Praxeology with Dr. T

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The Economics of Poverty By Dr. Glen Tenney

Inequality & Economics • Economic science is silent on the normative question of whether more equality is good or bad. • Some people (economists included) feel that equality is morally good, others are not much concerned, and some think equality is positively evil. • However, it is differences between individuals that prompt economic exchange, and exchange creates wealth generally in society. • So, economics would not necessarily want to discourage differences between people.

Inequality Not the Same as Poverty • If Bob makes $250,000 per year, and feels sad about his situation relative to Bill Gates who makes 100 times that amount, then Bob has a problem with envy. • This seems to be a case of substantial inequality, but Bob is far from being “poor” in any important sense.

Poverty Measurements • Official US “Poverty” Designation • 3 times the annual food “requirements”. • About $19,000 annual income for family of four. • By world standards, almost no one in the United States qualifies as poor. • About 56% of the world population live on less than $3,000 per year for a family of four.

“In” and “Out” of Poverty • Most people in the US have been in the official “poverty” category for short periods of their lives. • Think of the “typical” 20-year old newly-wed couple who is “madly in love” but “dirt poor”. • For a short period of time, these typical people are counted in the “poor” even though most of them quickly remove themselves from the category with concerted effort.

Historical Progress • Throughout history, poverty has been the rule for the masses. • Using the standard of 3 times the necessary food requirement as the cutoff, the percentages of people living in poverty has dropped dramatically over the past 100 years in the US, as shown by the following census bureau estimates. Note: These data reflect a fixed standard of 3 times food requirements, but the standard has been adjusted for the decrease in purchasing power of the dollar over the century.

Two Important Questions Based on the Previous Data • 1. What has caused the dramatic reduction of poverty in the US over the past century? • 2. Why has the reduction apparently leveled out or stopped?

Possible Causes of the Huge Decrease in Poverty • While the possible causes of social phenomena are highly complex, they can be lumped into two broad categories. 1. Public policies focused on equalizing incomes & wealth. (The so-called “War on Poverty”) 2. The natural result of economic growth. • We will address these possibilities one at a time. . .

Attempts to Equalize Society More • The desire to equalize can be attempted by two possible means: • By voluntary charitable transfers of wealth. • By involuntary changing (breaking?) of the generally accepted “rules” of society with regard to property rights. • The idea here is to give favoritism to the poor at the expense of the non-poor. • While there are some similarities between these two approaches, let us focus on three examples of the latter.

Changing the Rules • 1. The Minimum Wage Law • Creates a situation where the quantity of labor demanded by business firms is less than the quantity supplied by workers. • This phenomenon is generally called “unemployment”. • Work is well-known as the most effective anti-poverty program, and therefore the minimum wage law is well-recognized by economists as harmful in trying to bring the poor out of poverty because it reduces the jobs available at the lowest skill levels. • The minimum wage law makes it illegal for the lowest-skilled people in society to be gainfully employed.

Changing the Rules • 2. Rent Control Laws • These laws create a situation where the quantity of cheap rental units demanded by the poor is greater than the quantity supplied. • This phenomenon is generally known as a shortage of cheap rental units (or homelessness). • Rent controls are well-recognized by economists as harmful in trying to bring the poor out of poverty because they reduce the number of cheap rentals available for the poor.

Changing the Rules • 3. Straight Welfare (Public Relief) • Two sets of incentives that are changed. • The tax creates incentives to not create wealth. • The grant creates incentives for the non-poor to try to “qualify” for the benefits. • Two long-run consequences will result. • More poverty (because poverty is “not so bad”). • Less wealth in society with which to provide relief.

Changing the Rules • One More Indirect Result of Changing Rules • The “time preferences” of all parties go up (an increase in present-orientation) because people are less responsible for the consequences of their economic actions. • In a general sense, high “time preferences” (severe present-orientation) are the key reason why people are poor in the first place.

The Second Reason • The second possible cause of the dramatic reduction in poverty is that the poor have become more productive over time, thus participating in general economic growth. • People become more productive when they have more and better capital to work with. • Capital arises from people reducing consumption enough to warrant expenditures on productive assets.

Why has the reduction in Poverty Slowed or Stopped? • While economists are not in total agreement on the specific reasons, one factor does seem to stand out: • The focus of public policy since the 1970s has shifted dramatically from one of allowing wealth creation to one of equalizing incomes. • This has caused the serious disincentives for both the rich and the poor, as discussed previously.

Work and Poverty • Work is, by far, the most effective anti-poverty “program”. • Only about 3% of those who work full time are in the poverty category. • Thus, the poverty problem is mostly (though not completely) tied to unemployment.

The Negative Attitude People are basically greedy. Work caters to, or feeds, that greed. Greed is bad. Therefore work is bad, or at best a “necessary” evil. The Positive Attitude People are basically self-interested, but not greedy. The best way to help ourselves is to help other people. “Working” is the very best way to do this. Work is good, worthwhile, meaningful, even noble. Two Attitudes Toward “Work”

The Unemployed Poor • Those who don’t work fall into three categories: • Those who, due to legal restrictions, are not allowed to work. • Those who, due to their perceptions of the costs and benefits of working, choose to not work. • Those who, due to physical or mental situations cannot work.

Those that are Not Allowed to Work • The minimum wage law is the main culprit here. • The law makes it illegal to hire anyone who has a productivity level less than the wage rate prescribed by law. • It takes the first few rungs from the ladder of progress for many people.

Those that Choose to Not Work • Some laws increase employment costs, causing firms to hire fewer workers: • Payroll taxes • Mandated benefits • Arbitrary mandated safety standards • These laws drive a wedge between what the employers pay and what the workers get, which causes fewer workers to be employed.

The Disabled that Can’t Work • This is the most serious, but the smallest, group of unemployed. • Either voluntary charitable relief or coercive governmental relief is necessary in addressing this problem. • Of course the governmental relief suffers from the incentive problems noted previously.

Public Policy Prescriptions • Make employment feasible for the poor. • Abolish payroll taxes • Abolish the minimum wage law • Abolish mandated benefits • Recognize that attempts at coercive equalization hamper the poverty problem by restricting the wealth creation process that poverty abatement depends on.

Conclusion • The Paradox of Relief: • The richer the community, the less the need for relief, but the more it is able to provide. • The poorer the community, the greater the need for relief, but the less it is able to provide. • If this is true, then what is the real key to poverty abatement? ------------------------

Praxeology with Dr. T