Real Solution for Poverty is Economic Growth, Not Welfare State

PovertyIncome inequality is taking center stage as a high profile issue in both national and California politics this year.

An op-ed in Friday’s Washington Post by billionaire industrialist Charles Koch gained attention when he wrote there was one issue he agreed with Democratic Socialist and presidential candidate Bernie Sanders. (Sanders) “believes that we have a two-tiered society that increasingly dooms millions of our fellow citizens to lives of poverty and hopelessness… I agree with him.”

The reference to the agreed upon “two-tired society” caught my attention because of a speech the late congressman and Housing and Urban Development Secretary, Jack Kemp, gave to the Heritage Foundation over a quarter century ago. Kemp was addressing the argument put forth by former New York governor Mario Cuomo that America had created a society of two static classes– the rich and the poor. Kemp argued, rather, that America was divided into two economies.

“One economy – our mainstream economy – is democratic capitalist, market-oriented, entrepreneurial, and incentivized for working families whether in labor or management. … The irony is that the second economy was set up not out of malevolence, but out of a desire to help the poor, alleviate suffering, and provide a basic social safety net. But while the intentions were noble, the results led to a counterproductive economy. Instead of independence, it led to dependency.”

Government solutions to address poverty have been offered since President Lyndon Johnson declared his War on Poverty. Yet, over 50 years after the War on Poverty began — and with about $22 trillion spent — the poverty rate is about the same.

The issues of poverty and income inequality are expected to take a prominent place in this election year. As soon as Gov. Brown released his latest budget, advocates for more money for poverty programs started complaining and campaigning to expand poverty programs. An initiative has been filed to raise and spend more money on poverty issues.

The real solution for poverty and income inequality is economic growth. That was the message Kemp was offering a quarter-century ago and it is still the best answer today.

An essay by Professor John Cochrane at Stanford’s Hoover Institution lays out the powerful argument for promoting strong economic growth.

Cochrane shows the power of economic growth on individuals by demonstrating when the United States enjoyed 3.5 percent economic growth from 1950 to 2000, an individual’s income rose from $16,000 to $50,000 (measured in 2009 dollars.) Had the economy grown at 2 percent – about the growth rate the country has experienced since 2000 — the individual’s income would be $23,000, not $50,000. Quite a difference.

Economic growth not only provides hope for relieving poverty but also is the key to fortifying the sagging middle class.

While Cochrane’s numbers are national in scope, California policymakers must focus on ways to improve growth in one of the largest economies in the world. With the loss of manufacturing jobs, California’s middle class is in jeopardy. With one third of Californians relying on Medi-Cal and the state’s cost-of-living adjusted poverty level the highest in the nation, enhancements to poverty programs is not a long-term answer. The sooner pro-growth policies are put in place, the quicker people can climb out of poverty and boost the middle class.

This is not to say that government cannot have a role in helping the poor.

California recently joined about half the states in providing an Earned Income Tax Credit. An effort is being made to encourage those eligible to file their tax forms and secure the credit. The Earned Income Tax Credit is a positive program to encourage workers to stick with employment as they work on raising their standard of living.

In fact, in that aforementioned speech by Jack Kemp, he included the Earned Income Tax Credit as one part of the solution for lifting people out of poverty.

Kemp’s goal was to reestablish the link between effort and reward.

He said of the poor in his Heritage Foundation speech: “They don’t want lectures on income redistribution and capitalist exploitation, they want income and capitalism.

“They don’t want more government promises and egalitarian welfare schemes, they want to live in neighborhoods free from crime and drug abuse, with good jobs and opportunities to own property and homes; they want quality education so that they and their children can live better lives. They want what we all want – a chance to develop their talent, potential, and possibilities.”

Yet, in Sacramento we hear too much about the need for more and larger poverty programs and too little about encouraging and developing economic growth and incentivizing the link between effort and reward. Shortsighted solutions will not solve the deepening crisis of income inequality.

Developing strong models for economic growth would enhance other quality of life aspects that Californians expect. As Prof. Cochrane notes in his essay, “Only wealthy countries can afford environmental protection and advanced health care.”

