Mitt Romney and the politics of poverty

19th September 2012

There has already been plenty of interesting work done on indentifying the 47% of Americans who do not pay income tax (summary: it is a pretty broad church). Underlying the discussion, however, is a central division between the Left and Right; namely the Left's unquestioning support for the welfare state and the Right's visceral opposition to it.

Whether knowingly or not Megan McArdle, special correspondent for Newsweek and The Daily Beast, sums up the position of the Right fairly succinctly:

"I think it's hard to disagree that the poor could stop being poor–at least as the US currently defines poverty – if they behaved differently; it's basically numerically impossible to fall under the poverty line if you finish high school, wait to have children until you get married, and both work full time."

Her statement is internally consistent; it is numerically impossible to fall under the poverty line if two people in a household have full time employment. The US Census Bureau defines poverty as a state in which "total family income is less than the threshold appropriate for that family". In 2011 the average individual had to earn above $11,484 to be above their poverty threshold, while a family of two had to earn $14,657 between them to do the same.

Assuming that an employee works an average of 40 hours a week for 52 weeks on the current minimum wage in the US of $7.25 per hour, according to the Department of Labor, then they should earn $15,080. Two people on that salary would equate to household income of $30,160 before tax, significantly above the poverty threshold.

So on that point McArdle is correct. The problem comes in the real-world conditions that must be in place in order to reach this scenario.

McArdle assumes that every individual able and willing to undertake gainful employment will necessarily be able to do so. To date the market economy has struggled to achieve this, indeed the failure to do so was one of the major charges levelled at the capitalist economy by John Maynard Keynes.

Unlike many of his predecessors Keynes did not see unemployment as a symptom of market failure. Instead he believed that the employment level could reach an equilibrium point where effective demand remained insufficient to justify further hiring. Without additional employment creating more effective demand this would result in a stable level of unemployment.

Under these circumstances it becomes much more difficult to criticise those who are capable of working for not doing so. Leaving aside those who cannot work due to ill health, age or disability, even if the greatest efforts were put into searching for paid employment there is good reason to believe there would simply not be enough of it to go around.

Therefore it is not really that hard to disagree with the statement that the poor could simply stop being poor.

McArdle does, however, point to some of the problems of wealth inequality. She notes:

"Pumping more cash into poor households would give them much greater ability to buy things like electronics and food and clothing.  It would not create more housing slots in safer neighborhoods, nor educational slots in better schools, nor reduce crime."

That is to say that transfer payments from the state may not provide a fix-all solution to poverty because the poverty level shifts with average incomes. The other problem, which McArdle does not address, is that such transfers would be inherently inflationary – it is equivalent to paying someone for producing nothing.

Increases in the cost of goods and services could then cancel out any dollar gains households may get from improved welfare payments.

There have been solutions suggested for this problem, although many would appear unpalatable both to proponents of a small government model and supporters of the welfare state. The economist Hyman Minsky, for example, suggested that the only employer capable to breaking through the demand shortfall is the state itself.

"The current strategy seeks to achieve full employment by way of subsidising demand. The instruments are financing conditions, fiscal inducements to invest, government contracts, transfer payments, and taxes. This policy strategy now leads to chronic inflation and periodic investment booms that culminate in financial crises and serious instability. The policy problem is to develop a strategy for full employment that does not lead to instability, inflation, and unemployment.

The main instrument of such a policy is the creation of an infinitely elastic demand for labor at a floor or minimum wage that does not depend upon long- and short-run profit expectations of business. Since only the government can divorce the offering of employment from the profitability of hiring workers, the infinitely elastic demand for labor must be created by government."

Stabilizing an Unstable Economy, 1986

No doubt there is something in there for all sides of the political divide to get agitated about but given recent events the idea is at least worthy of serious consideration.

 

More on Mindful Money:

Why economists are wrong to support the Romney plan

Is Paul Krugman a false idol?

Paul Ryan’s path to recovery – or renewed financial crisis?

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