Why don't we care about the poor?

Source: US Census Bureau, 2014.

Last week saw the release of the annual US poverty and income statistics.  On the face of it, they make for pretty terrible reading. The top fifth of the income distribution held nearly 50 per cent of all income, the bottom fifth just over 3 per cent (Figure 1b). If income was equally shared out across the population, the top fifth would only hold 20 per cent. A longer sweep of history shows how everyone except the top has lost out over the past 40 years, with only the income share of the top growing (Figure 1a).

It's a pretty lonely place down there at the bottom. 15 per cent of Americans are in poverty*. Many more are in near-poverty, struggling on the edge of hardship. Single mums and children fare the worst. Young children are five times as likely to be in poverty if they live in a family headed by a single mother compared to married parents. And despite a small tick down in poverty rates for children and those of Hispanic descent, poverty remains stubbornly high.

You'd be forgiven for blinking and missing this publication. The data are only published once a year and are already a year out of date. They don't move markets or grab headlines.  In fact, those that get most impassioned about the data are people already working at the coal face of poverty alleviation, who are able to demonstrate through statistics what they already know through experience.

Why don't these facts and figures about the harsh reality of life in America grab more attention?

Is it because the average person is also under pressure?  In 2013, the median household was 8% poorer than it was in 2007, just before the financial crisis began. That means that even though we might have made up for all the jobs that we shed in the Great Recession, we haven't made up for all the money we lost.  If the average family is worse-off, and are themselves struggling to stay afloat, they probably don't have the time, or money, to worry about the very poor.

Or is it because poverty's very existence goes against the ideal of the American dream? That if we really believe what they show, then we have to accept that opportunity is not equal for all. That hard work and determination alone are not enough to move out of hardship. By accepting poverty, we accept that there are barriers in-built into our institutional architecture that mean non-Whites are more likely to be born into poverty, live in a deprived area, eat poor-quality food, attend poor-quality schools, drop out of college (if indeed they apply), hold a minimum wage job, not have access to childcare, suffer from poor health outcomes and die early.

Perhaps these reasons are two sides of the same policy coin. If ordinary people are struggling to stay afloat, and those at the very bottom are sinking, then only active government policy can generate a tide that will lift all boats. An increase in the minimum wage, for example, would benefit the majority of people living in poverty but it would also create a corresponding increase in pay further up to maintain pay differentials. A concerted effort to improve the quality of K-12 education would benefit those who in poverty who are most likely to fall behind, as well as creating positive spillovers to all students within that learning environment. Those in poverty may be in the minority but solutions to their problems would definitely benefit the majority.

*According to a more comprehensive measure, the supplementary poverty measure, poverty rates are higher still. The 2013 estimate will be published later this year.

Health-onomics

Source: CIA World Factbook (life expectancy) and
Wilkinson and Pickett, 2009 (income inequality) 

Higher inequality means poorer health outcomes. The US is a case in point. It has the highest level of income inequality in the industrialised world. And at birth, Americans can typically expect to live shorter lives - around 79 years compared to 82 years in Switzerland (Figure 1) and nearly 90 years in Monaco (not shown in Figure 1). So why is inequality associated with adverse health?

In health, it's all about hierarchies, whether by income, education, social status or race. Those higher up the hierarchy report more favourable health outcomes than those lower down. Even those at the very top report better health than people just a notch below them. There is a 'gradient' effect of your position in society on your health (Adler et al, 1994;  Marmot et al, 1991).

Towards the middle and top of the income distribution, this is attributed to a 'keeping up with the Jones'' mentality. People are under pressure to compete with each other in jobs, wealth and possessions. These behavioural factors cause stress and stress-related illness.    

Towards the bottom, this is attributed to the more straightforward relationship between absolute deprivation and health. Material factors matter. The conditions of modern-day poverty in the US - working two jobs to make ends meet, living in over-crowded accommodation, living in neighbourhoods with few healthy eating options, low probability of having health insurance - all contribute to poor health outcomes. This becomes self-reinforcing for today's working families. Those who suffer from poor health are less likely to be able to hold down a long-term job. It also impacts on tomorrow's workforce. Children born into deprivation are more likely to suffer short and long-term health problems like obesity and asthma.

Healthcare reform will go some way to fixing these problems for the poor and uninsured. By opening up the market for healthcare, expanding government-funded medical programs and subsidising insurance premiums, coverage has already ticked up. The hope is that as more people sign up for medical insurance, they will be able to access timely and cost-effective care [a future blog will provide critique of the US healthcare system].

