Sunday, February 10, 2013

Poverty in the United States

Deriving an accurate definition of poverty is not an easy task. Poverty is related to financial resources, but it is also involved with social and cultural resources. To counter poverty and attempt to eliminate it, all three factors must be addressed. In order to obtain a precise, but not necessarily accurate, tally of poverty, most countries associate it with income level. A standard prescription is to define poverty as an income below some fraction of the median income in a given country. The OECD tallies the poverty level based on an income less than 40% of the median after taxes and income transfers. The OECD would include Food Stamps, welfare payments, tax credits like the Earned Income Tax Credit (EITC) and other such transfers as income. By that reckoning, the US would have a poverty rate of about 11%. The US uses a slightly more complex formula and ignores income from transfers. It would quote a poverty rate of about 15%.

An article on poverty in the US appeared in The Economist and provided this chart:

This was derived using OECD numbers and methodology. It would seem that the only developed country with a poverty rate greater than the US is Mexico, and no other country comes near to the US in producing the quantity of poor people. This is a rather disturbing result for a country that likes to think of itself as the richest in the world.

It is of interest to consider the effect of government income transfers on the poverty rate. Each country will have different policies that will produce changes in the effective poverty rate. A second article from The Economist provided an interesting way to look at the effect of these transfers and compare the US policies with those of other countries. What is tallied here is the Gini coefficient, a measure of income inequality, both before and after the inclusion of income transfers. The larger the Gini coefficient, the greater is the inequality.

There are several countries, such as France and Finland, with an income inequality about as great as the US, but they have policies that are much more effective at diminishing the inequality. Could it be that the US just does not devote enough resources to such issues?

Bruce Bartlett, in his book The Benefit and the Burden, provides us with more OECD data on the amount of funds (as a fraction of GDP) that OECD countries devote to social issues. This would include direct spending and indirect transfers such as those considered in the poverty definition.

It seems the US devotes a considerable fraction of funds to social purposes. While spending less than France, it spends considerably more than Finland, and is well above the OECD average.

The obvious interpretations of these numbers are that the US is either less efficient in alleviating income inequality (and thus poverty), and/or is more interested in other social issues. It is not for lack of funds.

There is another instructive way to examine poverty in the US: geographically. The first article from The Economist also provides these breakdowns of the poverty rate by county.

The snapshot data from 2010, a time of broad economic distress, indicate a widespread distribution with some concentration in the southern and southwestern regions. The long-term poverty data indicate a definite focus on southern states and regions that share their border with Mexico.

It is interesting to note that the areas of persistent poverty are mostly found in the states that traditionally vote for Republican legislators. Of perhaps more significance is the apparent persistence of poverty in two different socioeconomic groups: southern whites and blacks, and the Hispanic and non-Hispanic whites in the border regions. There is also a third persistent socioeconomic group that does not show up in the county-level data, the urban blacks and Hispanics who live in poverty.

The US is a large and diverse country. The fact that long-term poverty is concentrated in three groups with distinctly different histories and cultures suggests that there is not a unique and simple solution that would eliminate poverty. There is more involved here than just transferring funds in order to increase incomes. It is likely that each of the three groups will require different types of assistance if they are to extract themselves from their low income status. There is no indication that mere increased economic growth and lower unemployment would alleviate these endemic conditions.

On a positive note, the US is already spending more on social manipulation than most would believe. If it chose to address poverty in a coherent fashion, the funds would be there.

Poverty in the US is a topic that deserves much more discussion than it has been receiving.

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