More Money Can’t Solve Poverty

I first came to economics out of a concern for poverty. I had been attracted to classical liberalism for its uncompromising defense of the rights and dignity of individuals, along with a healthy skepticism about power. Everything made sense to me: constitutional constraints, limited government, rule of law, political and economic freedom. One thing held me back: what about the poor? Could civil society provide sufficient relief? Might welfare be an exception, a collective action failure to be remedied by a limited state?

I still remember discovering a quotation, drawn from a 1988 paper by economist Robert Lucas. It was one of a half dozen or so quotations that seems to define one's own life better than one could ever do oneself: "Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia's or Egypt's? If so, what, exactly? If not, what is it about the 'nature of India' that makes it so? The consequences for human welfare involved in questions like these are simply staggering. Once one starts to think about them, it is hard to think about anything else."

It turns out that the story is as simple as it is beautiful; it is the story that Angus Deaton has dubbed "the great escape" from poverty. It is a story of ideas unleashing markets and technology (what Deirdre McCloskey has dubbed "the bourgeois virtues"). Poverty was the natural condition of humanity for 99.9 percent of its 200,000-year existence. Sometime around 200 years ago, some people in some countries started to escape. Gradually, more people in those countries, and people in more countries, escaped too. The late Hans Rosling offers an enthusiastic, almost giddy, visualization of the story.

When faced with bunk whining that capitalism is evil, because it didn't include everybody immediately, I share Martin Luther King's 1963 "I Have a Dream" speech:

In a sense we have come to our nation's capital to cash a check.

When the architects of our republic wrote the magnificent words of the Constitution and the Declaration of Independence, they were signing a promissory note to which every American was to fall heir. This note was a promise that all men - yes, Black men as well as white men - would be guaranteed the unalienable rights of life, liberty and the pursuit of happiness.

It is obvious today that America has defaulted on this promissory note insofar as her citizens of color are concerned. Instead of honoring this sacred obligation, America has given the Negro people a bad check which has come back marked insufficient funds.

But we refuse to believe that the bank of justice is bankrupt.

We refuse to believe that there are insufficient funds in the great vaults of opportunity of this nation. And so we've come to cash this check - a check that will give us upon demand the riches of freedom and the security of justice.

After 199,800 years of poverty, capitalism - free markets, classical liberalism, the Enlightenment project, call it what you will - started lifting people out of poverty. It has not fully succeeded. Not yet. After all, it has not been given much time. And it faces skeptics and enemies everywhere. Freedom House reports that we are in the 18^th year of democratic decline around the world. A decade of growth in economic freedom was erased in 2020, as governments around the world addressed the pandemic with spending and regulation (which were supposed to be temporary). Anti-globalization forces on the left and right are threatening to push back 70 years of progress since World War II, the increasing "extent of the market" that lifted billions out of poverty. In 1820, almost 100 percent of the world's one billion people were living in extreme poverty. In 1950, it was about 75 percent of the world's two billion people. Today, it's less than 10 percent of the world's seven billion. Three cheers for markets!

The Poor with Us Always

Despite this stunning progress, poverty remains. Why? Matthew Desmond, a sociologist at Princeton University, thoroughly examinesthe question. The book has serious flaws, but it offers a wake-up call.

Desmond reminds us that one in nine Americans is poor. He walks us through poverty and its daily assaults on stability, growth, health, and morale. It is expensive to be poor: fines accumulate on unpaid vehicle registrations; jobs are lost from unaffordable car repairs; mass incarceration kills income; the unbanked are saddled with high-interest payday loans; the poor are excluded from affluent neighborhoods, and stuck in a cycle of eviction and neglected housing; because public schools are financed by local property taxes, the poorest don't get a good basic education; health insurance is tied to full-time work, so preventive care is often neglected, and medical catastrophe can lead to bankruptcy.

To be sure, governments at all levels are spending - a lot - on poverty. The US welfare state (as a percentage of GDP) is the second biggest in the world, after France. But the welfare state is a sieve, and welfare programs are poorly designed and cumbersome.

