drug cartel or genocide. Furthermore, when a nation develops, it becomes a better trading partner. The nations of the world can help each other out.




A subtle source of poverty

In the United States, people enjoy a great deal of freedom.  One of those freedoms is the freedom from discrimination based on pretty much anything.  It is what provides for universal civil rights for everyone in America.  Those same rights have had a positive impact on our society, allowing the U.S. to develop into the world power it is today.  Martin Luther King worked to successfully end racial segregation, but today data indicates that it is happening today, with poverty standing in for race.

The University of Michigan has done research that shows segregation can create and reinforce poverty.  As the research shows, there are many factors effecting poverty, and many of them can be attributed to not being in the right group in society.  While the research is focused on racism, many of the causes, such as isolation from social networks, linguistic isolation, and oppositional culture as developments of segregation that perpetuate poverty, do so no matter what your race.  Such things have nothing to do with school performance, intelligence, or macroeconomics events.  They say a lot about how much money your family had growing up.

Segregation creates impoverished areas as well as individuals.  And these people and places can’t be ignored.  Detroit may be the most recent and famous example.  Currently bankrupt, white flight in the 60’s and 70’s has left the metro area more the most segregated in the country, with respect to black and white.  Property values are at an all time low, and the employment rate for the city is at 16.3%.   But the economic disaster stops at the city limits.  This map shows just how clear cut things are:

DETROITINLINEPicture from here, blue is white, green is black (8 mile is border of Detroit, to the south)

The suburbs have prospered; the metro area is home to some of the most affluent areas in the country and land values have soared.  Detroit has been plagued with social and economics problems for decades, and the surrounding areas have largely considered it to be unrelated to them. We are only left to wonder if the bankruptcy could have been avoided if so many didn’t just walk away and turn their backs.

Martin Luther King courageously fought for civil rights, not just for African Americans but all Americans.  One of the practices that he fought to end was that of segregation.  Segregation has had a real ethical and economic cost for the country.  Segregation causes poverty; it depresses land values, results in the unemployment, and a waste of social resources.  How much of this poverty can be attributed to segregation, both historical and current, is unknowable.  It serves as a reminder that for all that was accomplished by this day’s namesake; and that it is rendered worthless if we do not vigilantly guard against growing apart.

How to help poor countries tackle poverty?

As millions of people honored Martin Luther King across the nation on Monday, an issue with global impact remains debatable – how should rich countries, like the United States, help poor countries tackle poverty and other human rights concerns?

According to Bill & Melinda Gates Foundation,

The global picture of poverty has been completely redrawn. Per-person incomes in Turkey and Chile are where the U.S. was in 1960. Malaysia is nearly there. So is Gabon. Since 1960, China’s real income per person has gone up eightfold. India’s has quadrupled, Brazil’s has almost quintupled, and tiny Botswana, with shrewd management of its mineral resources, has seen a 30-fold increase. A new class of middle-income nations that barely existed 50 years ago now includes more than half the world’s population.

And yes, this holds true even in Africa. Income per person in Africa has climbed by two-thirds since 1998—from just over $1,300 then to nearly $2,200 today. Seven of the 10 fastest-growing economies of the past half-decade are in Africa.

In the long run, World Bank aims to cut down on those that live in “extreme poverty” to 3% worldwide by 2030.

Undoubtedly, foreign aid has been playing a critical role here.

However, many people show concerns about such generosity – in particular, will it account for a large share of our budget? Will it turn out to be ineffective due to corruption in poor countries?

Actually, the first concern is unnecessary since foreign aid is less than 1% of national income in the United States, where spending on farm subsidies and the military are more than twice and 60 times compared to that on international health aid. On a global level, Norway, the most generous nation in the world, spends less than 3% of its national income on foreign aid. Therefore, such offering would not be a real burden for people living in the rich.

The second one is somewhat more reasonable. Corruption has been one of the most prevailing problems in poor nations and there is a chance that foreign aid could be wasted. Nevertheless, this should not be an excuse of pull-back because corruption is just like a 2% tax on foreign aid given its relative small scale. Certainly, we should try to reduce such negative, but the fact that we cannot eliminate it should not prevent us from saving lives in those developing or undeveloped parts of the world.

So from my perspective, foreign aid should be offered continuously especially in the health and infrastructure sectors so as to enhance human welfare in the poor. Furthermore, education should be on focus as well as part of the effort to advance development of civilian rights in the long run.



Theories of Relativity about Poverty

As we start the New Year I’ve noticed that a lot of journalists and politicians have been reflecting on future challenges for our country, and one of the biggest and most talked about challenges we face is poverty. After reading a number of opinion articles from the Wall Street Journal, I have been finding that poverty is also one of the most complicated and controversial challenges we face today. Ultimately, the more I read about poverty, the more confused I become about the topic.

