Tuesday, January 31, 2006

Shaky Economics and the Poor

Supply Side Bulge

I know some of you hated economics in college, so please forgive the graph. But read on. Trust me, it's relevant. And even if your palms get clammy at the sight of the Laffer Curve above you'll find the post below easy to follow.

Wanted to return to the issue of the morality of the federal budget and how it affects poor people. You can check out "Moral Budgets" (November 05) for the first part of the discussion.

What Shook Out

Congress will ratify the new federal budget as soon as tomorrow.

It's not as bad as it could have been, mostly due to the opposition of justice activists and a few key players in both political parties. Dr. John Perkins, the seemingly ageless founder of Harambee Christian Family Center and the Christian Community Development Association, was among those arrested a few weeks ago in D.C. protesting the proposed budget.

Things have sure changed these days at Harambee.

But the new budget will still be pretty harsh.

The quick summary: dramatic cuts in a whole variety of bedrock programs for the poor and extended tax breaks and benefits for the "investment" class (i.e, the well off :^). Not to mention lots of big ticket pork barrel projects and big scratch for the wars we're now fighting against tribal enemies who might someday threaten us with the nuclear weapons that we originally developed

The Congressional Budget Office just released a study that showed the specific effects of the new budget on health care for the poor: "...millions of low-income people would have to pay more for health care under the bill worked out by Congress, and some of them would forego care or drop out of Medicaid because of the higher co-payments and premiums."

Real world translation: A whole lot of the poorest people are likely to go without medical care because of the new budget. And that's just one of the many negative effects for the poor.

The Magic of Supply Side Economics

Why would moral and thoughtful people who genuinely want to help the poor pass a budget like that? I believe some of the folks who voted for it fit that description.

The simplest answer? They genuinely believe that cutting even effective programs for the poor and giving tax cuts to wealthy people help the poor by creating economic growth and more jobs for everybody. They also think cutting aid to the poor gives them incentive to get out and work, thus benefiting poor people morally and adding to the economic growth that helps everybody. Finally, they believe that by cutting taxes on the investment class overall tax revenues will increase as economic growth expands. In effect, the tax cuts for the rich will "pay for themselves."

The ideology driving the congressional majority and our executive branch is a version of supply-side economics. Many supply siders unfortunately appear to be true believers. One of the economics editors of The Economist recently described the Bush White House as "an administration that truly believes that tax cuts for the wealthy and benefits cuts for the poor will solve almost any problem."

I guess I'd like to ask at least one key question in evaluating supply-side federal budgets like the one Congress will ratify tomorrow.

Is there clear and obvious evidence that giving further tax breaks to the wealthy and cutting benefits to the poor enhances overall economic performance and creates more jobs and overall wages for the poor?

Clearly, no moral person would support a budget that cuts beneficial programs for poor people unless they were very sure those cuts would bring substantial benefits that would outweigh the suffering caused by the cuts.

What About the Evidence?

That same edition of The Economist contained a fascinating article which carefully looked at the economic data from the past 5 years in the US.

They concluded that there is little if any evidence that the Bush tax cuts for the wealthy generated substantially greater economic activity or more jobs or wages for the poor.

Further, they challenged the idea that supply side tax cuts for the wealthy will "pay for themselves" through increased economic activity. That's important because supply siders make that pitch in selling tax cuts for the rich and benefits cuts for the poor.

The fact is the hard evidence simply won't support such a claim.

Remember, The Economist isn't MoveOn.org. It's arguably the world's leading market oriented publication.

The historical record of the US economy during the last 50 years and basic comparisons with other world economies also cast some doubt on supply side claims.

It's true that punitively high tax rates on the investment class and unrealistically generous welfare programs for the poor and other groups in a society can slow economic growth and therefore can inadvertentely hurt a lot of people.

But, of course, that's not the situation we're dealing with in the US right now. As I've mentioned before, our tax rates on the well off are among the lowest in the developed world and our social benefits for the poor are among the least generous.

When you look back on the track record of the US economy, it's fairly obvious that the economy flourished at times when income and investment taxes on the wealthy were signficantly higher and useful social programs for the poor were more generous than they are now.

Very strong economies in the 60's and 90's boomed in the midst of non-supply side tax codes and budgets. Whatever you might think of Bill Clinton's personal morality, more wealth was generated during his years in office and more people rose out of poverty than at any time in recent memory.

The economic situation of the poor in America has declined by pretty much every measure during the Bush years just as they did during the supply side Reagan years.

So I'd argue the evidence is tenuous at best that cutting benefits for the poor and taxes for the wealthy actually helps the poor.

Getting Out Ahead of the Curve

Why is all that important? Well, for those of us who are less ideologically oriented and who are interested in the plight of the poor, I think we've got to evaluate who we're supporting and how we're voting. And I believe that's true no matter what our political orientation might be.

