It’s the economy, stupid.
The Welfare State and Poverty
The Left thinks wealth
is natural, and what needs to be explained is poverty. How
many articles
have you read in
issues of Time
and Newsweek down
the years about
the
causes
of poverty? There is intense investigation into the causes of poverty, as if
poverty
were
not natural. How can you explain
it? Would it not be wonderful to figure
out the
answer,
.What is the cause of poverty?. Because then we could make more
poverty.
Terrific. That is the wrong question. The important question is: What are the
causes of
wealth? That question was not asked until very late
in human history, in 1776. The
answer
to it has somehow not been learned by a large part of the political class. [1]
As we go about comparing different strategies for tackling poverty we must ask ourselves two important questions:
- How do we define poverty?
- What is our measure of success?
If we define poverty by a hard number- an amount of income per year – then we must ask if and how that number might change year to year and what it includes (unearned income etc.). We also must define how we may compare this number country to country – beyond exchange rate, are there other factors to consider?
The United States
Census Bureau defines an individual as poor if his or her family income is
below a hard number. The number depends on family size. In 2002, a family of
four was deemed poor if its annual income fell below $18,556; a family of three
was deemed poor if annual income was below $14,702. But because it is only a number, it doesn’t count previous
income. So, if someone owns a business
and generally does well but goes into the red one year, he will be counted as
poor even though his assets may be large.
Most students are also counted as poor, as they often have little income
while they attend school. This explains
the large number of “poor” in America, but does not separate any truly poor
from the rest. If we used an exchange
rate and applied the same standards to other countries we could compare the
number of poor in each country by this tactic – there are international studies
that do this, which we will discuss.
The World Bank defines poverty as subsisting on less than $1 a day, by this standard there no impoverished in America – nor in any of the European Socialist countries we will be comparing with America. Using eleven dollars a day as a standard across countries, there is poverty in America – more than in socialist European countries but less than in the UK and Australia[2]. Of course, some of those failing businesses or students may be included in those numbers.
Another way to define poverty is by standard of living factors such as levels or amount of hunger, clothing, discretionary income, luxury and modern convenience items, size and quality of dwelling, etc.
A fourth way is to define poverty by simply comparing the poorest with the richest in a given country. This is easy but means that there will always be people in poverty unless every person has identical income – which is neither practical nor desirable. Unfortunately this is the way it is defined by several important international groups – UNICEF defines first world poverty (Child Poverty in Rich Nations) as “less than half the median income of an equivalent household”. So the richer the well off get, the higher the income of the “poor” must be in order not to be labeled as “poor”. The poor in America could make twice what the poor in Sweden make and still we could be said to have a higher poverty rate, simply because we have more and wealthier rich.
The next question is how we should define a successful eradication of poverty. Must every person be above our defined poverty level? What if this requires more than one approach, is that okay? How will we know if everyone is above the level – what if some people dip below it for a short time, the numbers may indicate poverty even when it is short-lived – should those be counted separately?
The Heritage Institute
compiled some numbers on American poverty[3]
taken from the American
Housing Survey for 2001[4],
which uses the Census Bureau definition of poor – below a hard income
number. The study demonstrated that
these poor have quite high living standards on the average: 46 percent own their
own home, typically a three-bedroom house with a garage and a porch, located on
a half-acre lot and in good repair (worth about $86,600); 73 percent own a car
or truck; nearly a third own two or more cars or trucks; more than 75% have air
conditioning - while 30 years ago only 36 percent of the general U.S.
population had air conditioning; Nearly three-quarters own microwaves; a third
have automatic dishwashers, 97 percent have color TVs; 78 percent have a VCR or
DVD; almost two-thirds have
cable or satellite TV reception.
If we had defined poverty level by standard
of living factors a few decades ago, its clear that these impoverished would be
well above that defining mark – but does the definition change with time? That again would be a way to ensure there
are always people in poverty.
Of course there may be some poor who fell
through the cracks. The report also
discusses the 10% who don’t own a phone and 0.5% who experience hunger for lack
of funds to buy food. But who are these
folk, why are they so poor and what is to be done about it? Does it mean we need to expand welfare
services or are they the folk who refuse welfare? Would there be a greater number of poor if we cut welfare? Would these poor accept money from a charity
if there were more charities around – or perhaps these are folk who are looking
for a job? Could it be that a more
robust economy would help some of these folk and charities the rest?
