TGIF: The Poverty of Poverty Data

"Poverty has no causes; prosperity has many. As history attests, poverty is humanity’s default condition.... But prosperity is not natural; it does not just happen."

—Phil Gramm and Donald J. Boudreaux

To hear some people tell it, America is in the grip of a vast conspiracy in which billionaires get richer, the middle class stagnates at best, and the poor get poorer. Poverty and inequality, by this account, are the shame of America. How can we let this go on!

Do not fall for it. Except for the part about billionaires (those who get rich by innovatively serving consumers), the story is hokum. The middle class shrinks because its members move up, and the "poor" get richer with mass production and lower prices. If a monolithic predatory ruling class has been making war on the rest of us, it has been bloody bad at it. Do you need proof (besides the abundant evidence in your home and out the window)? Check the data! This doesn't mean all is well with the American political system—far from it. Rather, it means that the market economy and the freedom it entails can take a licking and keep on ticking—better and better as years go by. Free the market (that's us) of government shackles, including Trump's tariffs, and the pace of wealth creation for all will quicken.

Phil Gramm and Donald J. Boudreaux document the real story in their book, The Triumph of Economic Freedom: Debunking the Seven Great Myths of American Capitalism. Let's see what they have to say about poverty.

Admittedly, the officially released statistics are a downer. Data compiled by many prestigious-sounding agencies and organizations, Gramm and Boudreaux write, "show that a higher percentage of Americans live in poverty than in any other developed country in the world." If true, that might be a mark against a commercial society like the United States. (Then again, it might be the government's fault.) "All of these damning conclusions," the authors continue, "are buttressed by the US Census Bureau’s official measure of poverty, which shows that the poverty rate has not declined on a secular basis for more than fifty years."

That stinks, but is it so? Actually no.

Gramm and Boudreaux, both economists, show that from 1947 to 1967—before the Great Society got into gear—the U.S. poverty rate dropped by over 50 percent. So "It seems strange that ... when the War on Poverty began and its programs were funded at significant levels, beginning in 1967, the poverty rate then remained essentially unchanged for over a half-century."

That is strange, especially because "the average bottom-quintile household has seen the inflation-adjusted value of government transfer payments rise from $9,700 per year in 1967 to $45,400 in 2017...." (That excludes the administrative costs.)

"Obviously," they write, something is wrong here."

What could be wrong? How about this? The data leave out quite a few important things.

[T]he official Census measure of poverty fails to count 88 percent of all the benefits that poor American families receive from the government as part of their income." [Emphasis added.]

Eighty-eight percent!

The omitted benefits include "refundable tax credits where the beneficiary receives a check from the Treasury, debit cards loaded with food stamp allowances, and benefits from over a hundred other major programs, including Medicaid and housing subsidies in which the government simply pays bills that are incurred by the programs’ beneficiaries." (This curious practice of omitting benefits is left over from when government benefits were mainly in cash.)

How do things look when that data is restored? Gramm and Boudreaux write, "When all transfer payments, net of the costs of making those payments, are counted as income to the recipients of the transfers":

• The 2017 overall poverty rate drops from the official 12.3 percent to 2.5 percent;
• The child poverty rate drops from the official 17.5 percent to 3.1 percent; and
• The poverty rate for seniors drops from the official 9.2 percent to 1.1 percent.

Gramm and Boudreaux account for the small percentages remaining by people who "have fallen through the cracks" because of medical and other problems. In any society, no matter how rich, some people choose poorly. The authors cite other studies that support this adjusted overall poverty rate.

Moreover, Gramm and Boudreaux point out that "the number of people who are classified as poor changes dramatically over time."

Less than a quarter of families classified as being poor have been poor for two years or more. It should also be understood that twice as many families were poor for only some part of the year as those families who were poor the entire year. Experiences such as being laid off, suffering illness, or being employed in seasonal work contribute to people alternating between being on the poverty rolls and rising off of them."

The misleading official picture, Gramm and Boudreaux note, is also exposed by the fact that, according to a different Census Bureau study, "42 percent of poor households own their own homes, the average of which has three bedrooms, one and a half baths, a garage, and a porch or patio. Of the households considered to be poor, 88 percent have air conditioning, and the average poor American family lives in a home that is larger than that of the average middle-income family in France, Germany, and Britain."

And this is impressive: "Of all American households in 2017, 66.3 percent had real incomes, after transfers and taxes, that only the top 20 percent enjoyed in 1967." That hardly looks like stagnation.

