HodgBlog

The city that I live in (Shoreline, a suburb just north of Seattle) closed two elementary schools this year, and the city of Seattle has also been talking about closing schools, in both cases because the number of children enrolled in school has declined. Yet the population of both Seattle and Shoreline must be increasing, as houses are replaced by condo buildings and apartments, so I had been somewhat confused about this… Until someone yesterday pointed out the (in retrospect) fairly obvious reason: housing in the nearby suburbs and the city of Seattle is getting more and more expensive. So people in my situation (two good jobs, no kids) can still afford to buy houses, but families with school children are having to move farther north or south, to find housing they can afford. So we are closing elementary schools in my part of town, and Kent (a farther-out suburb) has been building new ones. Food for thought…

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In my last article, I wrote about poverty, especially among people who have jobs. Many of the workers living in poverty around the world are working in the clothing industry; most of the clothing available for sale in the US is produced in sweatshops (which we can define as places where basic worker rights are lacking or where the workers do not earn a wage that allows them to support themselves and their families). But there are alternatives. I researched them today and put together a new section on clothing on my personal web site’s Social Responsibility Page, if you are interested.

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I have some more thoughts as a follow-up to my previous post about poverty and the economy — about solutions to the problem of poverty. First, the basics. Since poverty occurs when there is an imbalance between earnings and the cost of living, to move an individual out of poverty, either the person’s earnings must be increased, or his/her cost of living reduced. There are several ways we could consider doing that for the working poor segment of the population (whether here or overseas).

One idea that comes up a lot is to raise the minimum wage, or make it apply to more segments of the local or world population. At first glance, it seems obvious that if people doing the lowest-paid jobs in our society were earning more for their work, the gap between their earnings and the cost of living would be smaller. However, when you analyze the situation more carefully, the result is less clear. For one thing, according to classical economic theory, in a perfectly competitive market economy the presence of a minimum wage leads to unemployment, which could drive more people into poverty (see this Wikipedia article for a more detailed description of why). I am not sure whether this would really happen or not — economists disagree about whether this applies to the real economy — but it is a possible problem with the idea of raising the minimum wage. Another consideration is that raising the wages of the people who earn the least would certainly have some effect on prices. I’m not sure how much we could expect prices to increase, as compared to the increased earnings of the working poor, but clearly the poorest people are the most affected by price increases, and it would certainly reduce the positive impact of their higher wages. So maybe this isn’t the best idea.

Another possible method of alleviating poverty for working people is government subsidies, which could take the form of cost of living reductions (housing subsidies, food aid, free health insurance) or increases in take-home income (through tax deductions/refunds or some type of direct grant). This method might be more effective at reducing poverty than raising the minimum wage, because it should not lead to unemployment or price increases. On the other hand, sometimes people receiving government subsidies are stigmatized, and there is also the issue that subsidies may be a disincentive for people to work. One idea that I think avoids these problems is tax reform. For instance, right now in the U.S., every working person pays 6.2% of the first $92,000 earned in any calendar year for Social Security, and 1.45% of all earnings for Medicare (the employer matches these amounts). This tax could be restructured so that, for instance, the first $30,000 earned in a year was exempt from both taxes, and there was no upper income cut-off (perhaps with an adjustment of the rates), to shift the burden of this tax to those who can better afford to pay it. Alternatively, the special Social Security and Medicare taxes could be completely eliminated, and regular income tax rates adjusted to make up the revenue, because our income tax structure already ensures that people earning the most (whether from employment or investments) pay the most (loopholes aside), and people earning very little pay nothing. The current Earned Income Tax Credit also allows working poor people to receive a tax refund, which is a small direct grant to people who are working to support families; it could be increased. How about linking it to geography, and making sure that anyone working full-time (or legitimately unable to work due to disability) is brought up to at least the minimum income needed for their family to get housing, health care, child care, and food in the area where they live? I wonder how much this would cost to put into action, as compared to the rather ineffective and inefficient collection of subsidies we have now.

A third possible method of alleviating poverty among the working poor, for the longer term, is education. Now, I am a firm believer in education, and I believe that everyone in the world should have the right to a decent education. Also, statistics consistently (and not surprisingly) show that people with more education earn more, and they quickly recoup the investment of time and money spent on education. However, although I am certain that education is beneficial to the individuals receiving the education, and I believe it is beneficial to society as a whole to have a better-education world population, I am not sure that improving education will reduce poverty among the working poor in the U.S. The reason is that I don’t see how improving education will eliminate the need for the low-wage workers that are at the base of our economy — someone will still need to pick our vegetables, work in our fast-food restaurants, and clean our offices. If they are better educated, will they really earn more for types of work that do not require any special training? Possibly if the entire population were well-educated, they would demand a premium for doing boring work, but other than that, I doubt that improving education would make a big change in the poverty rates among the people doing those jobs.

On the other hand, I think increasing the education level in the developing world could have a real impact on poverty there (and on economics-based illegal immigration world-wide). This is because a higher general level of education enables a country to participate on a more equal footing in the global economy — to move from an economy based on subsistence agriculture and exporting agricultural products and natural resources, which does not provide many well-paying jobs, to one more like an industrialized nation. Several countries I am aware of in Central and South America have successfully made this transition in the last few decades, and while there have certainly been factors other than education contributing to these transitions, clearly they would have been impossible without improvements in the general level of education in those countries. There are certainly negative consequences of such transitions (such as increased energy use, probably leading to increased environmental impact), but for me, the morality of the situation is clear. The benefits to the individuals living in the developing world, if their educational systems are reformed and their economies become more industrialized, are such that we cannot morally deny them the chance for a better life.