It is common to read in studies on
inequality in America something to the effect of “We have a higher GDP than
European countries and yet we spend less on social benefits” – but it is rare
than such studies asks why we have a higher GDP. Could it be that the higher GDP is a result
of spending less on benefits – and that this helps the bottom quintile more than
the welfare handouts would? GDP by
Purchasing Power Parity is an indicator of living standard and this level is
40% higher in the US than in the EU or Sweden.
A higher GDP and higher level of growth do mean lower unemployment and a
more robust economy – with lower inflation and hence better purchasing
power. Could it be that the poor in
countries with a strong growth rate have a higher standard of living than their
counterparts in more socialized countries?
A quick
comparison does show that countries that spend less on social services tend to
have higher GDP, lower unemployment, lower long-term unemployment[5]
and more discretionary income. As a
percentage of GDP, Sweden spent a bit more than Germany, which spent more than
the UK, which spent more than the US.[6] The discretionary income per capita in
Sweden was a bit less than Germany, which was less than that in the UK, which
was less than that in the US.[7]
Of course it makes sense that if one is more highly taxed, one has less
discretionary income, but this is rarely noted. Some tables comparing total taxation as a percent of GDP and
total unemployment levels are shown below.
But how does
this affect the poor?
In Purchasing Power Parity (PPP)
adjusted income – the poorest Americans are better off monetarily than the
poorest French, German, Swedish or Belgian people. Only Luxemburg and Canadian poor are better off, and Finland and
Norway poor come close. There is some
concern about the accuracy of using PPP as a conversion factor, but it is
generally considered to be a better indicator than exchange rate and is used to
convert GDP as well. One argument is
that in countries with higher inequality the PPP conversion is less accurate –
but I am not sure that even PPP takes into account the very low cost of living
that a highly industrialized society with warehouse style stores such as
Wal-Mart allows. Using a PPP
conversion, German poor have 90% of the monetary income of American poor,
Swedish poor have only 87% and French poor only 81%. It may not be a huge difference in actual living standard, but
they are not better off than the American poor by that measure.[8]
There are two things to remember here as to
what is not included in this calculation:
1.
Non-monetary
income including healthcare and other subsidized benefits that the working poor
in each country might receive.
2.
Assets:
how many of the poor are only so for tax purposes e.g. because they are filing
as a business, and retain savings and/or non-monetary assets from previous
years.
Other things,
of course, cannot be measured in the simply monetary calculation and must be
considered separately – home ownership, opportunity vs. unemployment, etc.
Lets look
more generally at economies with larger welfare programs. How do they compare with the US in terms of
poverty – using each of these indicators?
Many sources (such as UNICEF)
simply state that Sweden has the lowest poverty without telling you that what
this means there are fewer people in Sweden that have an income which is less
than half the median income in their country.
If the median income in Sweden were less than what it is in the US, one
would expect fewer people to be below half that level. In fact it is only 75% to 80% of the US
median income.
Using the hard number “absolute” poverty
rates, as mentioned, there is still a lower rate in Sweden (but not in the UK
or Australia). But this, as we
discovered from the household survey, still does not take into account assets. How do the Europeans compare in terms of
assets?
As mentioned above, in the US the percentage of poor (as defined by a household income of less than around $15- $19,000 depending on family size, which makes them under half the median[9]) who own their own home was 46% in 2001. Casting a wider net and including as poor all those who earn less than 60% of median income in Sweden, still only 35.8% owned their own home in 2001 and 6.1% (about the same as in the US[10]) of those were overcrowded.[11] It was even worse for Germans, only 27.5% owned their own homes, with 14.4% of those were overcrowded.
In Belgium, though, 59% of those earning less than 60% of the median owned their own home – and their median is only 70% of the median in the US by purchasing power. Apparently it is quite easy to buy a home in Belgium and only 6% were overcrowded. Yet still the poor in the US do have more floor-space per person. The average poor dwelling in the US has 438.6 square feet per person while the average dwelling (not the average poor dwelling, which may have less) in Belgium has just 371.4 square feet per person. That means the average person in Belgium has only 85% as much room as the average poor American. In contrast, the average person in Luxembourg has 517.3 square feet – about half way between the average poor (438.6) and the average (721.2) American.
Another difference is in how income may be
spent. Although by most accounts, the
Swedish median earnings are about 75% to 80% of the US median earnings, the
average household spends almost twice as much on necessities (housing, water, electricity, gas
and other fuels) as a percentage of income, than does the US household[12]
– hence a lower level of actual discretionary income.
But poor American households more often are
without health insurance and so visits to the doctor and emergency room may
come out of pocket, as will pharmaceuticals.
Much has been made of this recently.
