More about Poverty and the Economy

27 August 2007

I have some more thoughts as a follow-up to my previous post about poverty and the economy -- about solutions to the problem of poverty. First, the basics. Since poverty occurs when there is an imbalance between earnings and the cost of living, to move an individual out of poverty, either the person's earnings must be increased, or his/her cost of living reduced. There are several ways we could consider doing that for the working poor segment of the population (whether here or overseas).

One idea that comes up a lot is to raise the minimum wage, or make it apply to more segments of the local or world population. At first glance, it seems obvious that if people doing the lowest-paid jobs in our society were earning more for their work, the gap between their earnings and the cost of living would be smaller. However, when you analyze the situation more carefully, the result is less clear. For one thing, according to classical economic theory, in a perfectly competitive market economy the presence of a minimum wage leads to unemployment, which could drive more people into poverty (see this Wikipedia article for a more detailed description of why). I am not sure whether this would really happen or not -- economists disagree about whether this applies to the real economy -- but it is a possible problem with the idea of raising the minimum wage. Another consideration is that raising the wages of the people who earn the least would certainly have some effect on prices. I'm not sure how much we could expect prices to increase, as compared to the increased earnings of the working poor, but clearly the poorest people are the most affected by price increases, and it would certainly reduce the positive impact of their higher wages. So maybe this isn't the best idea.

Another possible method of alleviating poverty for working people is government subsidies, which could take the form of cost of living reductions (housing subsidies, food aid, free health insurance) or increases in take-home income (through tax deductions/refunds or some type of direct grant). This method might be more effective at reducing poverty than raising the minimum wage, because it should not lead to unemployment or price increases. On the other hand, sometimes people receiving government subsidies are stigmatized, and there is also the issue that subsidies may be a disincentive for people to work. One idea that I think avoids these problems is tax reform. For instance, right now in the U.S., every working person pays 6.2% of the first $92,000 earned in any calendar year for Social Security, and 1.45% of all earnings for Medicare (the employer matches these amounts). This tax could be restructured so that, for instance, the first $30,000 earned in a year was exempt from both taxes, and there was no upper income cut-off (perhaps with an adjustment of the rates), to shift the burden of this tax to those who can better afford to pay it. Alternatively, the special Social Security and Medicare taxes could be completely eliminated, and regular income tax rates adjusted to make up the revenue, because our income tax structure already ensures that people earning the most (whether from employment or investments) pay the most (loopholes aside), and people earning very little pay nothing. The current Earned Income Tax Credit also allows working poor people to receive a tax refund, which is a small direct grant to people who are working to support families; it could be increased. How about linking it to geography, and making sure that anyone working full-time (or legitimately unable to work due to disability) is brought up to at least the minimum income needed for their family to get housing, health care, child care, and food in the area where they live? I wonder how much this would cost to put into action, as compared to the rather ineffective and inefficient collection of subsidies we have now.

A third possible method of alleviating poverty among the working poor, for the longer term, is education. Now, I am a firm believer in education, and I believe that everyone in the world should have the right to a decent education. Also, statistics consistently (and not surprisingly) show that people with more education earn more, and they quickly recoup the investment of time and money spent on education. However, although I am certain that education is beneficial to the individuals receiving the education, and I believe it is beneficial to society as a whole to have a better-education world population, I am not sure that improving education will reduce poverty among the working poor in the U.S. The reason is that I don't see how improving education will eliminate the need for the low-wage workers that are at the base of our economy -- someone will still need to pick our vegetables, work in our fast-food restaurants, and clean our offices. If they are better educated, will they really earn more for types of work that do not require any special training? Possibly if the entire population were well-educated, they would demand a premium for doing boring work, but other than that, I doubt that improving education would make a big change in the poverty rates among the people doing those jobs.

On the other hand, I think increasing the education level in the developing world could have a real impact on poverty there (and on economics-based illegal immigration world-wide). This is because a higher general level of education enables a country to participate on a more equal footing in the global economy -- to move from an economy based on subsistence agriculture and exporting agricultural products and natural resources, which does not provide many well-paying jobs, to one more like an industrialized nation. Several countries I am aware of in Central and South America have successfully made this transition in the last few decades, and while there have certainly been factors other than education contributing to these transitions, clearly they would have been impossible without improvements in the general level of education in those countries. There are certainly negative consequences of such transitions (such as increased energy use, probably leading to increased environmental impact), but for me, the morality of the situation is clear. The benefits to the individuals living in the developing world, if their educational systems are reformed and their economies become more industrialized, are such that we cannot morally deny them the chance for a better life.

So by all means, let's push for better education here and around the world, to improve everyone's standard of living in the longer term. And in the meantime, I think it's time for something like an expanded Earned Income Credit that would bring everyone up to a basic level of income. And I think it's time for me to find out what the current Presidential candidates are planning on doing about poverty, as well as the energy and constitutional questions I've been exploring in recent articles. More on that later...