I’ll provide a few examples. From Bill and Melinda Gates’ Wall Street Journal article, I came away with the view that, although our progress has seemed slow, there have been amazing improvements in the quality of life of the world’s poor. They cite statistics that demonstrate that there have been real improvements seen in our lifetimes: that per capita income has increased dramatically in many countries that once were considered impoverished, including China, Chile, and Mexico. Even Africa has seen tremendous growth; since 1998 per-capita income has increased by 2/3 from an average of  “$1,300 then to nearly $2,200 today.” The Gates’ even go as far as to predict that by 2035 there will be few truly “poor” countries left in the world, and that all of this growth has come even when most of the aid-giving nations dedicate less than 1% of their national budget to aid. It seemed to me after reading the Gates’ article that perhaps we are actually on the right path to eliminating poverty.

Just when I was starting to feel that all might be right in the world, I read a Robert Rector article in the Wall Street Journal describing that the U.S. has reportedly “lost the war on poverty” and that even after spending over $20 trillion dollars over the past 50 years the ambitions of the Johnson-era liberals have apparently been for naught. According to official figures, Rector explains, “the official poverty rate persists with little improvement.” And this comes even when nearly 1/3 of Americans receive some sort of national aid, with an average cost of $9,000 even before factoring Medicare and social security (which, to keep things in perspective, is more than 4 times the average GDP/capita across Africa). How can this be possible?

The culprits, according to Rector, are how we calculate “poverty” and how we’ve chosen to fight it. First, the National Census excludes welfare benefits from calculations of per-capita income, which means “government means-tested spending can grow infinitely while the poverty rate remains stagnant.” Second, standards of living aren’t easily accounted for in examining the poverty rate. For example, the home of the average American below the poverty level is larger than the average “non-poor” French, English, or German citizen. But on the other hand, we’ve neglected other metrics of the human condition when making policy decisions about poverty. Rector writes that nearly 41% of children are born out of wedlock today, and children born into poverty are 3 times more likely to end up in jail. Finally, the Organization for Economic Cooperation and Development ranks the U.S. in the bottom third of advanced countries in terms of upward mobility. It seems that even we in the U.S., despite our myriad resources, are capable of flubbing our attempts at good public policy.

Overall, after sorting through the conflicting sources of information, the conclusion I’ve come to is this: proper metrics matter a lot when analyzing problems. The relative poverty metric first described by Adam Smith in The Wealth of Nations describes poverty as “not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without.” This may make sense when also looking at an appropriate measure of basic human needs and absolute poverty, but when looking at relative poverty alone, a Wall Street analyst making US$100,000 a year when his peers make US$1 Million would be considered impoverished on a relative scale (and I think most would not feel any sympathy for this “peasant”). If you compare the income of someone in the bottom 10% of earners in the U.S. against the U.S. middle class across time, progress over the past 50 years seems quite dismal. On the other hand, if you compare the income of someone from the bottom 10% in the U.S. to the income of a middle class African citizen, the relative status of the poor American seems quite enviable. This is not to say that the U.S. doesn’t have a poverty problem; all it takes is a brief walk down Liberty Street in Ann Arbor to see the perils and pervasiveness of homelessness and poverty in the U.S.. What I mean to say is that we might not always be using the right metrics to analyze poverty in our country, which may lead us to target the wrong metrics in our public policies, potentially leading to sub-optimal outcomes. In conclusion, the use of correct metrics and the right data matter in analyzing the problem of poverty.

The poor need more then our money

The minimum wage laws in the United States are a point of disagreement for many Americans.    Economics predicts what should happen, but what we see in reality has contradicted theory.  Consider unemployment. Any student in an introductory economics class can tells you that if the price of something increases (here, the price of labor), then the amount demanded will decrease; this is the law of demand.  Businesses should demand less labor at the higher wage/price, and therefore unemployment should increase.  In reality, this result says that the effect is not seen because of a combination of a reduction in worker turn over, small price increases, and other factors contributing to cancel out the effect.  This would seem to indicate that increasing the minimum wage might be both the efficient and ethical thing to do.  A modest increase may be appropriate; however increasing it too much, say to the $15 per hour would be too much.

