In a previous column, I lamented how the poverty rate in the United States has remained range-bound between 11 and 15 percent ever since the War on Poverty was launched in the 1960s.
On Aug. 21, economist and former U.S. Sen. Phil Gramm and John F. Early, former assistant commissioner of the Bureau of Labor Statistics, wrote an article for The Wall Street Journal titled “Americans Are Richer Than We Think” (an article I highly recommend). Among the authors’ assertions is that the incidence of poverty in the United States is a minuscule 2 percent, not the 12.3 percent that is the current official poverty rate.
What can possibly explain such a startling and enormous difference between a supposed poverty rate of 2 percent and an official poverty rate of 12.3? The answer is twofold, both having to do with how we measure wealth and poverty.
In the first place, this is an apples and oranges comparison. The official poverty rate strangely and confusingly includes some government assistance, but excludes the lion’s share, leaving about $1 trillion of assistance uncounted. The Gramm/Early computation includes all the gov’t benefits. Thus, Americans who are categorized as poor in terms of income have an actual standard of living that is not poor when one counts the government assistance they receive.
Indeed, poverty in the sense of acute deprivation is largely nonexistent in the United States in the 21st century. As reported by The Heritage Foundation, “The typical poor household, as defined by the government, has a car and air conditioning, two color televisions, cable or satellite TV, a DVD player” and “the typical average poor American has more living space in his home than the average (non-poor) European has.”
The second reason for the gaping disparity between the official poverty rate and the Gramm/Early poverty rate is due to major differences in how key macroeconomic data are measured. GDP, consumer price, and real wage indexes, inflation, productivity, and poverty rates all are inherently difficult to measure accurately. According to Gramm and Early, methodological flaws have resulted in all of these economic indicators making us appear less prosperous than we really are.
One seemingly insuperable obstacle in macroeconomic statistics is how to quantify improvements in quality. If you can figure that one out, you’re a lot smarter than I am. To me, this is comparable to the 19th-century Swiss economist Vilfredo Pareto’s attempt to quantify happiness—an unsolvable problem.
But there are other more down-to-earth calculations that can be improved upon. For example, Gramm and Early reject the oft-repeated assertion that real average hourly earnings increased only 6 percent from 1975 to 2017. They claim the actual figure is a 52 percent increase. Whether that figure hit the bullseye, I can’t say, but the 6 percent figure has long seemed unrealistic based on everyday observations of material standards of living.
American Enterprise Institute economist Mark J. Perry has convincingly shown that wage stagnation is a myth. Perry took a basket of 11 household appliances, such as a washing machine and a toaster, that cost 885.6 hours of labor to buy in 1959. He showed that by 2013, the same goods—many of higher quality—could be purchased for 170.4 hours of labor. (My favorite example of how much more bang we get for our buck today—very much on my mind during the hot, muggy days we had this August—came from an article titled “Air-Conditioning Costs Fell by 97 Percent Since the 1950s” by the Foundation for Economic Education.)
The implications of using seriously flawed macroeconomic data to formulate public policy are profound and far-reaching. If, in fact, inflation has been overestimated while real wages, productivity, and GDP growth have been underestimated—and this is what Gramm and Early maintain—then government spending and debt have been rising much faster than they should. Many standing assumptions may in fact be erroneous.
Whether Gramm and Early have found the “right” way to compute macroeconomic data is a topic worthy of vigorous debate. Their upcoming book, “Freedom and Equality,” co-written with economist Robert Ekelund, will examine macro measurements in depth. This book could be one of the most impactful books on public policy in many years. My opinion is that we will never find exact, indisputably accurate ways to measure wealth and poverty, but we shouldn’t stop striving for accuracy. The present established methods are misrepresenting real-life economic conditions and need to be recalibrated.
Returning to the poverty issue, if is true that only 2 percent of Americans actually live in poverty, is it time to declare victory in the War on Poverty? I would respond with an emphatic no. While glad that few Americans live in serious want, as long as the only thing holding people above actual poverty is government spending, there’s further progress to be made. My reasons are several:
Economically, our entire society will be more prosperous if the millions who consume, say, $35,000 per year of goods and services were to actually contribute that much wealth production through their own labor. This is particularly true of the armies of bureaucrats who administer these programs. I mean no disrespect to the many caring, competent civil servants administering the myriad government anti-poverty programs, but they are not truly creating wealth; rather, they are simply redistributing it. And the most glaring economic reason: We can’t keep adding trillions of dollars to government debt indefinitely.
Ethically, we need to move away from the facile and dangerous notion that government should be in charge of redistributing property. The federal government was constituted to protect property rights, not abrogate them.
Socialist zealots claim they want to use government to help those in need. In practice, however, what they really want is the power to tell businesses what to produce and to determine who gets how much wealth. As I’ve explained before, theirs is a “might makes right” ethos (i.e., “There are more of us than there are of you”). The kind of society they would produce would operate on the principle that “all animals are equal, but some [the political elite] are more equal than others.”
Politically, the trillion dollars per year now spent on poverty programs means that millions of Americans have gotten habituated to massive transfers of wealth. According to public choice theory, which states that government employees still respond to incentives just as much as anyone else, the anti-poverty bureaucrats don’t want to eliminate poverty. If they did, the reason for their jobs would evaporate. So instead, they seek to manage it. Indeed, with the relative fixity of the poverty rate over the past 50-plus years, they seem to have managed the problem quite successfully, repeatedly redefining poverty and keeping the numbers of poor from falling.
One technique that keeps people “stuck” to welfare is the structure of government benefits. In Pennsylvania, for example, a single mom earning $29,000 becomes poorer for every dollar earned between $29,000 and about $57,000 because she loses various benefits and pays higher taxes at a faster rate than her income rises. In effect, when she gets a raise, more than 100 percent of it is taken away. Think how demoralizing it must be to be penalized rather than rewarded when you get a raise. (If you want to see this depicted graphically, search for “welfare cliff.”)
A final political objective is to lift people out of poverty, strengthening their dignity and self-esteem as they learn the satisfaction of becoming independent and self-supporting rather than dependent clients of the state. This will be a daunting and difficult challenge, but if Gramm, Early, and Ekelund are even half right about how flawed measurements have led to inferior policies, then it would behoove us to start making the necessary adjustments both to macroeconomic calculations and to public policies. Until then, Americans will remain poorer than we should be.
Mark Hendrickson, an economist, recently retired from the faculty of Grove City College, where he remains a fellow for economic and social policy at the Institute for Faith & Freedom.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.