LTC Bullet: The New Fallacy of Impoverishment

Friday, June 29, 2018


LTC Comment: Government should declare success in the War on Poverty and eliminate policies that discourage personal responsibility and work, after the ***news.***

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LTC Comment: In 1990, the Gerontologist published my article “The Fallacy of Impoverishment” explaining how middle class and affluent people take advantage of Medicaid long-term care benefits intended for the needy. In 2005, I updated that research in a “Policy Analysis” for the Cato Institute titled “Aging America’s Achilles’ Heel: Medicaid Long-Term Care.” My work shows how people do not have to be poor to get public welfare. Now Cato has published a new “Policy Analysis” that proves most of the poor … well … aren’t.

Whoa, say what? We’ve whipped poverty? How can that be? For answers, check out “Reassessing the Facts about Inequality, Poverty, and Redistribution” by John F. Early, published in April by the Cato Institute. Or read this summary by Phil Gramm and Robert B. Ekelund, Jr. in the June 24 Wall Street Journal: “How Income Equality Helped Trump: Working Americans sense that taxes and transfers now leave them little better off than those who work less.” What follows are snippets from the Cato piece to give you the gist followed by our comments. Footnotes are omitted.

Cato: “Improved estimates of poverty show that only about 2 percent of today’s population lives in poverty, well below the 11 percent to 15 percent that has been reported during the past five decades.” (p. 1)

LTC Comment: How can that be?

Cato: “By design, the official estimates of income inequality and poverty omit significant government transfer payments to low-income households; they also ignore taxes paid by households.” (p. 2)

LTC Comment: Interesting, how about some examples?

Cato: “The inequality debate is most frequently framed in terms of the differences in money income as measured by the Current Population Survey (CPS) from the U.S. Census Bureau.” (p. 2) [but] “Census money income estimates explicitly exclude the following:

  • The Earned Income Tax Credit (EITC)

  • The monetary value of benefits from the Supplemental Nutrition Assistance Program (SNAP), more commonly known as food stamps

  • Free or subsidized medical care such as Medicaid and the Children's Health Insurance Program (CHIP)

  • Free, subsidized, or controlled rent or other ‘affordable housing’ schemes
    Heating subsidies

  • Free or reduced-fee social services such as daycare, tax preparation, or meal services” (p. 4)

LTC Comment: So, when analysts report the percentage of people living in poverty and levels of inequality they’re leaving out cash and in-kind benefits provided by all those government programs? Wouldn’t that make people look a lot poorer than they really are?

Cato: “The net result is that although the lowest income group has only 2.2 percent of earned income, it receives 8.3 percent of spendable income available for consumption and savings. … Beneficiaries in the lowest income quintile during their working years receive 10 times more benefits per dollar contributed than those in the top two quintiles.” (pps. 5-6)

LTC Comment: Wait a minute. Wouldn’t this effect be counterbalanced by the taxes poor people have to pay, especially sales and payroll taxes?

Cato: “Official income statistics make no adjustments for taxes paid.” (p. 4)

LTC Comment: If that’s true, doesn’t it make higher income people look richer than they are? Leaving out government benefit transfers and taxes would make the poor look poorer and the affluent look wealthier. Right?

Cato: “The net effect is that pretax data overstate the true income of upper-income households by as much as 50 percent, and missing transfers understate the true income of lower-income households by a factor of two or more.” (p. 4)

LTC Comment: It sounds like all the anguishing we hear about poverty and inequality in the USA is vastly overstated.

Cato: “If the government were to raise taxes on the wealthy tomorrow and transfer all the additional money to the lowest income groups through a larger EITC [earned income tax credit], the official metrics of inequality would not budge by a single cipher because neither the new taxes taken from the top nor the additional income transfers given to the bottom would be used in the calculations.” (p. 4)

LTC Comment: What’s the bottom line?

Cato: “The net result was that the average spendable income for the highest income group was only three times higher than that for the lowest group.

  • Government redistribution eliminated 88.5 percent of the ratio between the highest and lowest market income quintiles.

  • The 3.0:1 ratio in spendable income between the highest and lowest quintiles is more than five times smaller than the 16.2:1 ratio highlighted by the annual Census Bureau money income estimate.” (p. 10)

LTC Comment: What does this really mean for the middle class?

Cato: “On average, households with $63,136 in earned market income get to keep it all. They pay taxes averaging approximately $17,000 per year, but on average they also get an equal amount of government transfers.” (p. 10)

LTC Comment: So, you’re saying we’ve practically eliminated poverty, as only 2% remain genuinely impoverished, and the middle class is getting back in benefits as good as it gives in taxes. Who’s picking up the tab?

Cato: “The top 47.5 percent of households were taxed to do the following:

  • Transfer enough money to the bottom 52.5 percent of households, to give them average spendable incomes close to the median income

  • Pay for the many activities of government that require 40 percent of all government spending

  • Pay the interest on the national debt, which constitutes 12 percent of government expenditures” (p. 10)

LTC Comment: But surely widespread hunger and homelessness belie your rosy statistics.

Cato: “Other independent data confirm that only small numbers of Americans live in conditions that would normally be considered poverty. These data show that families classified as poor have lifestyles that would usually be considered middle class. For example:

  • Only about 2.5 percent of the U.S. population has even a single day of hunger or malnutrition in a year.

  • Only about 1 percent of the population lives in housing that is severely inadequate or crowded-one-fourth as many as in 1975. Less than one-half of 1 percent of the population is homeless for even a short time during a year.

  • Most families that are defined as ‘poor’ have many goods and services that would be classified as luxury items. Air conditioning is seven times more prevalent among poor families today than among the general population when the War on Poverty began. Most poor families have microwave ovens, at least one vehicle, video games, flat-screen TVs, and personal computers.  

“These metrics are consistent with the improved measures that show about 2 percent poverty prevalence. (p. 20)

LTC Comment: I spent 1968-70 in the Peace Corps in Venezuela and I correspond with friends suffering there now. I know what poverty is. That isn’t it.

Cato: “More than 50 years after the United States declared the War on Poverty, poverty is almost entirely gone. … Public policy debate should begin with the realization that only about 2 percent of the population—not 13.5 percent—live in poverty.” (p. 21)

Closing LTC Comment: Well, there you have it. Poverty is gone for all intents and purposes. We spend one trillion dollars a year to erase it. But that’s not the only cost.

We “[t]ransfer enough money to the bottom 52.5 percent of households, to give them average spendable incomes close to the median income.” (p. 10)

Re-read that last sentence and then ask yourself:

  • Does taxing half the people enough to pull the other half up to the median income make sense?

  • What effect does getting so much unearned income have on the motivation and effort expended by the recipients?

  • What effect does paying their own bills and those of the other half of the population have on the motivation and effort expended by the payers?

  • Have we eliminated poverty at the cost of inhibiting economic incentives and rewards?

One last quote from the Cato report:

During the 15 years before President Johnson's announcement of the War on Poverty, the measured poverty rate had fallen from 34.8 percent to 19.0 percent. Two years after Johnson's speech and before most of the new programs were fully implemented, the rate had dropped to 14.7 percent, well within the range that would prevail for the next 48 years. (p. 15)

One last question: By eliminating the economic consequences of laziness, irresponsibility and poor behavior, did we punish producers, reward indolence, create dissension, polarize our politics, handicap the economy and make everyone’s life less rewarding?

The Cato “Policy Analysis” does not draw those conclusions, but it definitely provides ample evidence to support them.