The way to increase the wealth for all, to fortify the middle class, and to help take people out of poverty is to promote ideas for economic growth and good jobs. People will have the opportunity to rise — something across the ideological divide that all agree is the goal.

Originally published by Fox and Hounds Daily

Poverty plan offers a wealth of bad ideas

As reported by the San Diego Union-Tribune:

— As legislators return to the Capitol in January, there’s little question the issue of poverty will be high on the agenda. Legislative Democrats have been dismayed that the governor held the line on new social-welfare spending last session and are eager to step up public funding for new and existing programs. And news reports suggest a major new anti-poverty initiative, backed by some charitable organizations, already is garnering serious donations.

Expect poverty to be “big” this year. Even legislative Republicans haven’t resisted too much. They’ve generally been OK with new spending proposals – provided they’re funded without raising taxes. We’ll have to wait and see any specifics from legislators, but we already know the details of the so-called “Lifting Children and Families Out of Poverty Act.” It’s likely to spark a spirited debate during the November 2016 election season given the size of the tax increase it would impose on property owners.

That initiative is one of several possible tax-hike intiatives on the ballot, and proponents appear ready to start collecting signatures. It would impose what supporters call “a sensible and fair surcharge on properties with values of over $3 million” that keeps “all Proposition 13 property tax protections against reassessments … in place.”

The resulting cash flow – between …

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California: “Land of Opportunity” or “Land of Poverty”?

For decades, California’s housing costs have been racing ahead of incomes, as counties and local governments have imposed restrictive land-use regulations that drove up the price of land and dwellings. This has been documented by both Dartmouth economist William A Fischel and the state Legislative Analyst’s Office.

Middle income households have been forced to accept lower standards of living while less fortunate have been driven into poverty by the high cost of housing. Housing costs have risen in some markets compared to others that the federal government now publishes alternative poverty estimates (the Supplemental Poverty Measure), because the official poverty measure used for decades does not capture the resulting differentials. The latest figures, for 2013, show California’s housing cost adjusted poverty rate to be 23.4 percent, nearly half again as high as the national average of 15.9 percent.

Back in the years when the nation had a “California Dream,” it would have been inconceivable for things to have gotten so bad — particularly amidst what is widely hailed as a spectacular recovery. The 2013 data shows California to have the worst housing cost adjusted poverty rate among the 50 states and the District of Columbia. But it gets worse. California’s poverty rate is now more than 50 percent higher than Mississippi, which long has set the standard for extreme poverty in the United States (Figure 1).

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The size of the geographic samples used to estimate the housing adjusted poverty rates are not sufficient for the Supplemental Poverty Measure to produce local, county level or metropolitan area estimates. However, a new similar measure makes that possible.

The California Poverty Measure                           

The Public Policy Institute of California and the Stanford Center on Poverty and Inequality have collaborated to establish the “California Poverty Measure,” which is similar to the Supplemental Poverty Measure adjusted for housing costs.

The press release announcing release of the first edition (for 2011) said that: “California, often thought of as the land of plenty” in the words Center on Poverty and Inequality director Professor David Grusky, is “in fact the land of poverty.”

The latest California Poverty Measure estimate, for 2012, shows a statewide poverty rate of 21.8 percent, somewhat below the Supplemental Poverty Measure and well above the Official Poverty Measure that does not adjust for housing costs (16.5 percent).

The California Poverty Measure also provides data for most of California’s 58 counties, with some smaller counties combined due to statistical limitations. This makes it possible to estimate the California Poverty Measure for metropolitan areas, using American Community Survey data.

Metropolitan Area Estimates

By far the worst metropolitan area poverty rate was in Los Angeles, at 25.3 percent. The Los Angeles County poverty rate was the highest in the state at 26.1 percent, well above that of Orange County (22.4 percent), which constitutes the balance of the Los Angeles metropolitan area. However, the Orange County rate was higher than that of any other metropolitan area or region in the state (Figure 2). San Diego’s poverty rate was 21.7 percent. Perhaps surprisingly, Riverside-San Bernardcox2ino (the Inland Empire), which is generally perceived to have greater poverty, but with lower housing costs, had a rate of 20.9 percent. The two counties, Riverside and San Bernardino had lower poverty rates than all Southern California counties except for Ventura (Oxnard) and Imperial.

