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Inequality, Poverty, and Why We're Definitely Not Broke

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I participated in a debate Thursday morning on the role of government in poverty reduction. A couple of "curious" points came up from the conservative side which I keep hearing lately and which make little sense to me.

First, on inequality, Michael Tanner from the Cato Institute couldn't understand why I kept going on about inequality. It doesn't have anything to do with poverty (Scott Winship of the Brookings Institution made a similar argument in a Senate hearing a few weeks back). Tanner argued that if everyone's income doubled, poverty would go down but inequality wouldn't change, so inequality must not matter.

Um... ok... but that's a total non-sequitur. What's been happening for most -- not all -- of the past 30 years is the pattern of real income growth you see here, from a recent CRS study. Sure, if everyone's income grew at the overall average of the first bar-20%-we'd have less poverty and less inequality. But in the real world, average income grew 20%, fell 6% at the low end, and was up 60% for the top 1%.

2012-03-02-crs_ineq.png

Source: CRS, link above.

That's how you get results like the ones shown here where the change in poverty over the past few decades is decomposed into the roles of growth, education, race, family structure, and inequality, the latter of which is the single largest factor.

In fact, for a few years in the latter 1990s, inequality between the middle and low end of the income scale actually compressed -- the very top still pulled ahead, based on large gains in capital income. But low wages actually rose at the rate of productivity growth for a few years there, something that hasn't happened since. And what happened to poverty rates in those years? They fell quite steeply.

This isn't rocket science. If growth reaches the bottom, there's less poverty. If inequality diverts growth from the bottom, poverty goes up.

The other mishap in the discussion was the claim that we really can't do anything to help the poor because we're broke.

No, we're not. It is implausible to argue that the US economy will somehow stop growing. No one knows how fast, but CBO has GDP growing about a third over the next decade (2012-2022), and that translates into per capita growth of about 22% (see EPI's take on this here).

We may well be unwilling to raise the revenue we need to fight poverty, invest in poor kids, fix up our infrastructure, push back on climate change, and ensure secure retirements for our elderly. But it won't be because we're broke.

This post originally appeared at Jared Bernstein's On The Economy blog.

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