Desmond is probably exaggerating the problem; it's unclear whether he's intentionally playing with statistics to bolster his case, or if - as a sociologist - he is more concerned with pathos than logos. For example, he pooh-poohs the drop in the price of almost everything, because "[y]ou can't eat a cell phone." Yet food expenditures fell from one third of income to 9 percent in the last century.

Econ 101

Unfortunately, the book suffers from two fatal flaws. First, Desmond does not understand markets, and sees the world as a zero-sum game; second, he does not understand the unintended consequences of intervention.

Desmond asserts that poverty persists because "we" - the middle class and the wealthy - benefit from it. Consumers want cheap stuff and corporations want high profits, so wages are kept low. Unions are repressed by greedy corporations. The gig economy leaves workers unprotected, but it's convenient and cheap. We don't want poor people living next to us, so we keep them out with zoning laws. Corporations and "the wealthy" have rigged the system to avoid paying their "fair share" of taxes. The wealth "hoarded" by the wealthiest excludes the poorest and serves as an excuse not to implement real change. Et caetera. In sum, "Defenders of the status quo, this pro-segregationist propertied class, have shown themselves to be willing to do the tedious work of defending the wall." "Our abundance causes others' misery." Well.

The problem is reality: markets are a not a zero-sum game, but a positive-sum game. Jean-Baptiste Say and Henry Ford famously saw the link between worker and consumer. The real problem is that the poor are excluded from markets, mostly by the same well-intentioned government programs that Desmond champions.

Desmond would solve poverty in America with "ambitious interventions" - "we should go big." But he ends up proposing more of the same government interventions that cause poverty in the first place (and that he himself admits are inefficiently administered). Lest I appear to be a market radical or a bourgeois apologist for my comfortable life and the taxes I refuse to pay to help the poor, let's look at some examples.

Unions increase wages for their members - at the expense of non-members. They are a drag on productivity and growth, leading to a less dynamic economy and lower employment. Sustainable wage increases come from productivity gains and human capital accumulation, not legalized bullying. Alas, teachers' unions have completely deflated high school education; federal intervention is gutting higher education. The poor need fewer unions, more vibrant labor markets, and better education.

Inflation-adjusted prices have dropped significantly over the past fifty years - with the notable exception of three sectors: healthcare, education, and housing. Desmond laments this. But he does not recognize that these are three of the most subsidized and regulated sectors of the economy. Subsidies increase demand, and thus prices. Regulation decreases supply, increasing prices. Clearly, there is a problem. Clearly, even more government isn't the solution. Consider that - before Obamacare - almost half of healthcare was already paid for by government funds. Consider the higher education bubble, where federal intervention has driven up prices and driven down quality.

Desmond rightly laments the injustice of exclusionary zoning regulations. Unfortunately, he also prescribes inclusionary zoning (forcing builders to include low-income housing in any new project). The unintended consequences should not be hard to predict. And let us not forget that massive government intervention to increase home ownership among the poor has already been tried. Pre-2007 US housing policy - the deadly cocktail of Community Reinvestment Act, lower lending standards and moral hazard through Freddie Mac and Fannie Mae, and federal encouragement of subprime loans - did indeed briefly increase home ownership among the poorest Americans. They were also the ones who suffered the most when the inevitable crash followed the boom.

Payday loans are ugly, but they are often the only available option. Regulating them would make things worse, killing credit or driving the most vulnerable into black markets. Instead of banning them, we should make them irrelevant. Alas, federal and state regulations limit banking competition, driving up prices. The Durbin Amendment to the Dodd-Frank Act of 2010 capped debit card interchange fees. In the spirit of Frédéric Bastiat, what is 'seen' is a policy to help the poor. What is not seen is the increase by a whopping million of unbanked Americans, who were forced out when banks recuperated their losses by increasing fees on other services. Banks were able to do so because Dodd-Frank ended up increasing US banking concentration (as I demonstrate in a working paper with my AIER colleague Michael Makovi).

