Washington Post, August 29, 2007: On Poverty, Maybe We’re All Wrong

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By Steven Pearlstein
Wednesday, August 29, 2007; D01

Most years, what passes for the national debate about poverty is confined to the 24 hours after the government releases its annual report on household incomes, as it did yesterday.

The left expresses moral outrage — in the richest country the world has ever known, one in every eight residents still lives in poverty — and calls for government to do something about it.

The right, to the degree that it pays any attention to the issue at all, notes that while the poverty rate goes up and down with the economic cycle, it has remained relatively stable over the past 35 years and, in any case, represents a failure of government meddling, not a mandate for more of it.

That there is a germ of truth to both views does not excuse the fact that the debate has become stale and unproductive, based on misleading data and outdated assumptions.

It is more than a bit disingenuous for liberals to push for worthwhile programs like food stamps, housing vouchers, child tax credits and the earned income tax credit — and then to constantly cite official income and poverty statistics that do not include the impact of food stamps, housing vouchers, child tax credits and the earned income tax credit.

As it happens, each spring the Census Bureau gets around to computing an alternative after-tax measure of disposable income that includes these various tax and transfer programs, while also making adjustments in the official poverty line to reflect the economic realities of different household sizes. This supplemental report gets little attention, but the adjustments are both statistically and politically significant. In 2005, for example, they dropped the poverty rate from 12.6 percent to 10.3 percent, with the biggest improvement coming in a four-percentage-point reduction in child poverty.

At the same time, these revisions help put the lie to the right-wing conceit that government tax and transfer policies only make poverty worse. Conservatives are left to fall back on the argument that government handouts and social insurance programs, while appearing to lift some out of poverty, have created a permanent underclass by discouraging work and thrift and fostering a culture of dependence.

Much better, conservatives say, to do away with all those patronizing and inefficient social welfare schemes that create perverse incentives and “empower” the poor to act in their own best interest using the same traditional market mechanisms as everyone else.

The best refutation of this argument that I’ve seen in a long time is contained in a new book, “The Persistence of Poverty,” by a friend of mine, Charles “Buddy” Karelis, a professor at George Washington University. Karelis isn’t an economist or social welfare expert but a philosopher by profession with wide-ranging curiosity, a dry wit and a weakness for unconventional wisdom. And after doing lots of reading and giving it extensive thought, Karelis concluded that the reason some people are perpetually poor is that they don’t have enough money.

Let me say that this isn’t as self-evident, or tautological, a truth as it might appear. Rather, the argument goes something like this:

The reason the poor are poor is that they are more likely to not finish school, not work, not save, and get hooked on drugs and alcohol and run afoul of the law. Liberals tend to blame it on history (slavery) or lack of opportunity (poor schools, discrimination), while conservatives blame government (welfare) and personal failings (lack of discipline), but both sides agree that these behaviors are so contrary to self-interest that they must be irrational.

After all, the reason we study, work, save and generally behave ourselves is that these behaviors allow us to earn more money, and more money will improve our lives. And, by logic, that must be particularly true of the poor, for whom each extra dollar to be earned or saved for a rainy day is surely more valuable than it is for, say, Bill Gates.

In economics, this insight — that the fifth ice cream sundae is less valuable than the first one — is enshrined in the law of diminishing marginal utility.

But what if this iron law of economics is wrong? What if it doesn’t apply at every point along the income scale? If you and everyone around you are desperately poor, maybe it’s perfectly rational to think that an extra dollar or two won’t make much of a difference in reducing your misery. Or that you won’t be able to “study” your way out of the ghetto. Or that if you find a $100 bill on the street, maybe it’s logical to blow it on one great night on the town rather than portion it out a dollar a day for 100 days.

On the other hand, maybe the point at which people are most willing to work hard, save and play by the rules isn’t when they are very poor, or very rich, but in the neighborhoods on either side of the point you might call economic sufficiency — a motivational sweet spot that, in statistical terms, might be defined as between 50 percent ($24,000) and 200 percent ($96,000) of median household income. And if that is so, then maybe the best way to break the cycle of poverty is to raise the hopes and expectations of the poor by putting them closer to the goal line.

Admittedly, this is only a theory, supported by logic and anecdote. But if Karelis is right, it could provide a solid economic argument to replace the old moral ones for spending more money on programs like food stamps, subsidized child care and the earned income tax credit.

In recent years, conservatives have dominated the poverty debate with their strategy of breaking the cycle of dependence. But after a decade of welfare reform, budget cuts and calls for individual responsibility, poverty is still very much with us. Maybe it’s time for liberals to regain the upper hand in the debate by arguing that the vicious cycle that needs to be broken isn’t one of dependence but one of declining expectations.

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