High US Child Poverty: Explanations and Solutions

High US Child Poverty: Explanations and Solutions

High US Child Poverty: Explanations and Solutions Jeffrey D. Sachs, PhD From the The Earth Institute, Department of Health Policy and Management, Colu...

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High US Child Poverty: Explanations and Solutions Jeffrey D. Sachs, PhD From the The Earth Institute, Department of Health Policy and Management, Columbia University, New York, NY Conflict of Interest: The author declares that he has no conflict of interest. Address correspondence to Jeffrey D. Sachs, PhD, The Earth Institute, Department of Health Policy and Management, Columbia University, Hogan Hall, 2910 Broadway, Level A, Mail Code 3277, New York, NY 10025 (e-mail: [email protected]). Received for publication February 8, 2016; accepted February 8, 2016.

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AMONG THE 34 Organisation for Economic Co-operation and Development (OECD) countries, the United States is one of the richest countries but also one of the countries with the highest rates of child poverty. According to the OECD measure of poverty, around 21% of US children aged 0 to 17 are in poor households, compared to an average of around 14% of children across all OECD member countries with data. The explanation is that the United States has among the most unequal distributions of income of the

OECD countries and thereby combines a high average income with a significant proportion of households below the poverty line. The lower poverty rates of the other OECD countries are mainly the result of national policies rather than intrinsic economic structures; the United States could also sharply reduce its high poverty rate by emulating the social policies of the other OECD high-income countries. Figure 1 shows the basic data. (All data I use here are from OECD.Stat,1 generally for the year 2012, or as close

Figure 1. Indicators of income, poverty, and inequality from Organisation for Economic Co-operation and Development.

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Figure 2. Effects of taxes and transfers on poverty rate.

as possible to 2012.) While the United States ranks fourth from the top in per-capita GDP, it also ranks sixth from the bottom in the rate of child poverty, with only Greece, Chile, Israel, Turkey, and Mexico having a higher rate of child poverty. The OECD measure of child poverty is the proportion of children aged 0 to 17 living in households with incomes that are below half of the national median household income. In this case, the household income is measured after taxes paid and public transfers received, so it takes into account the net social benefits received by low-income households. The rate of child poverty is an increasing function of the degree of income inequality, measured by the Gini coefficient. The higher is the income inequality, the greater is the rate of child (and overall) poverty. The Gini coefficient is a standard measure of household poverty, showing the deviation of household incomes from full equality. The Gini varies from 0 (full equality of income across all households) to 1, the extreme case in which one household has all of the national income while the other households have none. The main point of social policy in OECD countries is to reduce poverty and market-based income inequality by

collecting taxes greater than transfers (plus in-kind benefits) from richer households and paying transfers (plus inkind benefits) greater than taxes to poorer households. By redistributing income (and in-kind benefits) toward the poorer households, market-based inequalities of income and poverty rates are thereby reduced. Consider the data in Figure 2. In Ireland, for example, the poverty rate before taxes and transfers is 42.1%. This means that 42.1% of households have pre–tax-and-transfer incomes below the pre–tax-and-transfer median income level of all households. Yet because the richer households pay net taxes and the poorer households receive net subsidies from the government, the post–tax-and-transfer poverty rate is only 8.4%. The point is that Ireland’s social welfare system dramatically reduces the proportion of Irish households with less than half the median income after accounting for taxes and transfers. The same effect reduces the Gini coefficient. If the inequality of market incomes is measured before taxes and transfers, Ireland’s Gini coefficient is a very high 0.58. Yet once household income is adjusted for taxes paid and subsidies (and in-kind benefits) received, the Gini coefficient falls sharply to a much more equal

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Figure 3. Effects of tax and social outlays on poverty reduction.

0.30. The point, once again, is that fiscal policy is redistributive from high-income households to lowincome households. The striking difference across the OECD countries is the extent to which they are willing to use fiscal systems to reduce poverty and inequality (Fig. 3). In most northern European countries, for example, public social expenditures (on health, education, family support, child care, pensions, and the like) are large relative to national income, roughly 20% of GDP. These social outlays, and the taxes levied to pay for them, have the effect of sharply narrowing the income gap between richer and the poorer households. As a result, the northern European social welfare systems dramatically reduce the poverty rates and Gini coefficients in northern Europe when comparing the pre–tax-and-transfer and the net-of-tax measures. In several countries, including the United States, Switzerland, Israel, Chile, Mexico, Turkey, and Korea, the tax-and-transfer system redistributes a much smaller share of national income between richer and poorer households. Taxes as a share of national income are lower, and poor households receive much lower benefits in cash and in kind. The differences between the pretax and posttax

