Piketty, Poverty, Political Pooh

The 50th anniversary of President Johnson’s War on Poverty has led to a flurry of articles and debates about whether that war succeeded. That debate has been reenergized by Thomas Piketty’s best-selling book, Capital in the Twenty First Century, which argues that inequality is rising because returns to capital have risen relative to average economic growth. A solution to this inexorable force, Piketty claims, lies in some form of worldwide wealth tax.

In both cases, I find the political debate largely unproductive. Many conservatives and liberals pick at pieces of data and history to support their own forgone conclusions. Rather than seek practical margins for making progress, much of the discussion turns to thumbs up/thumbs down rhetoric or totally impractical solutions.

Here’s how the data play out. Since the late 1970s, market-based measures of poverty and the distribution of income (that is, measures of income before taking account of government redistribution through taxes and transfers) improved very little in the first case and got worse in the second. Both did much better a few decades earlier, including up to the mid-1970s. PIketty bases his broad historical conclusions about growing inequality largely on market measures. In turn, researchers ranging from Gary Burtless at Brookings to Tim Smeeding at Wisconsin to Richard Burkhauser at Cornell to Diana Furchgott-Roth and Scott Winship at the Manhattan Institute have shown greater reductions in poverty and less growth in inequality of income or consumption when market-based income is adjusted for government taxes and transfers.

These two different ways of looking at the data make for strange bedfellows as the debate turns political. Conservative critics of the War on Poverty combine with liberal world-always-getting-worse warriors, who like to cite Piketty, to form conclusions based largely on the before-tax, before-transfer measures. They unite to attack the status quo, with one suggesting fewer transfers (the war failed) and the other higher taxes on the rich (the tax system failed). Liberal defenders of social welfare programs and conservative opponents of higher tax rates, in turn, conclude that on an after-tax, after-transfer basis the world is a lot better off than the other side asserts. They defend the status quo.

Here are the statistics that I ponder. In real terms, social welfare spending averaged about $7,500 per household at the time the War on Poverty was declared. By the time that Ronald Reagan was inaugurated in 1981, spending per household had grown to $15,000. And today it has doubled again from the start of the Reagan administration to about $32,000. (These figures do not even include tax expenditures for social welfare, such as pension, housing, and wage subsidies, which averaged about $7,000 per household in 2013.) Meanwhile, GDP per household grew from about $70,000 in 1964 to nearly $140,000 today.

Over this same 50 years the official thresholds for measuring who is in poverty have not grown one dollar in real terms. These measures, adjusted only for inflation, in a sense, are based on absolute poverty, unadjusted for the new goods and services a growing economy provides or, said another way, for whether a household’s income keeps up with average or median income in the economy. For a family of four, for instance, the nonfarm poverty threshold is crossed when a household’s income falls below roughly $23,550 today, essentially the same level as in 1964. For a single person, the poverty threshold equals $11,490

“Wait a second,” you may think. The government spends far more on social welfare than would be required to give every household support above poverty levels. And in almost every year there have been substantial real increases in the amount of transfers made. Why, then, has the poverty rate not fallen more?

There is no single answer. Here are four pieces of the puzzle:

Huge gains at the top. Inequality in market-based income DID grow substantially since the late 1970s, the period when progress against poverty slowed. The ability of high-income individuals at the top of a winner-take-all economy to capture much of the extra rewards that derive from monopoly or oligopoly settings does help explain some of the stagnation in earnings growth for those with average or low earnings.

It doesn’t explain why the public supports, which have continued to grow, haven’t made greater headway in improving the skills of the population enough that their market incomes would rise more. That brings us to the next three pieces of the puzzle: the extent to which the public money has been spent to help providers, help the middle class, and pay for health care.

Providers. Beneficiaries include providers who have captured large portions of government, not just private market, money. Before you start looking elsewhere, just remember that providers include, among others, doctors, drug manufacturers, social workers, lawyers, lenders, other financial intermediaries, builders, housing officials, software developers, tax preparers, government contractors, and, for that matter, researchers like myself.

The Middle Class. The middle class rather than the poor has also captured very large portions of the social welfare budget, largely in ways that have for decades encouraged them to retire and work less for greater portions of their lives. Early growth in Social Security benefits, for instance, did a good deal to reduce poverty, but in more recent decades has made less progress because growth—the marginal increase in payments—has been concentrated preponderantly on more years of support and higher levels of benefits for everyone, from rich to poor alike. Remember that a program can on average be successful in meeting some objectives, yet still target its incremental budget poorly. Incremental spending in our public retirement programs in the modern age increasingly operates to decrease the market incomes of the middle class and, despite billions of additional dollars spent each and every year, only modestly increases the transfers received by the poor.

Health Care. A large share of the growth in the income of almost everyone but the rich has come not in cash but in the form of government and employer-provided health care and insurance. One-third of per capita income growth in our economy from 1990 to 2010, for instance, went simply to pay for real increases in health care, as average annual health care spending per household from all sources ballooned to approximately $24,000. Measures of both market income (e.g., Piketty) and most measures of after-transfer income (e.g., the official poverty measure) fail altogether to count this major source of income. Yet for many, particularly those below median income, that item has dominated the way their income has grown for perhaps three decades. The CBO has tried very recently to count health insurance received as income in some of their work, but its efforts are an exception to the rule.

These four pieces interlock in various ways. For instance, more years and money in Social Security support, particularly as people live longer, has encouraged the average worker to retire for more than a decade longer than in 1940, when benefits were first paid, thus reducing their market income. Because many of the government’s expenditures on health care have been captured by providers, the public’s gain in benefits comes out to only a fraction of each additional $1 the government spends, while in the private sector cash compensation stagnates to pay for higher costs of health insurance.

In sum, the debate over poverty and inequality deserves renewed attention. However, it provides a quandary to many in both major political parties, who are largely mired in mid-20th century debates and fighting the thumbs-up, thumbs-down battles that blocks improvement from either side. The times beg for a 21st century agenda (an issue I try to address in my new book, Dead Men Ruling).

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