The COVID rescue packages that Desmond would like to make permanent may have worked in the short run. But they cost the federal government $5 trillion it didn't have. So the Federal Reserve monetized the debt, driving inflation to 40-year highs. While inflation is now tamed, prices remain 20 percent higher than they were four years ago - with disproportionate effects on the poor, of course.

Although he isn't an economist, Desmond did his homework on minimum wage. He gleefully concludes that George Stigler's seminal work on the disemployment effects of minimum wages - along with pretty much all of microeconomic theory - was debunked by the famous 1994 Card and Krueger paper. But the arguments in that paper are, at best, "tiny pulls in the intellectual tug-of-war to accurately predict the outcome of a minimum wage policy change. And there are more… and stronger, tugs on the side that says minimum wage increases hurt employment." Back to Bastiat, minimum wages are good for the workers who can secure them and bad for the workers who are priced out of the labor market - and especially those who are permanently excluded from their first job, with disastrous, lifelong consequences. Witness understaffed European stores and the proliferation of kiosks to replace expensive fast-food workers. As Henry Hazlitt explained, "we cannot make a man worth a given amount by making it illegal for anyone to offer him less. We merely deprive him of the right to earn the amount that his abilities and opportunities would permit him to earn, while we deprive the community of the moderate services he is capable of rendering."

The failure of government anti-poverty programs is captured in a single fact that Desmond completely overlooks. The US poverty rate has indeed dropped a bit since 1964, when President Johnson declared a War on Poverty, and started a six-decade spending spree. But the real story happens before 1964. As markets were liberated to work their magic - after the twin assaults of the New Deal and the wartime economy - US poverty dropped dramatically. From a high of almost 35 percent after World War Two, the poverty rate had already fallen to 19 percent in 1964. It continued its downward trend over the next few years, then has stagnated between 10 percent and 15 percent ever since.

Getting in the Way of Growth

Markets are the world's greatest anti-poverty program. Alas, the government keeps bumbling in the way. Part of this stems from the unintended consequences of good intentions - and part of this stems from cronyism. Desmond rightly points out that the top 20 percent of earners receive $35,000 in annual government benefits, while the bottom 20 percent receive only $26,000. He is playing a bit with the numbers, as he includes not just direct transfers, but also tax deductions, which the middle class is better at capturing. But he has a point; everybody has a snout in the trough of wealth redistribution, as political activity is increasingly rewarded over economic activity. As I have written in this space, it "is no coincidence that three of the five richest counties in the US (and nine of the top 20) are located in the Washington, DC area - an area with little native industry, beyond spewing regulatory externalities."

The fundamental problem is not a lack of funding to address poverty, as Desmond would have us believe, but government failure. Mass incarceration, qualified immunity of police, and overcriminalization co-exist with failure to provide security and rule of law in poorer neighborhoods. State interventions have rendered high school education largely useless and college too expensive. Labor laws, minimum wages, occupational licensing, and other regulations with regressive effects deny workers the opportunity earn a living and work their way out of poverty. Zoning laws and a thousand subsidies and regulations drive up housing prices, keeping the poor out of thriving neighborhoods, and out of good schools that are linked to real estate. The welfare state has crowded out a once-vibrant and effective civil society (Desmond is surprisingly silent on civil society and private charity, as he is so enamored with state solutions).

Art Thou for Us, or For Our Adversaries?

Given the book's tragic flaws, Desmond's emotionalism, accusations of complicity in exploitation of the poor, and with-me-or-against-me fallacy, end up being grating, rather than inspiring. Still, he is describing a real problem, and unintentionally making the case for markets.

It's not always clear which bad policies come from the unintended consequences of good intentions, and which are naked attempts at rent-seeking. But it doesn't matter. It's time to stop rearranging the deck chairs on the Titanic. The poor deserve nothing less than the opportunity to participate in the great escape.