Stubborn Poverty

This "article" is actually a response to a question in another blog here. It is a good thread and I encourage giving it a read and a vote. Here is the question I want to address here because a picture tells a thousand words and I don't think I can post a picture in a comment box:

The question for me is this: In a free society, where people are free to make bad choices, how much poverty can we eliminate without rewarding, and hence encouraging, bad choices?

And despite $6.6 Trillion spent on anti-poverty programs, the poverty rate has not budged much since 1968--regardless of the party in power or plan of attack.

I think this is a really good question, good enough to send me to the Census Bureau to dig up the chart above. What it shows is that poverty in this country was very bad in the 1950s and fell throughout the 1960s and 1970s. At first I thought the downward trend had a lot to do with the economy in general, but looking at the GDP growth rates doesn’t seem to indicate that was the reason. Labor unionization likely played a part as some jobs that did not provide a living wage became subject to collective bargaining (a trend that is now reversing).

I then looked at the minimum wage. I found this quote here.

The minimum wage was first enacted in 1938 as part of the Fair Labor Standards Act (FLSA). It is enforced by the U.S. Department of Labor's Employment Standards Administration. Initially just 25 cents per hour, the minimum wage has been raised several times in the decades since. In real (inflation-adjusted) terms, the minimum wage reached its peak in 1968, when it was worth $6.92 in 1998 dollars.

So minimum wage legislation could certainly explain some of the downward trend in poverty over this time period. Today, the minimum wage has finally been raised again to $6.55 beginning in July of 2008 and $7.25 in July 2009. At the current rate of $5.85, a full time minimum wage worker would make about $12,000 per year working 40 hours per week with no vacation. This is above the poverty line for a single person, but well below the $16,000 poverty line for a family of three. And getting “Mom” out to work does not pay because childcare costs more than the available earnings. At $7.25 per hour we get close to the line for a family of three, but by that time it will be further below the poverty line due to inflation. So what we see is that many very hard working people live in poverty.

(On minimum wage – if we make employees more expensive, we provide incentive to innovate. This results in fewer jobs in that particular field, but more jobs in the field of the innovations. So, the idea that raising the minimum wage translates directly into inflation is just wrong, and in fact raising it could be, in the long run, exactly the incentive we need to continue innovating to compete globally.)

Then there is The Great Society, and the war on poverty launched by the Johnson Administration. This war included all of the types of programs I here today’s conservatives speak about, such as community development, job training, education, and so on. You can get a pretty good summary of those here. Two of the most important programs implemented were Medicare and Medicaid, and this likely had a lot to do with the rapid decline in poverty among seniors. Note that the poverty rate among seniors in 1959 was in the 35% range, hardly justifiable based on laziness and clearly unacceptable by today’s standards.

So, certainly the programs of The Great Society launched during Johnson’s War on Poverty in the 1960s had a lot to do with declining poverty rates throughout the 1960s. Since those programs were fully implemented and integrated into our society, the poverty rate has remained somewhat stable although they have begun to track up again. I think this goes back to the minimum wage issue.

So, back to the original questions. First:

In a free society, where people are free to make bad choices, how much poverty can we eliminate without rewarding, and hence encouraging, bad choices?

I wish I had an answer to this question but the fact is I do not. This is a question that I believe is impossible to answer because the only way to do so is to know how many people being helped would actually not need it if it were not available to them. We did see, however, what happened in our society when it was not there – a quick look at the graph tells me that poverty rates were very high by today’s standards and would be unacceptable to us in this more modern era.

The second question:

And despite $6.6 Trillion spent on anti-poverty programs, the poverty rate has not budged much since 1968--regardless of the party in power or plan of attack.

