Public Policy, Economic Inequality and Poverty: The US in Comparative Perspective

A long, interesting report written last year by Timothy Smedding at Syracuse University’s Maxwell School of Public Policy. The conclusion of his research is:

Do American policies exacerbate or ameliorate inequality and poverty? That is the question we began this paper with. We have found that the United States has the highest level of inequality amongst the rich nations of the world. Our direct income transfer polices do less to redistribute overall and to lower income persons than do the polices in other nations. America began the last
quarter of the 20th century with higher inequality than in any other nation and our inequality increased by more than in any other nation over this period, through expansion and contraction of the economy.

The effects of other direct and indirect policies are harder to nail down, but they also affect well being in unequal ways. We have all but eliminated welfare in America and in so doing have turned the welfare poor into the working poor. But poverty rates did not go down along with welfare rolls. Instead we have the hardest working low income single parents, who also have the highest poverty rates in the rich world. While market forces have increased inequality in most
nations we examine, policy can make a difference.

Seven years ago British Prime Minister Tony Blair announced his government’s pledge to end child poverty. Since then the child poverty rate in Britain has shrunk―almost in half―from 25 to 13 percent on an absolute basis (Hills and Sutherland, 2004). They did it by enacting policies that help low-income families. Blair reformed the British tax system, offering a Working Tax Credit (similar to the United States EITC) to parents working for 16 or more hours a week. And they offered an additional tax credit to pay for up to 70 per cent of childcare costs, plus other work related benefits (including paid family leave).

In the US, on the other hand, President Bush has made no such pledge. In fact, the number of poor children in the United States has actually increased under Bush’s watch. The lesson is clear—if one decides to make poverty or inequality an active policy goal they can make a difference. We have
more inequality and poverty than other nations because we choose to have more. But why do we make these choices?

While the other papers and authors at this symposium are better qualified than I to discuss the relationship between inequality and politics, inequality itself―especially the economic distance from the rich the middle―may be closely related to the levels and patterns of redistribution that we find in the United States compared to other nations. In a recent paper (Schwabish, Smeeding, and
Osberg 2003) we argue that as the “rich” become more distant from the middle and lower classes, they find it easier to opt out of tax financial public redistribution programs and to either self insure or to buy substitutes in the private market. The implication is, therefore, that “two income” households with two highly educated parents have little need for redistributive cash and near cash social benefits because they are very unlikely to directly benefit from such transfer programs. High
income parents can also find better schools or buy private schooling if the public schools do not measure up. They have good employer health insurance so the need for better public insurance is not a relevant consideration (except perhaps for Medicare). The conclusion is that higher economic
inequality produces lower levels of those publicly shared goods which foster greater equality of opportunity and greater upward mobility: income insurance, equal educational opportunity, and more equal access to high quality health care.

Having greater numbers of rich in a nation does not lead to additional redistribution because the lower and middle classes do not have the political power, voice and access to legitimize these claims. Dissimilarities in the institutions that represent social and economic rights in the political arena may well determine redistributive government spending. Our analyses suggests that ideology and efficacy may both matter. Ideology—in the sense of national understanding of the meaning of “fairness,” altruism and basic human rights—may play a crucial independent role in defining the acceptable domains of inequality. But efficacy in the ways in which social institutions and political parties can influence government, is likely to be crucial in understanding whether demands are made of the political system to reach these “fairness” objectives.

The many factors that effect public social expenditures are complex and intertwined.
Certainly, social values and institutions in the United States differ from those found in other nations, and our belief in the market system is much more central and critical to social outcomes than in other advanced nations. Yet even within these beliefs, it seems clear that we do not possess the social institutions or political movements which might bring about greater levels of redistribution, even for those who are more clearly deserving because of their work effort or other factors. In the end, it is clear that the high level of market driven economic inequality which we
tolerate is in large part a determinant of the relatively poor social outcomes and social policy outcomes which we observe.