The Endurance and Transformation of American Poverty

For the first time in several years, the September 2014 Census Bureau report on the state of poverty and income within the United States contained encouraging news: incomes were up (slightly), and the poverty rate was down (from 15.0% in 2012 to 14.5% in 2013). It appears that, 5 years since the resumption of economic growth following the Great Recession, growth is finally translating into improvements in basic social indicators. With the output gap (between real observed GDP and potential GDP) now down to around 4% (from a peak of just over 7% of GDP), and with U3 unemployment beginning to approach its estimated natural rate of around 4.5-5.5% (it reached 5.9% in September 2014), the relative bargaining power of workers is slowly but surely improving, allowing for upward pressure on wages and income to materialize.  Despite these improvements, however, poverty as defined by the government’s federal poverty rate remains at multi-generational highs, and is likely to remain elevated for several years to come.

Output Gap

Resources are not being used to their full potential in the US economy

Poverty rate

Poverty rate remains at multi-generational highs

US Unemployment rate nearing estimated "natural rate"

US Unemployment rate nearing estimated “natural rate”

 

This is depressing, but it fails to tell anywhere near the whole story.  First, we must come to terms with the fact that the actual existence of poverty is all relative, dependent on the constructed definition of the observer.  Since there will almost always be disparities in income (assuming the absence of a genuine proletarian revolution), then there will always be a class of peopled who are “in poverty”, even if their real incomes and living standards would historically have qualified them as middle class or higher.  As such, we can never really eliminate “poverty”, in the sense that that definition is relative and always transforming as absolute conditions shift.    Secondly, the poverty statistics we currently use are woefully simplistic.  Our main poverty metric is calculated based upon the food budget of a typical family using thresholds from 1955 – when the share of income dedicated to food was very different than it is today.  Furthermore, the current poverty thresholds and definitions also do not take into account many forms of governmental assistance (food stamps, Medicaid, etc.) in its calculation that would significantly reduce the number of people listed in poverty.  Perhaps most importantly, though, improvements in product quality and the introduction of new goods & services have zero impact on poverty statistics.  This is important – for though the overall discretionary purchasing power of people is being squeezed (as necessities like healthcare, education, etc. rise in cost), many consumer goods & services are not only far more affordable than they used to be but there is now a greater variety of goods with new qualities and capabilities.  Even as overall discretionary purchasing power is stagnating, quality and variety continue to rise, to the benefit of all consumers.  The stats don’t reflect any of this, hinting that the actual poverty rate might be overstated and that American well-being has continued to improve over time.

Of course, this is in no way diminishing the hardships that those labeled at or near poverty experience within this country.  Indeed, we still are not considering all the variables that impact American poverty.  While consumer goods & services become cheaper and better qualities & characteristics are developed, this comes at the cost of the termination of employment in many sectors, such as low-end manufacturing and various low-skill professions.  Theoretically, these workers could be retrained to perform more higher value-added tasks; in reality, the United States lags in post-secondary completion rates and overall educational quality (mostly at the primary level), making such transitions more difficult.  Additionally, the United States is not particularly generous in offering temporary assistance to those who are unemployed due to market forces (consider the example of the Trade Adjustment Assistance program).  Ironically, this skills shortage in the American labor force and the structural unemployment that results makes it more difficult for consumers to purchase these higher-quality lower-priced goods and services, leading to large imbalances and counteracting many of the benefits of these improved and emerging consumer options.

So, to sum up:

1) Poverty will always exist as long as there are disparities in income (desirable, to a point) and it is (like everything) a human construct.  This does not mean it stays the same; rather, it evolves as overall conditions evolve

2) American poverty metrics are far from giving any rational sense of the true state of poverty in America

3) There are indications that poverty is both less and more widespread than is thought, with positive and negative influences counteracting one another

Certainly, lowering the prevalence of absolute “poverty” would be desirable for society, and not just for the obvious benefit of those so labeled as “the impoverished”.  Greater inclusiveness and higher earnings power boosts the overall macro-economy (consumption, productivity, etc.) and helps to promote social cohesiveness.  But first, we have to acknowledge that not only are the current measurements of poverty severely flawed and in desperate need of an update, but we must accept that we will never completely eliminate relative “poverty”.  As long as it is a relative concept that is allowed to vary as conditions change, it will always be said to exist, even if it vastly different from what it was in earlier periods.  The fight against poverty is therefore a continuous process whose end goal is the indefinite improvement in the living standards.  To say we can ever “win” the War on Poverty is, I think, misleading; because to say we can ever win implies that there is a set limit to how much living standards can ever rise.  Once we accept these points, we can proceed to rethink our goals and proceed to make genuine progress in improving American well-being.

 

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