We see that the basic premise of this question is correct because the poverty rates have not improved all that much since 1968 when most of the major Great Society programs were enacted. However, this may be in part an answer to the first question. Perhaps in this great society where people have the opportunity to amass great wealth and live with luxuries unimagined by most people in this world through all of its history, the cost is a 12-13% of the population living in poverty (I would hope not, but our track record seems to support it). The losers, if you will, in the great game we call our “free market” economy. So the question then becomes this: In our Great Society, do we want to see the accumulation of wealth never before seen in the hands of the few while we fail to honor our promises to provide benefits for those who are in need of them? Do we want to trade massive wealth for the few for massive suffering for the many? That is the question at hand, and I come down very clearly on the side that says share the wealth a little more. Has the $6.6 trillion been well spent keeping millions of our seniors and children out of poverty for the past 40 years? That’s a judgment call for each of us to make. The “free market” conservatives apparently think not, while the “bleeding heart” liberals think so. These programs have been under attack since 1980 and we are approaching, in my fear, a point of no return as this debate goes on and the wealth moves up.

One final note - the wealth distribution is not fully justified by "free markets" and all one need do to observe this is to follow the money in politics. If you want to eliminate waste, that would be the best place to start, in my humble opinion.

For more statistics on poverty go here.

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Federal Budget for 2006

Here are the rest of the federal budget numbers re-classified in a way that I think makes them understandable. They are approximate because the government figures use varying classifications depending upon where you get the numbers from. These amounts also ignore unemployment insurance, but the net impact of doing so is relatively small. The inflows are without including any payroll taxes as that is dealt with in the Social Security and Health Care pieces referred to below. Outflows are without Social Security and the portion of Medicare paid for by payroll deductions. My hope was to isolate those programs from the other government programs that we fund through general revenues rather than payroll taxes that fund Social Security and a portion of Medicare. By doing it this way, if you want to know how much you are paying toward any particular item you can get a very rough estimate by multiplying the amount you paid in federal income tax times the percentage to the right of the outflow category (plus your share of the additional national debt used to fund the shortfall, so add another 30% or so).

Interest expense is not "net interest" because the portion that the government considers a wash (about $169 billion) is "paid" to trust funds like Social Security but then immediately re-borrowed. Because of this the government accounting figures a net interest amount as though it really wasn't paid. In any event, about $100 billion of the interest expense is paying the interest on the money borrowed from Social Security, so if you like you can add that to your retirement costs.

Non-SS Mandatory Income Security includes all of the means tested entitlements.

The difference between the inflow and outflow explains the additional half trillion or so of national debt from end of year 2005 to end of year 2006 (approximately $574 billion).

A final note - to really understand who benefits and who pays in our system it is necessary to go beyond a simple inflow/outflow analysis. It requires a real analysis of the tax code to understand who is getting a better deal and who is not. One example of this is the capital gains treatment of carried interest for hedge fund and private equity managers that allows them to pay 15% on large portions of their (often seven figure) incomes. I hope, however, that this analysis provides some insight.

For health care go here.
For Social Security go here.
For welfare go here.

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Federal Health Care Expenses

2006, Dollars in millions.
Here are the numbers for Federal health care expenditures. By way of background, Medicare Part A, hospitalization, is paid from payroll deductions while Parts B and D are paid from premiums and general revenues. Part A is currently self funding, but projected to fall into major deficit in the short and long run. In addition, Parts B and D are drawing from the general funds at a level that requires the President to propose modifications by 2009. What all of that means is the costs of health care are expected to increase dramatically and there has been no trust fund established for the bulk of the costs.

All of the numbers come from Tables 2.4, 3.2, and 8.5 of The Office of Management and Budget (OMB) 2008 Budget Of The United States Government Fiscal Year 2008 Historical Tables except for Premiums, Taxes on Benefits and Interest which came from Status of Social Security and Medicare Programs, A Summary Of The 2007 Annual Report.

To sum this up, the Federal Government spends 22.7 cents of every dollar it collects (over and above payroll deductions) on health care. If you are an "average" taxpayer making $50,000 per year and paying 12.45% of your income in federal taxes, then you are contributing $1,414 to health care from income taxes and $725 from payroll deductions (1.45%) for a grand total of $2,139.00. This is in addition to any non-governmental health care you may be paying for.

For Social Security go here.
For welfare go here.
For the balance of the budget go here.

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