So by all means, let’s push for better education here and around the world, to improve everyone’s standard of living in the longer term. And in the meantime, I think it’s time for something like an expanded Earned Income Credit that would bring everyone up to a basic level of income. And I think it’s time for me to find out what the current Presidential candidates are planning on doing about poverty, as well as the energy and constitutional questions I’ve been exploring in recent articles. More on that later…

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I have been thinking lately about the U.S. economy, and how it is related to poverty. Here are some thoughts:

• Many people in this country are living in poverty (see my previous article on homelessness for more detailed analysis). Some of these people are unable to work, due to physical disability, mental illness, or other factors. But many of them are working in jobs which do not earn them enough to meet the basic needs of housing, food, and health care for themselves and their families.
• Many people are living and working in this country illegally. The ones I am most aware of come here, mainly from Mexico, because they have very few opportunities for employment at home, and hope they will have a better life here. And although their life here seems very difficult by my standards, they generally say that it is much better than it would be back home.
• People in both of these categories (the working poor and the illegally employed) are staffing our fast food restaurants and grocery stores, picking our fruits and vegetables, cleaning our office buildings and hotels, and working in low-skilled manufacturing jobs. Presumably, if the illegally employed were sent home, and the working poor earned enough to live on, prices would be higher. Though perhaps that would be offset by lower taxes, as we would presumably have less need for Medicaid, Food Stamps, Welfare, Section 8, and other programs where government agencies take care of some of the basic needs of the working poor.
• Overseas, the inexpensive goods we import are being produced in ways that would not be legal here: with child labor, long workdays and work weeks, low wages, and large environmental impact. These practices also keep our prices down.

To me, it is clear that the social and environmental cost of our low prices is too high. What I am less clear about is how to reduce the social and environmental costs, and what effect it would have on our economy. I think I need to do some reading…

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I just read an interesting report by the Western Regional Advocacy Project (WRAP) about the real causes of homelessness in the United States. The main findings of the report, called Without Housing, are:

• The number of homeless people in the US roughly tripled during the 1980s. Currently, about 3 million people experience homelessness each year, roughly 40% of whom are children.
• The social reasons people normally cite as the causes of homelessness (such as mental illness, drug and alcohol problems, etc.) have not changed dramatically since the 1970s.
• Direct subsidies from the US government that help low-income people pay their rent, as well as direct subsidies that build housing intended for low-income occupants, have fallen sharply since the late 1970s, and in particular, were cut drastically in the Reagan administration of the early 1980s.
• On the other hand, the tax deduction we have for payment of mortgage interest, which is basically a housing subsidy for the middle and upper classes, has increased dramatically in the same time period. As of 2005, the budget for this tax deduction is roughly four times the budget for low-income housing subsidies.
• There has also been a loss of existing public subsidized housing, and privately-owned low-cost rental units have also declined in numbers.
• Considering all of this, the report concludes that the real reason for the sharp rise in homelessness since the early 1980s is not the slight (if any) increase in social problems, but the sharp decrease in affordable housing. The social problems that lead individuals to need lower-priced housing definitely exist. However, in the 1970s, these people did not end up homeless because they could find affordable or subsidized housing. They cannot now, so if we actually want to end homelessness in the United States, we need to have more affordable housing or housing subsidies available. Working on mental health and drug rehabilitation is probably a fine idea, but it is unlikely to end homelessness by itself.
• Some methods for increasing the amount of affordable housing (which could be offset by lowering the housing subsidy for middle- and upper-income homeowners):
  • Raise the minimum wage, so that people with jobs can afford to pay more for existing housing.
  • Offer more rent assistance to people who cannot afford to pay for existing housing.
  • Offer more assistance with other expenses (health care, child care, food, clothing), so that more money is left over for housing expenses.
  • Create more housing with lower rent, either publicly-owned or privately-owned housing.

Here are a few other thoughts, based mostly on 2005 reports from the U.S. Census Bureau:

• The current federal minimum wage is $5.15 per hour. This translates to an annual income of $10,712 for someone who works 52 weeks at 40 hours per week, which puts that person at about the official federal poverty level for a single adult, and well below the poverty level if that person is the sole earner for a larger family.
• 12.6% of people in the U.S. are currently living in poverty.
• The poorest 20% of U.S. households (i.e. about 23 million households) earn less than $19,000 per year.
• Housing is considered “affordable” by experts if it costs less than about 30% of a household’s income (the National Association of Realtors says 25%, Fannie Mae and the National Association of Home Builders say 28%, and the MIT Center for Real Estate says 30%, for instance). Using the 30% figure, a household with $19,000 per year in income can afford up to $475 per month in housing costs.
• The census bureau reports that there are only about 8.2 million rental units (occupied or vacant) that cost $475 per month or less. Considering that there are 23 million households who need housing that costs approximately this much, this simple estimate says that only about 36% of the poorest households in the U.S. are likely to find rental housing they can afford. Perhaps some of them can purchase housing, but it seems likely that most will be renting… No wonder we have a problem.

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