A New Approach To Poverty

A letter in the New York Times from Joel Berg, the chief executive of Hunger for America, caught my eye because it encapsulates the political debate about financial poverty and what to do about it.

Progressives believe that increasing the disposable incomes of the poor via minimum wage rises, expansions of tax credits and benefits (reform conservatives agree here), and government provision of services is the way to go. Plenty of conservatives want to reform existing welfare programs with work requirements or reforms to reduce disincentives  to encourage people to earn their way to higher incomes.

Let's put aside debate about what the "correct" measure of poverty is. What links the two is that both consider financial poverty (understood commonly) as being about nominal incomes. In one view you alleviate it by transferring money or have government take on the funding of services to reduce out-of-pocket costs. On the other, you incentivize people to earn it.

Income, however obtained, is of course crucially important to individual well-being. Money matters, as do the debates about the efficiency and trade-offs of all these programs.

But focus by policy experts, politicians and the media on the “income-based” narrative of poverty alleviation has left a huge blind spot: that many government policies worsen the finances of the poor by raising the prices of important everyday goods and services. This means any level of income goes less far in satisfying needs - worsening the financial plight of the poor directly, but also driving the very demands for more redistribution and higher minimum wages we see.

Think about housing and the role of zoning and land-use planning laws in raising prices. Child care costs are likewise driven up by stringent staff-child ratios in certain states, without appearing to raise overall quality. Highly regressive tariffs are imposed on imported clothing. Sugar programs and milk marketing orders raise both sugar and dairy prices.

The poor spend the highest proportion, on average, on what we might consider “essential” goods and services. Shelter, food, transport, utilities and apparel together account for 68.3 percent of the $25,318 spent on average by the poorest fifth of households. And yet in all these areas, policies at the federal, state and local levels often structurally raise market prices by restricting supply, raising compliance costs, institutionalizing monopoly power and much else.

Of course all of these interventions are introduced for other reasons: to prevent urban sprawl, to raise the quality of child care, to deal with environmental externalities or to “protect” certain industries, and much else. But the fact is these policies cumulatively raise the cost of living significantly for the poor, and increase the demand for higher government spending and intervention to alleviate poverty. In fact, it most cases they are doubly damaging, as often they reduce economic efficiency too.

This presents an opportunity for libertarians to offer a different perspective on the poverty debate. We should highlight how existing government interventions drive up the cost of living for the poor, and propose a targeted assault on them as a significant “first do no harm” anti-poverty agenda. Serious analysis on how these policies are regressive has been done before, but they are rarely all pulled together into a single narrative that says governments should prioritize undoing these interventions as a nationwide poverty reduction effort.

There are theoretical reasons to think that such an argument – that freer markets are part of the solution to poverty, rather than its cause – could get a better hearing today.

With the US deficit already projected to rise to 5.3 percent of GDP by 2019, the scope for raising structural government spending is low. Liberalization of these markets could even reduce the need for spending in certain areas by reducing the demand for government. We appear to have hit diminishing returns where redistribution is concerned anyway. Poverty rates have remained stubborn despite huge increases in transfer spending since the 1970s. Housing and child care costs are regularly in the news. Left-wing commentators and public intellectuals worry about the regressive nature of zoning and occupational licensing laws, and conservatives worry about regulations which impeded economic growth. More and more evidence (not least the recent paper on Seattle) now suggests that there are significant trade-offs for policies such as minimum wage increases too.

A “cost of living” agenda would be neutral on the welfare state and so could attract bipartisan support too. You do not have to believe existing anti-poverty programs have completely failed to acknowledge their effectiveness can be undermined by bad policies elsewhere which drive up living costs. You do not have to believe they are a success to believe that it is prudent and just to improve the financial position of the poor by reducing living costs as a quid pro quo for cutting welfare programs.

The main political barriers to such an agenda are two-fold. First, the vested interests who “win” from the various interventions and protections will resist. Second, comprehensive supply-side reform across a number of different areas and levels of government is tough to coordinate, and does not provide the focus that campaigning on one area - wages or tax credits - does.

Nevertheless, it is a worthwhile agenda. Before calling for major changes to welfare spending, one way or the other, politicians should realize the destructive consequences of their own policies on the living standards of the least well-off. That’s why over the coming few months, I am going to try to map out the contours of what an anti-poverty cost of living agenda might look like.