Imagine thinking the government can reduce poverty.
For most readers of this website, the thought is laughable. And for good reason. The government has no resources of its own. Every dollar it spends it must first either tax, borrow, or print. Taxing and borrowing redirect money from the voluntary, productive sector of the economy to the hands of politicians. Printing new money erodes the value of currency already held by citizens, harming low-income households disproportionately, while distorting important market signals like interest rates that are vital to coordinating the economy’s complex patterns of production and exchange.
Nevertheless, the Urban Institute—a highly influential and deep-pocketed left-leaning think tank—just released a report claiming that the recently passed American Rescue Plan will reduce the poverty rate by one-third in 2021.
Major media outlets like the Washington Post and CNN wasted little time in reporting on the study’s findings.
The report’s methodologies and assumptions, however, are highly questionable and cast doubt on the legitimacy of its conclusions.
The Urban Institute’s study claims that the Rescue Plan will reduce the number of people in poverty in 2021 “by about 16 million, from over 44 million to 28 million.” This will be accomplished, according to the study, because the plan will increase “aggregate net resources” for households currently under the poverty line by $87 billion, or an average of about $3,850 per family.
The report, however, gives away the game early on. “Our analysis does not include the macroeconomic effects of the policy changes.” This is often referred to as a “static” analysis.
This admission alone should be enough to dismiss the Urban Institute’s findings. Assuming that the massive changes to the money supply, government debt, and incentives to work, spend, or save will have no effect on behavior or other “macroeconomic effects” like price inflation is wholly unrealistic.
For starters, how many households will fall back below the poverty level when price inflation pushes up the cost of living, especially the cost of common household needs like groceries, gas, and utilities?
In January, grocery prices were already up 3.7 percent year over year, the largest such increase in a decade, with beef leading the way with an 8 percent rise.
Gas prices are up more than fifty cents per gallon already this year, and are expected to surge beyond three dollars a gallon this summer. Oil prices are up more than 20 percent this year, and continue to climb.
Add in a “rescue plan” of $1.9 trillion, most (if not all) of which will be newly created fiat currency, and price increases should be expected to accelerate still further. The rescue plan will cost nearly $5,800 for every man, woman, and child in the country (more than $23,000 per family of four). Yet according to the Urban Institute’s calculations, even those households targeted for the greatest amount of relief will receive on average $3,850 per family.
Basic math indicates that low-income households will struggle to keep pace with the rising cost of living, even with the financial relief.
More specifically, the Urban Institute attempts to evaluate the impact of four specific measures contained in the rescue plan.
The plan will add another twenty-five weeks of federal benefits, along with an additional $300 a week. This would continue to be in addition to the normal state unemployment insurance benefits, which average about $300 per week.
At an annualized rate, a household with two people collecting an average of $600 per week in UI benefits would be receiving the equivalent of more than $62,000 per year, nearly matching the national median household income of $68,703.
This obviously provides strong incentives for people not to work, and to hold out for ideal, well-paying job opportunities that may never materialize. Fewer people actively working means lower amounts of production, which limits the quantity of available goods and services. A limited supply of goods and services being chased by a dramatically increasing amount of dollars will help to drive up prices more significantly.
Discouraging work and productive activity is the opposite of helping to alleviate poverty.
And what about the longer-term effects on the recipients once the benefits expire? How much more difficult will it be for them once again to find work after another six months of being out of the workforce? The Urban Institute leaves such questions unaddressed.
The Urban Institute report also estimates that the extension of increased Supplemental Nutrition Assistance Program (SNAP) benefits would serve to reduce poverty by one-tenth of a percentage point.
The assumption here again is that the value of the benefits isn’t being traded off against higher food prices, an assumption that is naïve at best and intellectually negligent at worst. The higher cost of living may force more people below the poverty line than the benefits would enable to exceed it.
Of the four measures analyzed in the Urban Institute’s report, the “stimulus” checks of $1,400 for most Americans are predicted to “produce the largest projected poverty reduction.”
The checks are purported to provide “relief” to families enduring financial struggles thanks to the covid lockdowns. But in spite of the significant spikes in unemployment, especially concentrated in the fields of hospitality and leisure, the majority of people receiving the stimulus checks will have suffered little to no interruption in their incomes.
Once again, however, the Urban Institute simply adds in the stimulus check amounts to low-income households’ incomes and declares that the additional income will propel many households above the poverty threshold with the assumption that the stimulus checks will have no other “macroeconomic effects” like price inflation.
Child Tax Credit
Finally, the study claims that the Rescue Plan’s child tax credit increase from $2,000 to $3,600 or $3,000 (depending on the age of the child) will “substantially boost the income of families with children.”
I recall Nancy Pelosi describing $1,000 tax cuts for working Americans as “crumbs” in 2018. But now a similar amount is described by the Urban Institute as a substantial boost in income.
Nevertheless, even though on the margins this additional income from the credit could push some families above the measured poverty rate, it remains irresponsible for the Urban Institute to merely wish away the negative impact of rising prices on low-income households in their analysis.
Only Productivity Reduces Poverty
Claims that government can “boost” the economy, or “create” jobs, or reduce poverty should be met with harsh skepticism.
With no resources of their own, the government can at best rearrange jobs, incomes, or patterns of production. But even more likely, the process of doing so will hamper economic progress, destroy jobs on net, and exacerbate poverty.
As John Chamberlain, the late economic historian, stated, “Poverty in society is overcome by productivity, and in no other way. There is no political alchemy which can transmute diminished production into increased consumption.”
Government “stimulus” or “relief” plans are long on encouraging more spending of newly created dollars, but short on encouraging actual production. The combination makes for a perfect recipe for price inflation, but not poverty reduction.
The fact that a report like the one produced by the highly esteemed Urban Institute must resort to such damning assumptions to conclude that the Relief Plan will reduce poverty bolsters my point.