rates of poverty and income inequality are therefore much smaller. The high inequality of income due to market forces is not relieved by transferring net incomes from richer to poorer households, at least not as significantly as in most of northern Europe. Reduction of the Gini coefficient (subtracting the pretax Gini from the posttax Gini) is strongly associated with the ratio of public social outlays to GDP. Countries with a high rate of social spending—for example, France (at 31.5% of GDP)—have a large reduction of the Gini coefficient after accounting for taxes and transfers (a reduction of 0.21 comparing the pretax and net-of-tax Gini). In the United States, by contrast, the social spending is only around 18.7% of GDP, and the decline of the Gini is only 0.12. Likewise, the magnitude of the decline in the poverty rate is associated with the level of social outlays relative to GDP. As with the Gini, countries with higher social outlays relative to GDP, notably in northern Europe, show much larger declines in the poverty rate comparing pretax and posttax poverty rates. In Germany, for example, which spends a hefty 25.4% of GDP on social outlays, the pretax poverty rate is around 31.4%, while the net-of-tax poverty rate is just 8.4%. In the United States, by contrast, where

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Figure 4. Correlates of high child poverty.

social outlays are only 18.7% of GDP, the pretax poverty rate of 29.2 declines only modestly to 17.9% after taxes and transfers. The essential and simple point is that tax-financed social outlays are enormously powerful in cutting both income inequality and poverty. The main reason that the United States has relatively high poverty rates and high inequality of income is that the social welfare system is much smaller than in the high-income countries of Europe. The United States ends up with far higher levels of child poverty and income inequality than high-income Europe simply because the United States does not have an adequate taxand-transfer system to redistribute income toward the poor. I have written about this difference in detail in my 2012 book The Price of Civilization.2 There are no doubt deep social roots to this discrepancy. In Europe, the relatively greater ethnic and racial homogeneity leads to a greater degree of social solidarity. In the United States, at least part of the culture is the right to ignore one’s neighbor, especially if that person is of a different faith, religion, or race. There is considerable political science and sociological evidence that political support for social transfers in the United

States is reduced in parts of the country where the majority white population objects to fiscal transfers that might go to benefit racial or ethnic minority groups.3 The country’s long history of racial oppression finds part of its presentday reality in the much smaller US social outlays than in northern Europe. Whatever the causes, the European social welfare states have successfully reduced overall and child-related poverty, and they have successfully narrowed the high rates of market-driven inequality of income. European countries deploy their successful social outlays in several ways: free publicly financed health care; zero tuition for quality public schools at all levels, including higher education; generous family support for low-income families; quality day care and early-childhood education programs for all children; maternal and paternal leave policies; flexible work arrangements; and other social policies. Family support spending in Sweden, for example, amounts to a generous 3.6% of GDP, while in the United States, family support is just 0.7% of GDP. Poor families in the United States struggle and often fail to survive. Yes, such family programs must be paid by higher taxes,

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which in Sweden total around 43% of GDP, compared to just 25% of GDP in the United States. The benefits for child well-being of reduced poverty are powerful. In the United States, children growing up in poverty experience many lifelong deficits in health, educational attainment, and lifetime work opportunities. Many poor US children are almost condemned to a lifetime of poverty. The obesity rate is far higher than in most of Europe, as is the rate of infant mortality (Fig. 4). Europe’s strong social welfare states, by contrast, lead to much higher social mobility and much less deprivation for children born into households in the lower end of the income distribution. By virtue of the stronger social welfare system, nearly all children, rich and poor, are afforded an opportunity to meet their individual potentials. There is a striking negative relationship between a ranking of children’s material well-being devised by UNICEF and the extent of inequality in the society (measured by the net-of-tax Gini). The UNICEF measure is a composite indicator of several dimensions of children’s material well-being, including the extent of poverty, quality of health, quality of education, behavioral patterns of children, and quality of housing. Countries with a low net-of-tax Gini have their children living in relatively favorable material conditions. Children in countries like the United States, with very high inequalities of income, face much worse material conditions.

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In recent years, several researchers including myself have examined how overall self-reported happiness, also called subjective well-being, in the society relates to the policy choices made by the society. The United States declares itself to be a country committed to the pursuit of happiness. Yet the countries with low rates of poverty and income inequality such as in northern Europe are consistently happier than the much richer United States.4 By failing to implement an adequate system of social support for its families and especially its children, America is sacrificing its children’s long-term well-being and squandering its most important opportunity to pursue and achieve happiness.

REFERENCES 1. Organisation for Economic Co-operation and Development. OECD.Stat. Available at: http://stats.oecd.org/ 2. Sachs J. The Price of Civilization. New York, NY: Random House; 2012. 3. Alesina A, Glaeser E, Sacerdote B. Why doesn’t the United States have a European-style social welfare state? Brookings Papers on Economic Activity. Washington, DC: Brookings Institution. Available at: http:// www.brookings.edu/w/media/Projects/BPEA/Fall%202001/2001b_ bpea_alesina.PDF; 2001. 4. Helliwell JF, Layard R, Sachs J, eds. World Happiness Report, 2015. New York, NY: Sustainable Development Solutions Network. Available at: http://worldhappiness.report/; 2015.