The surge in poverty is perhaps the most pressing economic problem affecting our country today.
Inflation and the end of Covid stimulus drove an increase in the poverty rate in 2022.
E conomists have had a few weeks to digest the latest poverty figures. Those, by definition, reflect the recent past, but the outlook too is extremely grim. Inflation makes the purchase of necessities more costly, forcing those with less means to make difficult trade-offs. Poverty and deprivation can also create secondary effects driven by despair or necessity. Teenagers may drop out of school to get a job, undermining their long-term prospects. And depression about difficult circumstances can lead to substance abuse and separation from the labor force, and from society more generally.
When economic times get tough, these factors can have immense and long-lasting effects on lives. A large economic literature, for example, documented that China’s entrance into the World Trade Organization induced countless manufacturing jobs to be destroyed in the U.S., and the pain from this job destruction was highly geographically concentrated. Angus Deaton and Anne Case’s landmark book, Deaths of Despair and the Future of Capitalism, documented the gruesome effect of such dislocations.
Against that bleak backdrop, consider the following chart, which is drawn from the latest numbers.
The chart indicates that overall poverty increased in the short period between 2021 and 2022 from 7.8 percent of the U.S. population to 12.4 percent. While that top-line number is a stunning increase, the cross-sectional detail of the numbers highlights that specific groups have been hit harder than others. Female-headed households saw their poverty rate increase from 11.7 percent to 22.6 percent. Individuals without a high-school education saw their poverty increase from 19.7 to 29.7 percent. Those who were unemployed for 2022 saw their poverty rate increase from 21.5 percent to 29.9 percent.
Why the big jump? There are really two forces. The first is inflation. When goods get more costly, the same amount of income gets spread thinner and thinner. While income could in principle rise to offset the higher cost of goods, that did not happen on average, and especially did not happen (for obvious reasons) for those without a job. The second factor is that the Covid stimulus checks provided consumers with the wherewithal to support their consumption even while prices were rising. When the extra help disappeared, those at the bottom suffered the most.
This surge in poverty is perhaps the most pressing economic problem affecting our country today. We know from the China-WTO literature what happens when shocks like this occur, and the need to act is urgent. The inflationary policies that contributed to the crisis were driven recently by President Biden and the Democrats, and bad news gets buried when it might have a negative partisan impact on the left.
We need to have a lively policy debate about how to respond. The latest numbers are only through 2022, and they likely worsened in 2023. For the employed, wage growth has begun to catch up to inflation growth, with the Atlanta Fed’s wage tracker showing wage growth of 5.2 percent in September of this year. If policy-makers can engineer a negative shock to inflation, then real wages can rise and poverty will inevitably decline. While the Fed is fighting inflation with higher interest rates, Congress could help by sharply reducing discretionary spending (by cutting subsidies for green energy, for example), and taking measures to support increased supply (marginal rate reductions paid with base broadening would do the trick).
Those measures would help the employed, but getting people who left the workforce to return is more difficult. If the economy becomes vibrant enough to draw them off the sidelines, there will be a positive effect, but the ominous Deaton and Case facts were gathered at a time that was far better than today. What should we do? The first step is to study and debate the problem with increased urgency, a duty that many have likely missed because the poverty explosion has been rendered invisible for partisan ends.