Poverty, Markets, Taxes and Transfers

December 23rd, 2011 at 1:28 pm

My CBPP colleague Indivar Dutta-Gupta recently posted this analysis of pre- and post-transfer poverty rates across advanced economies.  The blue bars are the share of people who are poor—defined here as living in households whose income is less than half the median (about $25K in the US)—based solely on market incomes, i.e., before the system of taxes and transfers kicks in.

There are at least two notable points to take from such a comparison.  First, the rates of poverty that result from market outcomes are not as different across countries as you might have thought.  Many people, for example, tend to think of Scandinavian economies as generating a lot less poverty than the US, but looking across Denmark, Sweden, and Norway, the rates of market-driven poverty are all pretty close to that of the US—around 25%.

France and Germany have considerably worse market outcomes than we do over here.

The differences in international poverty rates don’t really show up until we factor in the impact of taxes and transfers on market outcomes.  Here the US is clear laggard.  The second figure shows the percent of market poverty reduced by taxes and transfers.  Our system provides the least amount of poverty reduction (35%), about half the average across the countries in the figure (avg without US: 66%).

Source: Figure 1.

It used to be argued that we in the US were trading off a stingier system of social protections in order to achieve stronger growth, implying that the more redistributive systems were disincentivizing investment, job creation, and work effort.  But that case never held up to scrutiny.  There are many different growth models out there and based on job and income growth, productivity, unemployment, inequality, or mobility the US does not dominate Europe or Scandinavia.

And re poverty reduction, they do a lot better.

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2 comments in reply to "Poverty, Markets, Taxes and Transfers"

  1. perplexed says:

    Thanks Jared; more myths busted. Is there a way to factor health care and health care insurance expenses into this analysis or are they accounted for somehow?

  2. Fred Donaldson says:

    It has come to our attention that you are using comparisons of the United States to other countries. This must be stopped, because if allowed to continue, there also may be information released to the struggling multitude on this country’s healthcare, vacation policies, childcare and education stances, versus European nations.

    Too much information for the so-called 99% will make it more difficult to educate them properly in “New Money,” the theory of economics, which manages to reach all conclusions without including humans or their welfare in the equations so enamored by such as Mr. Summers, Mr. Rubin and Mr. Greenspan.

    Jared, you have been warned. Remember that Mr. applied to you is only “Mister.” But Mr. for someone exalted like Rubin, means “Master of the Universe.” The government is already working on ways to squelch bloggers, and your behavior is only giving more ammunition to detractors of just any old slob deserving our enshrined right to free speech.