Does this mean the welfare state works? Not if the goal is to foster independence in lower-income people. But the data do tell us that the welfare state does not need expanding, as the progressives claim.

For one thing, it discourages people from working and thus encourages dependence on the coerced taxpayers. Gramm and Boudreaux write,

The explosion in poverty benefits since 1967 caused the prepandemic employment rate among the bottom 20 percent of income earners to plummet from 67 percent to 36 percent, as well as the employment rate among the second quintile of earners to fall by almost 6 percent.... The growth in the welfare program has largely delinked the bottom 20 percent of income earners from the American economy....

It is not good when working people in the second lowest quintile have only slightly higher incomes than those who work little or not at all.

What's unseen is that without the welfare state, not only would the incentive not to work disappear, but the most innovative and productive people would have more money with which to make everyone more affluent.

Crime and Poverty

“The theory that crime is caused by poverty is not supported by the known facts. The very poor, in fact, tend to be just as law-abiding as the rich, and perhaps more so. To argue otherwise is to libel multitudes of people who keep to decency under severe difficulties, and in the face of constant temptation.”

—H. L. Mencken, Minority Report: H. L. Mencken’s Notebooks, 1956

TGIF: Question Intuition!

In the 1960s a popular button that New Left activists wore implored everyone to "Question Authority!" It was good advice, even though many kinds of authority exist. Some authority is chosen (for example, one's doctor) and others are compulsory (the government). But in either case, questioning it is reasonable. The button did not implore anyone to reject authority, only to question it.

What about intuition? I have the impression that people think their own intuitions need not be questioned because they are reliable. But is that wise? I don't think so.

First let's acknowledge that much of what people take for an intuition is often a mere claim heard repeatedly through the mass media or social networks. Something that seems like an intuition may not be one at all.

But ignore that distinction for this discussion. Some factual claims just feel true to people who have not read much about the matter. For example, many people are likely to say that it is intuitively true that a growing human population must bring a progressive depletion of natural resources (and the products embodying them) and thus scarcer supplies, higher prices, more hardship for poorer people, greater economic inequality, and other bad things. They feel this must be the case. How could it not be true? Resources are finite and nonrenewable, so if more and more people demand them, harm must follow.

But is it really true? Or is this a case of knowing something that isn't so?

It will shock many people to learn that we know empirically and theoretically that it is not true. If that sense of doom is an intuition, then intuition can be and often is wrong. Malthus got it exactly upside down. As Marian Tupy and Dale Pooley, building on the work of the late great Julian Simon, demonstrate, world population has grown dramatically -- one billion in 1800, eight billion today -- along with a dramatic fall in absolute poverty and a dramatic increase in the production of and access to food and all the other things we need and want.

More people are living longer and materially better lives than ever before. This simply cannot be denied. Tupy and Pooley emphasize a largely unknown fact among laymen: today it takes people on average everywhere less labor time to earn the money to buy all sorts of goods and the underlying resources than it took in the past, even the fairly recent past. In the time the average manufacturing worker labored to earn the money to buy one egg in 1919, he could buy 36 eggs in 2019. The time price of an egg thus had dropped to 1/36 of the earlier time price, roughly a 97 percent drop in the real price. And so on across the board.

Today, Tupy and Pooley say, average time prices have fallen to 2 percent of their 1850 level. (Quality improvements, which are hard to quantify, make this fall an underestimate.) Let that sink in, especially how that disproportionately benefits the poorest people. They have more time to buy more things or to enjoy leisure. That's new wealth. Industrious people at all levels have become smarter and more productive because of modern technology.

Tupy and Pooley call their new book Superabundance because, contra Malthus, the increase in resources has outpaced population growth. That's counterintuitive. We forget that while people are consumers, most are also net producers. (See the charts here.)

Exactly what accounts for that great progress? Two things, the authors say. The first is human intelligence, or as Simon called it, the "ultimate resource." This is an apt term. Contrary to intuition, there are no natural resources. Zilch. In the pilot of the 1960s TV show The Beverly Hillbillies, the backwoods farmer and hunter Jed Clampett discovers oil on his land. Does he cheer? No, he is unhappy. He sees it as a curse. When a city man offers to remove the oil, Jed says he can't afford to pay for the removal. The city man laughs and explains that Jed will be paid (a lot), not charged, for the removal. (Jed was really behind the times.) Obviously, that was not always the case.

