The Agenda

Paul Krugman on the Connection Between Poverty and Inequality

Paul Krugman argues that poverty and inequality are tightly intertwined:

[T]he war on poverty has, in fact, achieved quite a lot. It’s true that the standard measure of poverty hasn’t fallen much. But this measure doesn’t include the value of crucial public programs like food stamps and the earned-income tax credit. Once these programs are taken into account, the data show a significant decline in poverty, and a much larger decline in extreme poverty. Other evidence also points to a big improvement in the lives of America’s poor: lower-income Americans are much healthier and better-nourished than they were in the 1960s.

Furthermore, there is strong evidence that antipoverty programs have long-term benefits, both to their recipients and to the nation as a whole. For example, children who had access to food stamps were healthier and had higher incomes in later life than people who didn’t.

And if progress against poverty has nonetheless been disappointingly slow — which it has — blame rests not with the poor but with a changing labor market, one that no longer offers good wages to ordinary workers. Wages used to rise along with worker productivity, but that linkage ended around 1980. The bottom third of the American work force has seen little or no rise in inflation-adjusted wages since the early 1970s; the bottom third of male workers has experienced a sharp wage decline. This wage stagnation, not social decay, is the reason poverty has proved so hard to eradicate.

Or to put it a different way, the problem of poverty has become part of the broader problem of rising income inequality, of an economy in which all the fruits of growth seem to go to a small elite, leaving everyone else behind.

Scott Winship has done valuable work on how household incomes, including wages, have changed since the early 1970s that offers a slightly different picture than Krugman’s, but good for Krugman for acknowledging the role of programs like food stamps and the earned-income tax credit (and Medicaid) in lifting living standards for poor Americans. What is trickier is Krugman’s claim that the problem of poverty is part of the broader problem of rising inequality, for the simple reason that, as Roger Pielke Jr. observes, one could mathematically eliminate poverty without making much of a dent in income inequality:

1. Assume 50 million Americans in poverty in 2012, using the SPM (described in this post).

2. Assume the poverty rate is $12,000 (see poverty rate discussion)

3. For simplicity assume that the average income of those 50M is thus $6,000

4. That means that everyone in poverty could be lifted above the poverty threshold with 50M*$6,000 = $300 billion

5. Assume that the $300B is simply transferred from the incomes of the top 1%

6. That would mean that the income of the 1% goes down from $2T to $1.4T

7. The income of the 99% would increase from $6.85T to $7.45T

8. The share of income of the 1% would be reduced from 23% to 19%, or from 2012 levels to 2011 levels.

So poverty, formally defined, could be made to disappear with essentially no significant impact on income inequality. QED.

The rejoinder to Pielke is that the reason we don’t create such a transfer program is that influential high-earners would fight it tooth and nail. One could also argue, however, that as Krugman acknowledges, the past several decades have seen the emergence of a wide array of anti-poverty programs, and it’s not clear that they’ve done a good job of promoting economic self-reliance and upward mobility. This has contributed to skepticism about the wisdom of increasing expenditures devoted to fighting poverty, among some high-earners, to be sure, but also among less affluent voters as well. Krugman considers it “obvious” that “the rise of the 1 percent [has been] at the expense of everyone else.” One version of this story is the argument made by Thomas Piketty and others that falling top marginal tax rates have encouraged high-earners to leverage their power within business enterprises to extract more than they might have in the past. But not all high-earners are corporate executives, and there are other stories that at least as compelling (e.g., as the market capitalization of large public companies grows, small differences in the quality of management make a bigger difference; the tournament-like nature of many elite occupations generates a nonlinear distribution of rewards, etc.). University of Arizona sociologist Lane Kenworthy, author of the new book Social Democratic America, has found that rising income inequality doesn’t appear to depress income growth for middle-class incomes across the affluent market democracies. Moreover, he has observed that though rising incomes at the top haven’t been “Rawlsian,” i.e., they don’t appear to have benefited the poor, they also haven’t measurably hurt the poor. Kenworthy emphasizes that “[t]he key driver of improvements in absolute incomes for the poor has been shifts in transfers and taxes, and these do not seem to have been influenced by trends in income inequality.” Krugman and Kenworthy might agree on the remedy for poverty. But Kenworthy certainly doesn’t think that rising inequality is an insuperable obstacle to rising redistribution levels. Indeed, the experience of the past three decades suggests otherwise, as the reach of safety net programs has steadily grown.


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