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 The data are only published once a year and are already a year out of date.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.

Subsidise fruit not fries: addressing food insecurity in America

1 in 6 American families are food insecure. Put simply, they are going hungry.

The Federal government has relied on food assistance programs to meet the needs of the poorest families. Last year, it spent $80 billion on its Supplemental Nutritional Assistance Program alone. But budgets have been cut, reducing the amount of money in people's pockets. Reliance on non-profit food banks has increased sharply but they are unable to provide nutritionally-balanced food, like fruit and vegetables, because they are perishable.

In addition, hunger is no longer confined to the poorest or those who are unemployed. Two-thirds of food-insecure families with children have at least one adult in work. The problem, once again, is that wages have failed to keep up with the rising cost of living. After rent, bills and other necessities have been paid, there is often little left over for food.

The consequences of food insecurity are greatest for children, because health problems that set in early on are difficult to reverse. In areas where money is tight, the demand for luxuries falls, reducing the supply of supermarkets and increasing the prevalence of cheap fast-food restaurants. For this reason and others, hungry children are at a higher risk of obesity. Over a lifetime, child obesity costs $19,000 per child in medical costs ($14 billion for all current 10 year olds). Worse, many will have shorter lives than their parents.

Obesity, caused by food insecurity, has the potential to reduce the capacity of the future US workforce exactly at the time when a larger, more skilled workforce is required to support an ageing population. This is a multi-faceted problem, that captures costs, family income, lifestyle and parental education. But here are just two solutions that would tackle it at source.

To deal with rising costs, subsidise the production of fruit and vegetables. Currently, agricultural subsidies for US corn production end up inadvertently reducing the price of corn-based products like fizzy drinks or corn-fed meat, which results in cheap meat and snacks in our shops. So an adjustment to expenditure (not new money) could change consumption behaviour.

To deal with falling real incomes, raise wages. Company profitability would be supported because the workforce can afford a healthier lifestyle and are less likely to take sick days. Government finances would be boosted because higher wages lead to higher tax contributions and falling levels of income support. And tomorrow's growth is secured because higher take-home pay increases investment into children, reducing the future burden, and increasing the future capacity, of tomorrow's workforce.

Brazil's World Cup still half empty

Source:  Fédération Internationale de Football Association

As many on social media have pointed out, the World Cup 2014 emblem looked like a man hanging his head in shame (Figure 1).*

Not the shame that came from losing 7-1 to Germany (though that was pretty painful). The shame that came from knowing that hosting the World Cup reportedly cost the country $4.2 billion but more than half of Brazilians believed it would hurt the economy. That 50 per cent of Brazilians thought now was a bad time to find employment despite the government saying that the World Cup would create 710,000 jobs. That the number of poor people living in Brazil could have filled its World Cup stadiums 30 times over.**

After the dust settles, and the spotlight dims, the facts will re-emerge. The International Monetary Fund forecasts that the Brazilian economy will grow by 1.8 per cent this year, compared to a 10-year average of 3.5 per cent, because of weakness in manufacturing, consumer spending and export performance. Others are more bearish still. The central bank has raised interest rates in recent months, because of above-target inflation, leading to worries that economic growth will be choked off. Social discontent led to a number of high-profile protests in the months leading up to the World Cup.   

Brazil appears to have lost grip on the solid macroeconomic framework it established over the last decade. This platform generated high single-digit growth rates, funded active redistribution policies and contributed to a rapid fall in inequality. Between 2004 and 2012, poverty rates more than halved from 22 per cent to 9 per cent. Conditional cash transfer programs that provided monetary rewards in exchange for attendance at school and health centres improved outcomes for those on the lowest incomes. Between 1999 and 2009, the increase in per capita income of the poorest 10 per cent was nearly four times that of the richest 10 per cent. Out of a general rise in income, grew a substantial middle class.

This middle class is now demanding action. Brazil needs to take this opportunity to re-establish its credibility and tackle the hard problems that are preventing it from achieving sustainable and inclusive growth. It needs to push forward on much-needed reforms to infrastructure that would reduce local bottlenecks and improve the quality, not just quantity, of public education and healthcare. It needs to tackle wasteful corruption, which is estimated to cost between 1.4 and 2.3 per cent of GDP a year, and enables favours to the 'haves' at the expense of the 'have-nots'.         

Brazil will play host to the Olympics in Summer 2016. It is likely that between now and then we will see more protests from a discontented population. But, if the country undertakes substantive reform, we may also see a very different country when the spotlight returns.

* The green hands form the shape of a head, which is held in the yellow hand
** Author's calculation based on data from the World Bank and the Stadium Guide

Righting a Wrong on the Fourth of July. Period.

On this Fourth of July, when the country celebrates its right to "life, liberty and the pursuit of happiness", have we got the role of government in securing these rights... wrong?

Source: National Archives via The New York Times

"...We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed..."

New research by Danielle Allen (Princeton) on the Declaration of Independence has called into question the accepted emphasis on individual rights. She argues that an errant period was added in hand-made copies (Figure 1, highlighted). This meant that the second sentence in the Declaration (quoted) became entirely about the individual. By referring back to the original document, where the period is apparently missing, and individual and government are in the same sentence, "the logic... moves from the value of individual rights to the importance of government as a tool for protecting those rights".*

This re-interpretation of the government's role is philosophical. But consider the facts. Last year, the government provided an estimated $212 billion in welfare payments to support the poor and vulnerable. But substantially more - $335 billion - was donated by the public to US non-profits, the majority of whom exist to support education, human services and health.  

A population served predominantly by non-profits is one that has been let down by the mainstream system and fallen into the gap between the government and private sectors. Today, 1 in 7 people live in poverty. A more accurate measure shows it could be higher still. Non-profits report rising demand for services, particularly those that serve the most vulnerable. It would appear that not everyone has the right, or the opportunity**, to pursue happiness.

On the one hand, non-profits operating at the coal face are in a better position to understand local issues. On the other hand, they often deal with the consequences, rather than causes, of disadvantage. When they advocate for change, it is to the government. Only the government has the incentive, scale and investment horizon to deal with these underlying causes: more jobs; higher wages; affordable housing; higher-quality education. In the extreme, when government has done its job, charity should cease to exist. On the day that America reflects upon its "unalienable rights", for many, that concept is indeed alien.

* As quoted in the New York Times
** Or the capability, to use Amartya Sen's language