Friday, June 6, 2014

GDP and Poverty: Is Economic Growth the Answer?

From 1959 to 1973, the American economy grew 82 percent, per person. It is easy to assume this is why the poverty rate decreased from 22% to 11 percent.[1] From roughly 1985 to 1990 and then again from 1995 to 2000, heady growth rates are also correlated positively with declining poverty rates. But correlation is not causation. Indeed, had the correlation in the 1959-1973 period continued, the subsequent per capita growth would have ended poverty in 1986. What then are we to make of the relationship between GDP and poverty?

According to Heidi Shierholz, an economist at E.P.I., the “very tight relationship between overall growth and fewer and fewer Americans living in poverty” broke apart in the 1970s.[2] In spite of the OPEC oil cartel’s inflationary shocks in 1973 and 1979, the poverty rate remained relatively constant through the decade of “stagflation,” spiking only once Reagan took office—perhaps on account of David Stockman’s domestic budget cuts that hit the poor especially hard and Paul Volcker’s high interest rates at the Fed (to decrease the inflation rate) that increased the cost of borrowing money. To be sure, the recessions in the early 1980s and the early 1990s are associated with increases in the poverty rate, which even lags the subsequent recoveries, and the rate fell as the economy was humming along in the late 1980s and 1990s. Even so, eleven percent seems to be the rate’s floor. Perhaps this is why the relationship broke apart in the 1970s?

According to Thomas Piketty, the period from World War I to the 1970s is unusual economically because the shocks reduced returns on capital relative to the growth rates of income and GDP. The economist suggests that inequalities in income and even wealth narrow under this rather artificial arrangement; typically, returns on capital have outsized increases in income, thus increasing the inequalities. Perhaps the inverse relationship we are looking at holds only when the rate of return on capital is low relative to the GDP rate. However, as I indicate above, heady growth periods after the 1970s can be found in which the poverty rate is decreasing, and recessionary periods in which the rate is increasing.

So we are back to the 11 percent floor. When the relationship broke apart in the early 1970s, the poverty rate was indeed at 11 percent. Instead of continuing downward, the rate hovered, when up a bit, then slightly downward until just above 11 percent before heading starkly upward in 1981.[3] What might be behind the floor? It seems doubtful to me that 11 percent of the adults in America are simply unable to work for non-economic reasons. It seems more likely that the market mechanism, which can support wages at the minimum wage without any upward pressure (e.g., from labor shortages), functions at an equilibrium short not only of full employment, but rising wages (relative to returns on profits and stock appreciation) as well. In other words, we cannot look to the market to “grow” us out of poverty. While undoubtedly a help, the market is only part of the solution.

The question is thus how we can fill in the rest of the solution. What, outside of the economy, can make up the difference? As the source and enforcer of societal rules, government is not intrinsically the answer, for to be the “man in charge” does not in itself connote supplying materials (including jobs). Yet the government could direct that materials and or jobs be provided outside of private industry, such as by non-profit organizations receiving funds from tax revenues and thus directly under government oversight. Even now, the Full Employment Act of 1946 directs that everyone who wants a job should be able to have one—that this is a task of government to oversee. Lest employment be viewed as an end in itself rather than a means, we could stipulate that everyone has at least a minimum amount of money and wealth. Hence the unemployable veteran, for example, would not have to suffer in poverty. Lest breaking through the 11 percent floor make it more difficult for Walmart or McDonalds to pay cashiers the minimum wage of just over $7 an hour, we might remember that a part of the solution is not in itself more important than the solution itself.

That is to say, hits taken at the margins to part of the solution as the rest of the solution is added should not outweigh the solution itself, for the end is more important than any one of the means. Too often, I fear, the American public discourse obsesses on the downsides on the margins to a means, being all too willing to preempt a full solution just so the particular means is not slighted in any way. I suppose this is a sort of tunnel vision, with greed playing a supporting role. Death and taxes may be inevitable, but surely poverty is not. Indeed, it may be viewed as an artificial byproduct of human society and thus as fully within our powers and responsibility to eliminate rather than take as a given.

[1] Neil Irwin, “Growth Has Been Good for Decades. So Why Hasn’t Poverty Declined?The New York Times, June 4, 2014.
[2] Ibid.
[3] Ibid.