And for those of you who are passionate supporters of supply side thinking--particularly if you're trying to advocate for the poor--maybe a little less passion and a little more honesty would be in order.

Advocating for approaches that cause real suffering for poor families without clearly creating benefits that outweigh that suffering might turn out to be pretty counterproductive.


Anonymous Alex said...

Thought-provoking post as always, and one that deserves a sustained and considered response - which unfortunately I don't have time for at this very moment. But a couple of thoughts:

(1) As members of a larger social body (whether local, national or global), we have a collective moral responsibility to take into consideration the needs of our weakest members, including the poor. At the same time, as individuals within that social body, we all have a uniquely individual moral responsibility to behave in such a way as to benefit everyone.

I believe that both aspects of this responsibility, individual and collective, need to be honored (though they are often in tension with one another) and I often become frustrated at typical conservative/liberal discourse that to my mind privileges one over the other.

(2) You offer an impassioned and justified defense of our collective responsibility to the poor, with which I largely agree. But let me offer a response that emphasizes our responsibility as individuals, and that takes as its starting point the claim that:

"Clearly, no moral person would support a budget that cuts beneficial programs for poor people unless they were very sure those cuts would bring substantial benefits that would outweigh the suffering caused by the cuts."

I think at issue here are the nature of the unintended consequences that have in many cases accompanied these so-called "benefical" programs. I realize that anecdotal evidence is often suspect, but a personal story helps illustrate what bothers many conservatives about the proliferation of entitlement programs. When my wife and I were considering starting a family my sister-in-law was living with us - she had a child at 14 and since that time has been part of the "system." As we talked with her about the mainly financial reasons why we were waiting she got a puzzled look on her face and said, "But having a baby is free - you just go to the hospital and show them your card (i.e. medicaid card) and they pay for everything." That, in a nutshell, is what drives conservatives crazy, because of course, somebody always pays. I love my sister-in-law and she's had a rough time of it, but the net results of now three generations of "Great Society" programs in her life are an inability/unwillingness to hold down a job, increasing waves of bitterness and resentment, a stunning notion of entitlement, and a more than tenuous grasp on the reality of her situation and what it will take for her to get out of it. And what's worse, these same attitudes are being passed on to her daughter.

Now granted, this is just one example (though I could offer a myriad more) and of course it was better for my sister-in-law to have access to medical care and to be able to feed her daughter when she was a baby, but I think any reasonable person would ask the question, when does it stop? When is it the responsibility of the person being assisted to participate in their own recovery? As it stands now, the same cycles of dependency, addiction and entitlement have been passed on from grandmother to mother to daughter with no end in sight.

What makes more sense to me than large-scale bureaucratic efforts that by their very nature lack flexibility and accountability are smaller, more localized and probably private efforts, whether through religious or community organizations, that can quickly and efficiently respond to the unique needs the weakest among us may have.

A truly "moral" federal budget would eliminate the porkbarrel spending that politicians use to ensure their re-election and send that money back to local communities where we as individuals and local organiziations could decide how to put it to best use.

And on an unrelated note - I was perplexed by the dig at Harambee early in your post. Obviously something about that organization bothers you, but as far as I can tell, though it may in recent years have moved more towards the pole of personal responsibility, I don't see how it has betrayed the vision of John Perkins. They seem to be struggling honestly and authenticaly with many of the same issues we all are.

10:36 AM  
Blogger Wordcat said...

Excellent and thoughtful points, Alex.

I only briefly mentioned the notion that moving people beyond these kinds of support may contribute to their moral development. Personally, I find that argument much more compelling and empirically solid than the often (in my mind) shaky economic arguments.

We lived and worked in inner city neighborhoods for many years and met plenty of folks like your sister in law. My wife and I often asked exactly the same questions, particularly of the "when does it stop" variety.

Ironically, I have a sister-in-law here in Colorado who has been pretty irresponsible in her life and who was simply taking advantage of friends and family. Since we've moved here we've spent a good bit of time exercising some very tough love with her in an attempt to help her gain greater self-respect and personal responsibility. It's tough going and I'm still not sure how it's going to turn out

So yes, these issues are far more complex than the often oversimplified debates about economic and tax policy.

Monies and benefit programs have to attempt to encourage responsible behavior. The reality is that a proportion of folks living in poverty are not living responsibly.

At the same time, we're in a capitalist economy where the amny millions have little or no real opportunity for a decent education. The poorly educated have less and less chance every year to compete in the marketplace. Because of those realities there are going to be lots of people in pretty dire straights, even if they work full time. Most of those jobs pay little and increasingly they include few if any benefits as companies here seek to become more competitive.

Many of the people we lived around for years were in that latter category--upstanding folks working hard--often at multiple jobs--but who still couldn't make ends meet.

So I get frustrated at times with the ideological meat cleaver approaches to these issues that I'm seeing right now on the federal level.

6:12 PM  

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