Mises Wire

Three Barriers to Improving Poverty Rates in America

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As the election is well underway, the United States’s political discussion has intensified about the living standards of the poorest in the country and the solution to their poverty. The Democrats, as usual, have proposed extended welfare benefits and greater government aid to poor families.

This experiment began in the 1960s when President Lyndon Johnson initiated the War on Poverty programs. As he signed them into law, poverty levels were already plummeting, according to data collected from the Census Bureau, thanks to substantial increases in productivity and wages. Since the 1960s, although approximately $20 trillion have been spent on the programs, poverty levels have basically flatlined, often ticking up due to the occasional recession.

There is a fundamental reason for this. The War on Poverty programs lowered the relative cost of single parenthood in terms on poverty. Under the War on Poverty, subsides to single parent families became greater than two-parent families. This is why, since the programs were initiated, rates of single parenthood have ballooned. In 1960, less than 10 percent of all children were born out of wedlock in the US. In 2008, it hit 40 percent.

Single parenthood is a potent predictor of poverty. According to the Census Bureau, in 2019 the poverty rate for two-parent families was estimated to be 5.2 percent. The estimated poverty rate for single parent families, however, was 25.9 percent. The Heritage Foundation puts the numbers at 6.4 percent and 36.5 percent. It is also well documented that children who grow up in single parent households are much more likely to suffer psychologically and, when they grow older, commit crime, as documented by a study published in the Journal of Political Economy. Getting single motherhood to drop (or, at least, stop rising) would require reforming the welfare system: either by withdrawing welfare benefits from single parent families or increasing them for two-parent families. But either way, the message is clear: one of the side effects of welfare is high rates of single parenthood, which can be very damaging. Take a look at Europe. As described in a 2012 report (page 155) conducted by the Institute of Economic Affairs (IEA), single parenthood levels are very high in Europe as well—a symptom of welfare.

Another strong predictor of poverty in the US is a lack of full-time work. According to the Bureau of Labor, in 2016 the percentage of full-time workers who were “working poor” was only 3.1 percent, compared to 12.2 percent for part-time workers. As the report itself notes: “full-time workers continued to be much less likely to be among the working poor than were part-time workers.” This problem is once again attributable (at least in part) to welfare, because workers might lose incentives to work full-time. This happens when welfare payments are reduced or withdrawn when the recipient obtains full-time work. Here, reform would be vital; it is why benefits should never be more profitable than a full-time job. The implementation of work requirements for recipients would also make a difference. Reforms like this were made during the 1990s under President Clinton. As a result, in 1994, 40 million Americans lived below the poverty line. By 2000, it had approached 30 million.

Of course, it is not always easy to find a job. But this can be improved through the removal of policies that hinder hiring, such as high taxation rates and high regulatory burdens for employers.

Many will suggest that raising the minimum wage will alleviate poverty for those with jobs. This is wrong on every level. The people hit hardest by this policy will be the very people it intends to help: low-wage workers. According to a 2016 analysis conducted by the Heritage Foundation, a $15 minimum wage, for example, would cost the economy up to 7 million jobs. Minimum wage jobs are merely a means to an end and are the bottom of an ascending socioeconomic ladder. Its why over 76 percent of all minimum wage workers are between the ages 16 and 34. Cutting these off would inevitably cause poverty, because it would become increasingly difficult to climb the wage ladder up to prosperity.

A third reason for poverty in the US is, like in most countries, the high cost of living in many areas. This often comes as a result of the government imposing regulations on basic, necessary commodities, which drives up their costs. Housing is a notorious example. A 2019 study showed that housing regulations limited aggregate US growth by a third between 1964 and 2009. A reduction in regulations would increase the rate of construction, which would lead to a decrease in costs. Just compare the housing costs of California and Texas. The difference is that while California’s housing market is heavily regulated, with zoning rules and rent control, Texas’s is relatively free.

A similar phenomenon was witnessed in Britain in the 1930s: during the Great Depression, the housing market was dramatically deregulated, which led to a boom in construction (it was one of the reasons why the UK economy only had two consecutive years of negative GDP growth). To put this into context, last year, for every thousand people in the UK, three houses were built. During the Depression, the rate was almost doubled. Housing deregulation will increase construction, and therefore lower costs, because of an increase in supply of housing. Lower costs will take burdens off working families and free up their purses.

When it comes to housing, though, at least the US is at an advantage in terms of housing cost. The US ranks highly in terms of housing affordability, with the average American family spending 19 percent of their expenditure on housing—lower in than most European countries. Most houses also enjoy basic facilities such as indoor flushing, etc.—only 0.1 percent lack them. America ranks highly in terms of rooms per person (2.4). The only country which is higher is Canada, with 2.6 rooms per person. However, there is still clearly room for improvement.

If we want to lower poverty in America, we ought to adopt these three policies: reform the welfare system so it encourages intact family formation; reform the welfare system so it encourages full-time work; and lower the cost of living through the deregulation of important commodities like housing.

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