But tackling the hierarchies that generate unequal health outcomes requires reform of a wider set of institutions. That is because health is simply a window into the world of inequality. We need to flatten structures elsewhere. That might be in our schools and universities, where we need to ensure equality of opportunity. That might also be in our workplaces, where we need to ensure fair pay and progression. That might be in our neighbourhoods, where we lean against the creation of wealthy and less wealthy clusters. All of these actions would help break down the hierarchies that create inequality. Fixing health is only the first step.

An economy that works together, stays together

Source: Steve Breen / Creators Syndicate

The US economy is experiencing its slowest recovery in 70 years. We just can’t seem to give the economy the kick-start it needs. Why? Because we are held back by inequality. Only by tackling inequality head-on can we secure the sustained economic recovery that we are looking for.

Inequality sends a signal about the economy’s potential to grow today. Income among the poorest can be stagnant if people have given up looking for a job because opportunities are so scarce. The recent fall in US unemployment masks record falls in the participation rate, the number of people actually looking for a job. Fewer people in the labour force leads to lower per head growth rates and lower social cohesion. We are wasting our best resource – people. 

Source: Chan Lowe / Tribute Content Agency

Inequality also matters for the economy’s growth potential tomorrow. Richer families can afford to spend more time with their children, investing in their learning and development. Poorer families, who are more likely to work longer hours in minimum wage jobs, simply don’t have the time. But if you think that talent is randomly distributed, then this means that many children's potential will be left untapped. These young people are also more likely to drop out of high school or college, either because of cost or because they simply don't believe that people like them can succeed. This impacts on their ability to secure a job and makes it more likely that they will also fall on hard times.  

What can be done? If inequality is defined as a gap, then let’s build bridges that enable people to close this divide. Raising the minimum wage would enable everyone to earn a basic income. On-the-job training would improve career progression and lifetime income for those in work, and back-to-work training would improve job prospects for those out of work. A more progressive tax and social security system would provide much-needed resources to low-income families to invest in themselves. 

None of these policies constitute a hand-out. Raising the wage, for example, would actually increase tax receipts and reduce welfare expenditure as fewer people require income support. All of these policies can help children as much as adults. For example, women who joined the workforce following welfare reform in the UK spent the extra income earned on books and activities for their children. And each one would increase the productive potential of the economy. An economy that can produce more is likely to grow.  

Let's talk about tax, baby

Tax has got everybody talking. Warren Buffett famously declared that it was not right that he and other billionaires paid next to no tax. President Obama has since introduced changes to reduce taxes for the middle class and increase taxes for high earners. But not all of these have been successfully passed. So what is to be done with a system that appears to perpetuate, rather than ameliorate, inequality? Let's start with a little myth-busting.

Myth 1 – The richest Americans pay the most tax

Source: Citizens for Tax Justice, 2013.

False! It is true that the richest Americans, those in the top 10% of the income distribution, pay around 70% of all tax. But as a share of income, their tax burden is much lower. In fact, the share of tax paid by each income group is broadly similar to their share of income (Figure 1). In other words, the tax system does very little in closing the gap between the rich and the poor. It is only mildly progressive.

Some taxes explicitly benefit those on higher incomes. The most obvious is capital gains. The majority of US assets – houses, factories, stocks and shares – are held by the top half of the income distribution. Because of the level that capital gains tax is set, when these assets are sold at a profit, owners can end up paying a lower effective tax rate than low-income people who pay only wage and consumption taxes. So the rich move even further away from the poor.

Myth 2 – The US tax system unfairly penalises corporates

False! It is true that the US has the highest corporate tax rate across advanced economies - 39.1% compared to an average of 25.1%. However, corporate income tax raised is only 2% of GDP, much lower than in other countries. Why? Because corporations take advantage of tax loopholes to locate their headquarters overseas or attribute income to overseas sources, benefiting from lower tax rates. In allowing loopholes, the government penalises its own bottom line, not that of the corporates.

Myth 3 – The US tax system is supporting sustainable fiscal finances

False! Here’s where the debate gets interesting. The Congressional Budget Office says that US government finances now look in pretty decent shape over the next decade. They measure this by looking at the size of debt relative to national income, an affordability ratio. Once the economy has fully recovered and unemployment has fallen further, the deficit should be manageable, as long as the government sticks to agreed spending caps. 

Why should we be worried about this? Some highly-regarded economists, like Bob Gordon, are arguing that the US might be growing at a permanently slower rate. The economy won't recover in the way that we think. In part, this is because people are dropping out of the labour force (either because they cannot get a job or because they have reached retirement age).  It is also because the majority of income is tied up in the hands of the rich who save rather than spend (see previous blog). This means lower national income, lower tax revenues and a higher government debt ratio. Reforming the tax system today would allow the government to maximise its revenue, in preparation for a risky tomorrow. Part of this money could be spent on re-engaging those who have left the workforce, and who are more likely to be in poverty. 

More on that, next week.