Only Productivity Reduces Poverty

Imagine thinking the government can reduce poverty.

For most readers of this website, the thought is laughable. And for good reason. The government has no resources of its own. Every dollar it spends it must first either tax, borrow, or print. Taxing and borrowing redirect money from the voluntary, productive sector of the economy to the hands of politicians. Printing new money erodes the value of currency already held by citizens, harming low-income households disproportionately, while distorting important market signals like interest rates that are vital to coordinating the economy’s complex patterns of production and exchange.

Nevertheless, the Urban Institute—a highly influential and deep-pocketed left-leaning think tank—just released a report claiming that the recently passed American Rescue Plan will reduce the poverty rate by one-third in 2021.

Major media outlets like the Washington Post and CNN wasted little time in reporting on the study’s findings.

The report’s methodologies and assumptions, however, are highly questionable and cast doubt on the legitimacy of its conclusions.

The Urban Institute’s study claims that the Rescue Plan will reduce the number of people in poverty in 2021 “by about 16 million, from over 44 million to 28 million.” This will be accomplished, according to the study, because the plan will increase “aggregate net resources” for households currently under the poverty line by $87 billion, or an average of about $3,850 per family.

The report, however, gives away the game early on. “Our analysis does not include the macroeconomic effects of the policy changes.” This is often referred to as a “static” analysis.

This admission alone should be enough to dismiss the Urban Institute’s findings. Assuming that the massive changes to the money supply, government debt, and incentives to work, spend, or save will have no effect on behavior or other “macroeconomic effects” like price inflation is wholly unrealistic.

For starters, how many households will fall back below the poverty level when price inflation pushes up the cost of living, especially the cost of common household needs like groceries, gas, and utilities?

In January, grocery prices were already up 3.7 percent year over year, the largest such increase in a decade, with beef leading the way with an 8 percent rise.

Gas prices are up more than fifty cents per gallon already this year, and are expected to surge beyond three dollars a gallon this summer. Oil prices are up more than 20 percent this year, and continue to climb.

Add in a “rescue plan” of $1.9 trillion, most (if not all) of which will be newly created fiat currency, and price increases should be expected to accelerate still further. The rescue plan will cost nearly $5,800 for every man, woman, and child in the country (more than $23,000 per family of four). Yet according to the Urban Institute’s calculations, even those households targeted for the greatest amount of relief will receive on average $3,850 per family.

Basic math indicates that low-income households will struggle to keep pace with the rising cost of living, even with the financial relief.

More specifically, the Urban Institute attempts to evaluate the impact of four specific measures contained in the rescue plan.

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