Increasing the minimum wage increases the marginal cost of producing a good.  Since most jobs bound by the minimum wage increase would be low skilled jobs, this could increase the conversion to more efficient technological means.   Creations like the Burrito Box promise to revolutionize (or eradicate, depending how you view it) minimum wage jobs.  It is not just food service jobs that are on the line either.  Machines have replaced grocery store cashiers, and manufacturing has been automating their processes for years.  How much would you have to pay someone until a machine started to become an attractive option?  A lot less then $15/hr.  It is only a matter of time until automation like this happens.  It never calls in sick.  The machine is never late, doesn’t have a car to break down, and it doesn’t get paid overtime.  The Burrito Box will never ask for a raise or unionize.  There is too much savings (profit) to be had for businesses and highly skilled individuals to not automate as much of the process as possible.  In order to solve the problem in question, I think a more low-tech approach is in order.

Increasing the minimum wage alone may not be the answer to the problem.  While technology promises to “solve” our problem, a more humanitarian solution may be to help those working in those low skill jobs by combining a modest increase in the wage with a larger program of aide meant to provide the guidance to lift the worker out of what is most likely poverty.  The idea is to simplify and stream line the way out.  Not just the usual instructions on the importance of budgeting and planning, but a concentration of the bureaucracy that they must deal with.  In less precise terms, give them less hoops to jump through to get what they need.  Research and this first hand account provide evidence that it can be overwhelming to be poor.  They found that the constant trade-offs wore people down over time.  When you have no money, mistakes can’t be afforded, but simple things like cashing a check or even paying bills when they have the money can be an insurmountable due to lack of time, mobility, and credit.  By helping them simplify their life, they are given a shelter from their economic storm, and a way to a better life.

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. Wars are still happening, enemies still bomb each other, and allies fight each others’ wars. However, humanity has made immense improvements in medicine, to fight disease, and death rates have sharply decreased over the past century. But the focus of this post is on poverty, in which we have made colossal improvements, despite popular belief.

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 (The End of Poverty, Soon) 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 in the Wall Street Journal (Three Myths on the World’s Poor) 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 WSJ 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.

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. It is important to note, though, that we are referring to the international (absolute) poverty line and not the relative poor. Of course, there will always be “poor” people compared to others. 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.

False Sense of Insecurity

A great concern in modern times is world poverty. How extensive is it? How many countries and people would be considered poor? Is it only going to become worse? These are commonly asked questions about the portion of the world’s population below the poverty line. According to Bill and Melinda Gates of the Wall Street Journal, things are getting better for poor people around the world. Gates and Gates address three myths, in their article. The first myth states that poor countries will continue to be poor. They contradict this by showing that multiple forms of human welfare, such as income, are on the rise. This is all over the world. The second myth is that foreign aid is a squandering of money. Gates and Gates explain that foreign aid does a lot more than simply saving lives. They praise it as an investment because it can jumpstart sustainable economic growth. The final myth is that saving lives is a contributor for overpopulation in the world. The evidence that they provide for this myth is that countries with the highest mortality rates tend to have very high birth rates as well. This is due to the women having multiple births. Furthermore, letting starving children die as a way to put them out of their misery is not a morally acceptable solution, nor does it produce results.

In his article, Jared Bernstein explores a few graphs pertaining to growth rates and poverty. One of them depicts income gains in postwar decades, specifically 1947 to 2012. The general trend is that income has grown for the 95th, 50th and 20th percentiles. In the late 1970s, the 95th percentile has grown at a faster rate, hence the Occupy Wall Street’s campaign against the 1%.

Annie Lowrey of the New York Times commemorates the 50th anniversary of President Johnson’s presidency. She describes it as a failure due to the fact that the poverty rate only fell from 19% to 15%. The does mention that there is a silver lining to this. The government did not let the poverty rate rise, and this is partially due to the formation of social welfare programs.

It seems that there is no consensus for the discussion of poverty in the world. Gates and Gates seem very optimistic about the future of poorer countries in the world. It seems that citizens of poorer countries are receiving higher wages. Furthermore they have confirmed my belief that foreign aid works. As far as aid is concerned the problem lies with implementation. Countries who are given aid cannot be expected to know exactly what to do with the money which they are given. They need guidance from more developed nations who would be aiding them in the first place. Along with that, it seems that the United States has seen an overall trend of positive growth in salaries taken home. It has slowed down in recent years, however that was not a complete surprise. In my Econ 402 class that I took last semester, the professor showed the class a model that compares growth in poor and rich countries. Rich countries tend to see slow growth rates, and poorer countries tend to see very fast growth rates. At a certain point, the poorer countries catch up to the richer countries, and their growth slows down. Of course poorer countries are going to see much faster rates of growth than the US. The US is a developed country, so it will obviously have slower growth rates. This can be seen with statistics given by Annie Lowrey in her article about the US poverty rates.