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Home | Mises Library | How Prosperity Generates Poverty

How Prosperity Generates Poverty

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Tags Big GovernmentGlobal EconomyTaxes and SpendingU.S. EconomyWorld HistoryInterventionism

05/09/2006Paul B. Trescott

There is a predictable annual ritual which begins when the Census Bureau releases its estimates that roughly one eighth of Americans live in poverty, and that this proportion has been relatively invariant in recent years despite the steady rise of per capita real incomes. This is followed by predictable rant by the anti-free-market crowd who lament the presence of an alarming number of children in poverty (a legitimate concern) and declaim that "the system" must be seriously flawed and who advocate more heroic interventions to alleviate this condition.

There follows a pro-free-market backlash which points out that a large proportion of the "poor" own cars, color TV, air conditioning, and that compared to residents of mud huts in rural Zimbabwe, Bangladesh, or Brazil, the American poor aren't very poor.

The occupants of the poverty cohort are a very diverse crowd. But there are two substantial components which, in very different ways, are in significant degree larger because the economy is more prosperous.

1. A significant fraction of the American poor are "in transition." Many young people just entering the labor force initially have incomes below the poverty line. But especially relevant are the large number of recent immigrants. The United States has been receiving a million or more immigrants a year, many of them low-income illegals. They come in response to the high productivity and high incomes generated by the US economy. They bring a work ethic, look for work, and generally find work. As a result, most of them do not remain poor.

Over the past decade, more than 10 million immigrants have entered the country. Yet only about 1.5 million of foreign-born persons appear in the latest poverty estimates. This represents a major contribution by the US economy toward the alleviation of world poverty. Not only do the immigrants earn enough to raise themselves above the poverty line, but they send substantial remittances back to their countries of origin which relieve vastly more poverty in those localities.

2. A very different component of the poverty cohort consists of the people whom Charles Murray has labeled "the underclass." These are people who make life-style choices which produce almost-certain poverty. They have disdain for education, are likely to abuse drugs and/or alcohol, have poor work habits. The men are prone to violence and criminality. The women are sexually available and bear numerous children out of wedlock. The children do not receive parenting appropriate to develop a personal moral sense or a work ethic for their future lives. Children's health and education are neglected. The underclass lack coping skills. As a result, they often do not take full advantage of the vast array of social-safety-net programs that are currently available. Free food is so widely available that virtually all cases of inadequate child nutrition are symptoms of parental neglect.

The underclass are subsidized in many ways by our prosperous society. This is most evident in the generosity of our welfare programs — even more so in Western Europe. Private charity adds significantly — it does not take much effort for an adult to subsist indefinitely from privately-supported food banks and thrift stores. A very large element of financial and behavioral support comes within families, most evident in the large number of grandparents raising their grandchildren in situations where the intervening generation are not responsible adults. A sizeable proportion of the college-age population are slackers who spend much of their time partying, hanging out or shacking up, supported by parental funds or government financial aid.

Evidence that these conditions are not limited to the United States is provided by the work of sociologist Ronald Inglehart. He traces a major shift in values as a society achieves a high level of economic productivity and per capita income: "emphasis on economic achievement as the top priority is now giving way to an increasing emphasis on the quality of life. In a major part of the world, the disciplined, self-denying, and achievement-oriented norms of industrial society are giving way to an increasingly broad latitude for individual choice of lifestyles and individual self-expression." (Modernization and Postmodernization, Princeton University Press, 1997, p. 28)


To a significant degree, recent immigrants to the United States represent precisely the "disciplined, self-denying, and achievement-oriented norms" of which Inglehart speaks. Those of us who value these attributes can be grateful for their coming.

When I lived and worked in Thailand 40 years ago, it was a low-income country. There was no welfare system, and not many opportunities for freeloading. I was struck by the ingenuity of the self-employed. For a few baht, an individual could visit a wholesale market and buy fruits, vegetables, or flowers, put them in two baskets on a shoulder pole, and peddle them in the streets. A former farmer could rent a cab or a samlor (three-wheeler) by the day and drive it for hire. In many of these actions, the poor served the poor. For a few cents, construction workers could buy enough street food for subsistence. Local transport was absurdly cheap.

Higher income countries have lost these dimensions. Sanitary standards, motor-vehicle safety are better. But options that helped initially-low-income people to become productive have been foreclosed.

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