It is true, if the taxes spent by individuals that go toward the
healthcare program are calculated, then so should the amount spent out of
pocket toward these services.
The out of pocket expense for healthcare is indeed higher in the United States[13], but it is only similar in amount to the excess discretionary income that most European poor find themselves paying in utilities, as described above. In US dollars, corrected for purchasing power, the per capita cost of out of pocket medical expenses was $268 in France, $292 in Germany, $445 in Canada and a little more than that in Australia, and $737 in the United States. It is approximately $200 in the United Kingdom, based on earlier figures. If $500 to $600 is saved in out of pocket expenses on healthcare each year for a European poor family, the same may be lost in cost of utilities. An average poor family in the United States might spend $100 a month on utilities, if twice the percentage of income is required for a poor family in France, that could easily cost an additional $500 per year. So, after discretionary income is calculated one must calculate both the costs of utilities and the cost of healthcare, and we are back where we started – the poor in the United States are still better off than their European counterparts. This is, of course, assuming that the poor resemble the average person in healthcare and utilities or that they are comparable – and it assumes that the quality of the service is comparable. But we will have to leave this comparison there.
Many of the international studies focus on equality. Marx – a thinker whom the Europeans respect - spoke a lot about this and how different classes in society meant that the working poor would never be equal in society to the bourgeoisie. But in a society with mobility, there are no classes, so what really is gained from having less income disparity?
Personally, I would rather have a good life and see others even richer, than be poor with a world full of poor people. Of course I might think differently if I thought that my economic position relative to others would mean less freedom or less opportunity[14]. But comparing opportunity in America with that in Europe, it seems that the opposite is true. We will consider that next.
There are a few components to opportunity.
- Resources – disposable income or ability to leave work to look for new work, healthcare, childcare, education and basic necessities required for a fair chance at the job market.
- Market opportunity – availability of jobs, growth or advancement potential in given companies, earnings potential, availability of company resources for wage increase.
- Social mobility – social acceptance in society of economic mobility.
In comparing the European Socialist strategy, we see that numbers one and three are considered, leaving number two behind, traditionally. The thinking goes: jobs alone are not enough, the people need the resources to advance – how is a single mother in a low paid job going to move up the economic ladder without assistance in childcare and healthcare?
So welfare and job training and assistance have been part of an overall social assistance strategy, paid for by higher taxation. Though there are certain taxes that the European countries have wisely kept low – lower than the US on average and which they continue to lower, such as capital gains tax[15] - the overall tax rate is much higher. In recent years welfare spending and income taxes have been reconsidered in some countries, as economic wisdom has been sought to address failing economies.[16]
In contrast, the US has more closely followed the free market strategy of placing the importance of number two well above that of numbers one and three. The philosophy is that making sure the jobs are there is most important – if they are there in large enough numbers, the people will fill the jobs (so all else will fall into place).
So, by what can we measure which strategy works best? Should we simply compare unemployment levels? How about overall economic growth or new businesses and jobs created? Or what about economic mobility – the movement of people between income-brackets? It could also be gauged by a look at investment, entrepreneurship and other sorts of self-created opportunity. Lets have a quick look at all of those.
- Unemployment – the US wins, far lower unemployment levels on average and vastly lower long-term unemployment levels than European Socialist countries. Also, the US has a smaller “not in labor force” component.[17]
- Economic Growth – The US has, on average, much
higher economic growth than the European countries, average annual growth
in real GDP from 1991-2000 was 3.3% in the US but only 2.7% in the UK,
1.9% in France, 1.7% in Sweden, and 1.6% in Germany.[18]
- Economic Mobility – there is not full consensus
on this. Clearly there is high
mobility between all quintiles in the US and Europe. A study by the OECD showed greater
mobility for the lowest quintile in the US but also greater move away from
fulltime employment[19]. Another showed higher overall 5-year
mobility in the US than in France or Germany and greater probability to
move two or more quintiles in the US than in France, Germany or the UK –
but also greater chance of losing full-time[20]
employment status for low-paid workers[21]. Mobility studies that cover a
fifteen-year period in the US show very great mobility for the lowest
quintile[22]. Of course the quintiles represent
different earnings in purchasing power as well – a low-wage worker in the
United States may make as much as someone in the second quintile in
Belgium[23] and
much of the top quintile in the US may not exist in dollar amounts in some
countries. There is a general
consensus that overall upward mobility in the US is not significantly less
than in Europe and may be greater.
