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United States of America – Economy, Poverty and Elections

An important Irish philosopher, Edmund Burk, told us the following: “Those who don’t know history are doomed to repeat it.”. In fact, this quote transmits the essential idea that is present throughout the article.
The US is the country in the OECD with the highest inequality level and poverty rate. In 2009 the highest ever level of poverty in 15 years was registered. The new generation, the so called the millennials, suffer high poverty rates as well: 1 in 5 millennials lives in poverty, according to a recent report released by the US Census Bureau. An additional statistic of interest comes on behalf of the United Nations Children’s Fund, stating that the US ranks 34th in a total of 35 countries analyzed.
As it is clear from the graph below, from 1959 to 2014, the only significant decrease of poverty levels was registered in the 60’s; entering a period of stagnation afterwards.

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It is very difficult to point out all the reasons that cause an increase of the poverty rate. However, it seems to be consensual amongst economists that higher levels of inequality and lower income growth negatively impact poverty levels. According to the Economic Policy Institute, this is true for the US as we can confirm in the chart below. The bars show by how much the poverty rate increased or decreased due to rising income inequality, income growth across the income distribution, and changes in the educational levels, family structures, and racial composition of the US population. This is illustrated by the chart below, that allows us to compare the different contributions of different categories to the change in poverty rate.

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These factors beg the question of whether we are tackling income inequality issues in the US and if income inequality is in fact being reduced. Unfortunately, a negative answer will follow. As we can observe in the graphs below from Larry Bartels’ “Unequal Democracy” book, the US is becoming a state with a tremendous inequality distribution of income between social classes.

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The 95th percentile of real income growth is increasing at an incredible pace, on the other hand, we have the poorest part of the population with incomparable lower values.
These facts are so powerful and significant that it is our obligation to make some effort to understand the reasons behind this trend. Which measures were applied to increase the income inequality levels? And what about the income growth rates?
The important point here is to understand both sides of the coin. On the one hand, we have the democratic party supporting welfare measures such as food stamps or a strong role of the state in social security, with proven results. On the other hand, the republican establishment, argues in support for a smaller government, for flat taxes and even for trickle-down economics, as they defend that through these measures the gains in efficiency will generate positive spillovers for the rest of society, by the creation of jobs and of an economy with greater investment attractiveness.
The graph below is representative of the difference between democrats and republicans in power:

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When the democrats are in power, the income growth is always greater, independently of the percentile considered. Similarly, democratic presidency is associated with a level of inequality that is incomparably lower.
Another interesting exercise is to divide the first graph into periods. Actually, if we do that, we are able to take conclusions regarding which party is responsible to an increase or a decrease of poverty rates.

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Given the context of the current presidential election, it becomes essential, now more than ever to shed light on the performance of the two political parties in regards to poverty. The focus of the current political debate, or at least the media’s focus, is easily accused of being centered on style over substance. This is why we also need to “tell it like it is”, in regards to poverty since all this information may very well be fundamental for an undecided voter’s decision, it may even be a candidate’s trump card to victory (pun intended).

Finally, we should underline that the evident trends displayed undoubtedly favor the Democratic Party over the Republican, and it is this empirical evidence that constitutes the foundation of my positioning in the political spectrum. It is nevertheless essential to note how all the evidence that was presented does not provide any causal relation. We cannot draw definitive conclusions without considering all the factors that may have influenced how both parties tackled poverty throughout the years.

Gustavo Monteiro #800

 

 

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Author: studentnovasbe

Master student in Nova Sbe

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