What happened? Knowledge happened. Chemically, the crude was the same stuff as before. But in the 19th century, a chemist (in Canada, I believe) discovered that kerosene, which could fuel lamps, could be distilled from that oil. Then others discovered that oil could be pumped and refined economically, that is, cheaply enough to make a mass market. (John D. Rockefeller had a lot to do with this.) This solved a problem: the common fuel for lamps, whale oil, had been getting expensive because the whales were being killed off. Eventually, it was discovered that gasoline, which could fuel machines, also could be refined from oil, and we were off to the races.

What turned useless black gunk into useful "black gold" was human intelligence. This is true for all so-called natural resources. Nature provides stuff, but it neglected to furnish a user manual. People had to figure it out for themselves. And we all benefited immeasurably.

As important as human intelligence is to the creation of resources, something more is needed: freedom (or at least a good measure of it). If people are not substantially free to act and interact, peacefully, of course -- if society instead is planned from the top -- little if any innovation will take place to improve the lives of entire populations. Freedom and innovation go together.

A further implication, as Simon heroically taught, is that population growth (along with immigration, by the way) is good. More people means more ideas that can combine with other ideas to produce even better ideas. (Free speech is obviously crucial.)

The great economist Ludwig von Mises understood all of this. My favorite line in his magnum opus, Human Action, reads: "The fact that my fellow man wants to acquire shoes as I do, does not make it harder for me to get shoes, but easier." As the number of our fellow human beings increases, getting shoes and everything else becomes even easier -- if the government can be kept at bay.

Everything today is more plentiful and cheaper than in previous eras -- well, almost everything. The only thing that has gotten more expensive is labor, which indicates that people have become more scarce relative to consumer demand and resources. If a demographic problem for economic growth is looming, it's de-population in the most productive parts of the world. What's your intuition have to say about that?

Indisputably, then, free human beings have made the earth more, not less, hospitable. (For details on all these matters, see the works of Simon and Tupy and Pooley, as well as others, including Matt Ridley, Bjorn Lomborg, Alex Epstein, Patrick Moore, and Michael Schellenberger.)

Energy News Flash!

Higher-income people can cope more easily with government-created soaring energy prices than lower-income people can. The state is no friend of those who struggle to pay their bills.

TGIF: Reject Both Identity and Egalitarian Politics

The push-back against identity politics by disillusioned leftists is welcome, but the striving to replace identity with economic equality as the guiding political principle? Not so much.

I won't spend time on the problems with identity politics, a zero-sum game if ever there was one. The virtue of universalism extolled by classical liberalism seems indisputable. Why wouldn't everyone begin with the same entitlement to life, liberty, and the pursuit of happiness free of government impediment?

As a general matter, past crimes committed by some long-dead people against other long-dead other people cannot be rectified without creating new crimes and instigating an unending chain of grievances. That's no recipe for the liberty, cooperation, and peace that our individual and social welfare require. Identity politics is founded on collectivism, according to which people are judged by their membership, typically involuntary, in a racial or ethnic group. The obsession with identity has now gone from the ridiculous (skin color) to the absurd ("gender"), but that's a topic for another day -- perhaps. It's a minefield.

So let's turn to the proposed replacement: economic equality, sometimes called class-based politics. A contingent of people, including but not limited to some orthodox Marxists, have pointed out that identity politics has tragically taken our eyes off the ball. Instead of focusing on something that can unify all "oppressed" people -- the wealth and income gaps -- we have been misdirected toward something that needlessly divides them and reduces or obliterates their ability to resist and to make things better. One proposal is to replace race-based government programs like affirmative action with class-based versions that give preferences to people with less-affluent upbringings. (One finds this view expressed in a heterodox publication I like quite a bit, Spiked Online.)

Why is that not a promising alternative? Because it is riddled with fallacies. I'm not saying we have no good way of talking about class; many classical liberals have done so. Karl Marx himself, who is dubiously credited with creating class analysis, acknowledged his debt to the early French laissez-faire liberals for their pioneering work in the field -- before he proceeded to mangle it because of his fallacious economics. According to the classical liberal view, the state creates class antagonism by appropriating wealth from the industrious people (the tax-producers, who include, along with nonmanagement workers, the creators of businesses and employers) and giving it to their cronies (the tax-consumers). This sets in motion a social conflict with wide ramifications.

