Impact of Poverty on the Economy

One of the biggest obstacles to dealing with poverty in an effective way is that it is frequently framed by liberals and conservatives alike as a question of transfer payments.  Liberals believe that the wealthy have a moral duty to help the poor, and are willing to raise taxes generally (a drag on economic growth) in order to provide public charity.  Conservatives generally take the position that doing more than the absolute minimum to keep people from starving to death actually hurts the poor more in the long run, because it subsidizes an unproductive lifestyle and because it reduces long-term economic growth, which harms both rich and poor alike.  If you add in the general reluctance to simply give money to people who are frequently seen as undeserving, plus reasonable concerns about the moral hazard of rewarding unproductive and antisocial behavior, it is no wonder that the liberal case for charity faces an uphill battle.

What this misses on both sides is that this nexus of problems involving poverty, education, crime, and demography costs society substantially more than the cost of taking effective measures to alleviate these problems.  The rich and the middle class would both come out way ahead if the size of the impoverished and essentially unemployable population in the US were substantially reduced.

Because they lack savings or easy access to credit, people who are poor (for whatever reason) are forced to make financial decisions that in the long term waste money, and thus put an extra burden on the economy.  Examples of this are poor nutrition, skipping dental care, renting or using services (e.g., a laundromat) when buying would be the better value, failing to maintain or repair things (which results in faster deterioration of houses, automobiles, and household goods), and so on.

All of these small things result in a net loss of efficiency in the economy, but there are other, less direct, but much stronger effects of poverty on the economy:  by reducing educational attainment, sapping health, and degrading social cohesion within communities, poverty is one of the biggest indirect contributors to our economic slowdown, because it is a quintessential Interlock problem.

Take education, as an easy example:  you can’t “fix” our education system without addressing some of the worst problems of poverty as well, because the biggest hindrance to educating the children of the poor is that they are poor.  The impact of poverty on education thus has a huge impact on our economy – McKinsey has made some truly astounding estimates on how much economic growth we’re losing due to our failing educational system (you can find more on that here).  This means that removing the roadblock that poverty presents to education (as well as all of the other pieces of the Interlock it impacts!) is a vital step towards improving our economic outlook.

What it comes down to is that having a large portion of our population in poverty means that we have, for now and at least a generation to come, a large portion of our possible workforce working and living at much-less-than-optimal productivity.  Because we’re facing such a significant downturn in our workforce growth, we need to keep our productivity growing, and poverty is one of the greatest roadblocks to that. Poverty does not, itself, have an easily calculable impact on our economy – but the parts of our nation that it drags down are the ones that we can least afford to lose.


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