- Entrepreneurship and Investment – Not
surprisingly, there is no disagreement about this one. America wins by a mile. One in twelve adults in the United
States are involved in entrepreneurial activity, whereas only one in
thirty are in the UK and one in fifty-five in France according to the Global Entrepreneurship
Monitor, 1999. Investment is
obviously greater in order to fund these businesses and America holds
center stage in the investment world.
So how does the free-market strategy
fare? If we are better on all
these four counts then clearly people are finding the resources outlined above
or are somehow finding opportunity without them.
As to social mobility – we have nobodies who become actors and actors who become president – we invented the concept of social mobility and were the first (and perhaps only) society to eradicate class as a social concept. We replaced it with the three words that describe all of what we have outlined up to this point:
The American Dream.
Now, let’s take a look at why Europe is behind on some of these numbers – is it intrinsic to the economic and social policy? First lets ask why European Socialist countries have higher unemployment and lower GDP on average.
There
are a few studies of note on this topic.
The Beveridge Curve,
Unemployment and Wages in the OECD from the 1960s to the 1990s[24] asks this question and after a thorough
analysis is able to generally prove that:
“dramatic long term shifts in unemployment seen in the OECD countries over the period from the 1960s to the 1990s can be explained by changes in labour market institutions in the same period. The institutions concerned will be the usual suspects set out in the Oswald (1997) quote, namely generous benefits, trade union power, taxes and wage “inflexibility”.”
The OECD came out with a “jobs study”[25] in 1994 that included the following policy:
- Nurture an entrepreneurial climate by eliminating
impediments to, and
restrictions on, the
creation and expansion of enterprises.
- Make wage and labour costs more flexible
by removing restrictions that
prevent wages from
reflecting local conditions and individual skill levels,
in particular of
younger workers.
- Reform employment security provisions
that inhibit the expansion of
employment in the
private sector.
- Reform unemployment and related benefit
systems — and their
interaction with the tax system — such that
societies’ fundamental equity
goals are achieved in
ways that impinge far less on the efficient
functioning of the
labour markets.
Richard Jackman also raised this question[26] and this was the conclusion he came to:
Most government policy on unemployment in Europe has been based on the
premise
that unemployment is caused by there being
too few jobs. Hence policies have attempted
either to create more jobs, or to reduce
the labour supply. In the former category, there
is in many European countries, a clear
nostalgia for old-fashioned Keynesian-style
public investment policies… There are also
policies to maintain activity in uncommercial sectors (e.g. agriculture),
primarily on employment grounds. Attempts to achieve wage moderation also fall
into this category, especially where this can be achieved through agreement
with the union movement (the ‘social partners’). In much of Europe there is an
aversion to reducing unemployment through the creation of ‘bad jobs’, and a
belief that the American free enterprise approach has bought full employment at
the expense of creating an ‘underclass’ of people whose living standards fall
well below a socially acceptable level.
Of the latter, two types of policy have been particularly important:
limits on hours of
work and early retirement… overall labour
supply, taking together hours and participation, is substantially lower in most
European countries than in the
United States.
In the UK, by contrast, policies have been focused on deregulation and
increasing
labour market flexibility. Examples include
the gradual erosion of trade union rights
during the 1980s, the ending of the wage
councils (which imposed minimum wages in
various low-pay sectors) in 1993, and
weakening of employment protection legislation.
At the same time, the value of unemployment
benefits was allowed to fall relative to
wages, and the duration of benefit
entitlement was reduced from a year to six months in
1996, while the unemployed were encouraged
to search more actively through the
Restart program which had been introduced in
1986 and gradually extended. The final
step, taken by the new Labour Government’s
Welfare to Work program is to require
young people after 9 months to take work
or go on a training scheme, or else lose their
benefit.
And, of course, Britain’s unemployment and
long-term unemployment rates are second only to the US – which has an even
lower level of benefits for the unemployed and a market even freer from
restrictions.
But the report sums up:
If this analysis is correct, the prospects for
European unemployment must be
pessimistic. There is political and
ideological aversion to economic liberalism throughout
most of continental Europe, in particular
among the bigger countries which influence EU
policy. The financial consequences of
ever-increasing government expenditure seem
likely to restrain further growth of
labour market intervention, but Europe as a whole
appears condemned to high unemployment, as
the cumulative effect of its past policies
weaken market forces and inhibit the
functioning of the labour market.
And my concern is that the US is doomed to the same fate:
every year we add more restrictions and benefits and the ideology grows that it
is government’s place to do so and we are behind our good European neighbors in
this. After all, we have a higher GDP,
we should be spending more to help the poor!