Needless to say, most contemporary class analysts are not of the classical liberal variety even those who are increasingly suspicious of state power. They still suffer the fallacy that economic inequality is an inherent bug in market-oriented societies that requires force-wielding enlightened rulers (Bernie Sanders or Alexandria Ocasio-Cortez perhaps) to intervene.

I think that the pursuit of economic equality is doomed to fail because it clashes with immutable reality. I emphasize, though I shouldn't have to, that I am not talking about legal equality, equality of liberty, or what Roderick Long calls "equality of authority." (Equality of opportunity is a slippery term if it means more than freedom from government impediment.) I mean only income or wealth equality.

Why would the quest for that kind of equality clash with reality? It must do so because individuals will never be the same in many key respects. They differ vastly in talent, drive, energy, ambition, entrepreneurial intuition, and more. These things are clearly relevant to their degree of ability to create wealth and earn income through voluntary exchange in the marketplace. We all know that not everyone is equally endowed with the ability to produce value for consumers, say, by organizing a business. That would be the case even if everyone had a good upbringing and no one was forced to attend a decrepit government school. That's just the way it is.

A serious attempt to create economic equality, or even something close, would create the nightmare world envisioned in Kurt Vonnegut's short story "Harrison Bergeron." The philosopher Robert Nozick's Anarchy, State, and Utopia set out a scenario that is only slightly less dystopian. He pointed out that even if everyone started the day with the same amount of money, they wouldn't finish the day that way because some would have been better at pleasing consumers than others. So what now? If the goal remained perfect equality, government officials would have to start each day by redistributing the money evenly again. What would that do to people's incentive to produce? The policy might lead to equality, but it would be at an abysmally low level. Only the envious would be satisfied, but envy is no basis for a prosperous or pleasant society. So which do we prefer: equality of poverty or inequality in which the lowest living standard is higher than it would be in the egalitarian dystopia?

The connection between inequality and actual living standards is illusory. Imagine a rising elevator: the ceiling goes up, but so does the floor. Now imagine a rising accordion-like elevator that rises: even as the distance between the ceiling and floor increases, the entire unit goes up. This demonstrates the distraction of focusing on inequality.

The vast difference in incomes and wealth among people in the United States, which defines classes, obscures the more-important shrinking of the gap in consumption. For decades now, lower-income people have had progressively easier access to life-improving conveniences and necessities that the upper class once had only at enormous expense -- if at all. (Not long ago, no rich person walked around with a powerful computer/communications device in his pocket.) One-time luxuries have become commonplace necessities and affordable for virtually everyone even as they have greatly improved in quality.

In fact, if you measure this increasing access to products, not according to money prices (which are confounded by inflation and other things), but according to how long the average employee must work to earn the necessary money (time price), the picture that emerges is astounding. This is a good measure because we ultimately pay for things with our effort.

Average working people today toil a fraction of the time their parents and grandparents did to earn what it takes to buy not just the same products, but much better ones. In other words, we all get more and more utility for free. Think about it: if today you can buy something with only 15 minutes of work instead of the hour you had to spend before, you obtain three-quarters of the product's utility gratis. You have money left over for other things that you previously could not afford.

How does that happen? It happens through dramatic increases in productivity, which are made possible through investment (of savings and profits) in innovative technologies, which in turn are made possible by human ingenuity. ("The ultimate resource," the great Julian Simon called it.) Better machines, computers, tools, and other inputs vastly increase the power of unaided labor, enlarging the volume of goods that can be produced in an hour. When that happens, wages go up and time prices fall. That is called progress, though I don't mean to imply that money is all that's required for happiness. (We also ought to pay tribute to fossil fuels and their producers, without which this could not have happened.)

One more ingredient is needed: competition among producers and employers free of government fetters. Without it, the potentially improved terms of trade won't be converted into consumer welfare. 

These insights are is central to a new book, Superabundance: The Story of Population Growth, Innovation, and Human Flourishing on an Infinitely Bountiful Planet by Marian L. Tupy and Gale L. Pooley. But I first encountered this insight in Myths Of Rich And Poor: Why We're Better Off than We Think (2000) by Michael W. Cox and Richard Alm. (Listen to Keith Knight's interview with Tupy.)