 

The San Francisco metropolitan area had a poverty rate of 19.4 percent, more than one-fifth below that of Los Angeles. San Jose has a somewhat lower poverty rated 18.3 percent (Note 1). The metropolitan areas making constituting the exurbs of the San Francisco Bay Area had a poverty rate of 18.7 percent. This includes Santa Cruz, Santa Rosa, Stockton and Vallejo. Sacramento had the lowest poverty rate of any major metropolitan area, at 18.2 percent.

The San Joaquin Valley, stretching from Bakersfield through Fresno to Modesto (Stockton is excluded because it is now a San Francisco Bay Area exurb) had a poverty rate of 21.3 percent, slightly below the state wide average of 21.8 percent. The balance of the state, not included in the metropolitan areas and regions described above had a poverty rate of 21.2 percent.

County Poverty Rates

As was noted above, Los Angeles County had the highest 2012 poverty rate in the state (Note 2), according to the California Poverty Measure (26.1 percent). Tulare County, in the San Joaquin Valley had the second-highest rate at 25.2 percent. Somewhat surprisingly, San Francisco County with its reputation for high income had the third worst poverty rate in the state at 23.4 percent. This is driven, at least in part, by San Francisco’s extraordinarily high median house price to household income ratio (median multiple). In this grisly statistic, it trails only Hong Kong, Vancouver and Sydney in the latest Demographia International Housing Affordability Survey. Wealthy Santa Barbara County has the fourth worst poverty rate in the state, at 23.8 percent. The fifth highest poverty rate is in Stanislaus County, in the San Joaquin Valley (county seat Modesto), which is already receiving housing refugees from the San Francisco Bay Area, unable to pay the high prices (Figure 3).

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The two lowest poverty rates were in suburban Sacramento counties (Note 2). Placer County’s rate was 13.2 percent and El Dorado County’s rate was 13.3 percent. Another surprise is Imperial County, which borders Mexico and has generally lower income. Nonetheless, Imperial County has the third lowest poverty rate at 13.4 percent. Shasta County (county seat Redding), located at the north end of the Sacramento Valley is ranked fourth at 14.8 percent. Two counties are tied for the fifth lowest poverty rate (16.0 percent), Marin County in suburban San Francisco and Napa County, in the exurban San Francisco Bay Area (Figure 4).

Weak Labor Market and Notoriously Expensive Housing

The original Stanford Center on Poverty and Inequality press release cited California’s dismal poverty rate as resulting from “a weak labor market and California’s notoriously expensive housing.” These are problems that can be moderated starting at the top, with the Governor and legislature. The notoriously expensive housing could be addressed by loosening regulations that allow more supply to be built at lower cost. True, the new supply would not be built in Santa Monica or Palo Alto. But additional, lower cost housing on the periphery, whether in Riverside County, the High Desert exurbs of Los Angeles and San Bernardino Counties, the San Francisco Bay Area exurbs or the San Joaquin Valley could begin to remedy tcox4he situation.

The improvement in housing affordability could help to strengthen the weak job market, by attracting both new business investment and households moving from other states.

Regrettably, Sacramento does not seem to be paying attention. Liberalizing land use regulations is not only absent from the public agenda, but restrictions are being strengthened (especially under the requirements of Senate Bill 375). In this environment, metropolitan areas like Los Angeles, San Francisco, San Jose and San Diego could become even more grotesquely unaffordable, and the already high price to income ratios in the Inland Empire and San Joaquin Valley could worsen. All of this could lead to slower economic growth and to even greater poverty, as more lower-middle-income households fall into poverty.

Note 1: San Benito County is excluded from the San Jose metropolitan area data. The California Poverty Measure does not report a separate poverty rate for San Benito County.

Note 2: Among the counties for which specific poverty rates are provided.

isiting professor, Conservatoire National des Arts et Metiers, Paris

Cross-posted at New Geography.

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