What ought to matter, then, is not the differences in living standards but the absolute levels. The change at the lowest level alone is a good proxy for the general condition. Equality is a chimera and a destructive one at that. What we should want to see eradicated is real poverty, not inequality. Poverty is a comparative matter as well, however, since no matter how affluent the lowest income group is, it is still at the bottom. So the focus on (relative) poverty can also be an unfortunate distraction. We must keep our eye on the ball: real poverty.

America's lowest-income population is better off than even their recent ancestors, not to mention many people around the world today. But that doesn't mean it couldn't be even richer. The way to bring that about is to eliminate every government impediment to wealth creation, business formation, entrepreneurship, and labor mobility. That means eliminating everything from business regulations and subsidies to occupational licensing to home-building restrictions to intellectual property to taxes and much more. That's a large enough agenda to keep any politician busy for a while.

The Crisis in Civil Rights

My old friend Bill Evers and the Independent Institute have assembled a useful reader's guide to the civil-rights issues of our time: race, police brutality, anti-Semitism, and poverty. Check it out here.

TGIF: The Consequences of Liberty

What if we suspended disbelief and supposed that free markets could reasonably be expected to impoverish most people while benefiting only the few?

Read it here.

How to End Poverty Corporate State-Style

1. Erect countless state-backed tollgates along the road to personal success, starting with the schools. 
2. Filter tens of trillions of dollars through a humongous bureaucracy staffed by middle-class and upper-middle-class people, letting just enough money through to give the appearance of compassion, to avert civil unrest, and to create multigenerational dependency. 
3. Send low-income kids off to fight and die in periodic wars in foreign lands. 
4. Repeat as necessary.

Romney and the 47 Percent

There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe that government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you name it. That that's an entitlement. And the government should give it to them. . . . These are people who pay no income tax. Forty-seven percent of Americans pay no income tax. So our message of low taxes doesn't connect. . . . And so my job is not to worry about those people—I'll never convince them that they should take personal responsibility and care for their lives.

This quote is from the infamous surreptitious video made of Mitt Romney's speech at a fundraiser last spring. What are we to make of it?

The first thing to note is that Romney is typical of the right wing of the ruling elite, which often portrays lower income beneficiaries of the welfare state as a threat to the established order. In this view, they are dependent on government; they wish to remain that way; and they see themselves as victims.

Of course many people who qualify for welfare-state benefits take advantage of them, but it doesn't follow that they want to remain in that postion. Katherine S. Newman, author of Chutes and Ladders: Navigating the Low-Wage Labor Market and No Shame in My Game: The Working Poor in the Inner City, maintains that low-income people are far more industrious and ambitious, as well as determined to achieve independence, than the public generally believes. (Listen to her EconTalk conversation with Russ Roberts.)

Far less interested in independence from government are the large corporations, banks and otherwise, that exist by virtue of government contracts, guarantees, bailouts, and intellectual "property." The government's security establishment provides untold opportunities for companies to live off the taxpayers, which is much more secure than attempting to achieve market share among consenting consumers. (See Nick Turse's The Complex: How the Military Invades Our Everyday Lives.)

Strangely, Romney's speech had nothing to say about that sort of corrupting dependence.

As for feeling like victims, the working poor didn't seem to display this attitude to Newman during her extensive field research. Yet why wouldn't they be justified in regarding themselves as such? The corporate state, with its myriad barriers to competitive economic activity, including self-employment, blocks many routes to prosperity.

By the way, while many lower income people pay no income tax, they do get hit with the regressive payroll (FICA) tax, which until recently helped fund the government's general operations. While formally, employers pay one half of that tax, in fact most or all of the employer's share comes out of workers' pay.

Romney is trying to distract attention with a 14-year-old audio of then-State Senator Barack Obama endorsing a mild form of income "redistribution." Government distribution of wealth, of course, is objectionable, just as government itself is. But Romney to date has had nothing to say about the systematic upward transfer of wealth that the corporate state effects in a variety of way. To offer just two examples: Intellectual "property" law prohibits free competition, creates artificial scarcities and thus extra-market profits, and privatizes value that would have naturally been "socialized" in a freed market. Second, barriers to competition (again, including self-employment) reduce the bidding for labor and hence workers' bargaining power, resulting in lower wages than would otherwise be seen in a freed market. (See these articles by Charles W. Johnson and Gary Chartier.)

It is certainly true that no one is entitled to other people's stuff. That is just as true of the powerful and well-connected business interests that through government intervention amass great wealth at the expense of the rest of us.

When Romney begins talking about that sort of "redistribution of wealth" I will start to take him seriously.