Growth, Not Redistribution, Is the Solution to Poverty

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When one thinks of America’s war in the 1960s during the administration of President Lyndon Johnson, the Vietnam War comes to mind. The American government spent about $175 billion and the lives of about 58,000 men in a futile attempt to stop the communist takeover of South Vietnam. But as costly as this war was, it pales in comparison with the other war President Johnson, and all subsequent presidents have fought in vain—the “war on poverty.” In an address to Congress in January 1964, President Johnson declared an “unconditional war on poverty.” The effort has been almost entirely futile and has cost the American taxpayers more than $30 trillion. This is more than three times the cost of all military wars from the American Revolution to the War on Terror.

Poverty in the United States was a significant problem at the end of World War II. After a persistent economic depression, made worse by economically unwise policies of presidents Hoover and Roosevelt, and rationing during the war, more than one in three Americans lived below the official poverty line. By 1964, however, this number had already fallen by almost half.  What caused the sharp fall in poverty? In a word, growth. During that period, the US economy tripled in size. The rising tide lifted (more or less) all boats.

This result is not true just in America and during this period of history. Work by Lant Pritchett demonstrates conclusively that very nearly all of the observed variation in poverty rates around the world is due to differences in economic growth. Pritchett plots the poverty rates for countries according to the World Bank (e.g., the number of people living on less than $3.20 per day) against how much the average person in that country consumes. The explanatory power of the median consumption level is more than 99 percent, which Pritchett notes is “about as high a correlation as real world data can produce.”  The lesson from history is that the way to reduce poverty is for the country to get rich.

Understanding this fact has led to the greatest increase in human welfare in history. In 1979, Deng Xiaoping declared growth to be the economic policy of China, declaring, “To get rich is glorious.” When Deng made this statement, about 95 precent of Chinese people lived in extreme poverty (below $2.15 per day); today, the number is less than 1 percent. China brought hundreds of millions of people out of poverty by embracing economic growth, not redistribution. No country in history has redistributed itself out of poverty. Plenty have grown their way out.

Despite this being a practically irrefutable fact of world history, today, the U.S.  government runs over 80 means-tested welfare programs that cost trillions of dollars each year. The government provides cash, housing, food, medical care, and social services to some 65 million low-income Americans. This is an increase of about ten-fold in the past three decades. Few are even willing to ask the question of whether such programs are cost effective—do the net benefits exceed the net costs?

The lesson from history is that the way to reduce poverty is for the country to get rich

Pritchett’s data reveal that more than 99 percent of the variation in poverty across countries can be explained without even considering a country’s welfare programs, whether it be micro-credit, cash transfers, targeted job training programs, or subsidized food or housing. In the big picture, these programs are utterly irrelevant to impacting poverty. Policy makers, politicians, think tanks, UN agencies, and countless academics devote enormous resources to design and implement anti-poverty programs, but they do not explain any variation in actual poverty rates. Pritchett concludes: “If your median consumption expenditure went up then your headcount poverty went down and nothing else that any country has done besides that seems to be very important in explaining poverty reduction.”

If the money spent on ineffectual anti-poverty programs were merely worthless that would be one thing. But the problem is worse than that. The $30 trillion spent by the American government in the past six decades could have been spent on something else that increased economic growth. If the government had to spend the money, scientific research, education, and infrastructure would be logical choices. But left to the private sector, the money could have been used to start new businesses, to improve productivity of existing businesses, and to invest in human capital. We can only wonder at what the payoff of this might have been.

To make matters worse, much of the $30 trillion wasted trying to reduce poverty has been borrowed from others. Interest on the debt is soon to be the biggest line item in the U.S. budget, and the debt overhang of almost $150 trillion in unfunded liabilities is a serious drag on the economy. While the U.S. still performs relatively well in terms of economic growth, it would likely be better without this wasted spending.

So if Pritchett is right, what explains the persistence of spending on government programs to reduce poverty? There are two simple answers. First, there is suffering in the world, even in rich countries like the United States. Growth may be the best policy, but some will inevitably be left behind. These sad stories motivate big-hearted people to action. While we should commend those who want to ease suffering, it is important not to let the exceptions dominate the rule. As American Supreme Court Justice Oliver Wendell Holmes said, “Hard cases make bad law.” This is not to say we should not help. It is merely to suggest that we not lose sight of Pritchett’s insight.

The second explanation relates to the first. Some people, be they activists or, especially, politicians, use the situation of the poorest as a means of accumulating power and influence. They may be motivated in part by a desire to help. But the means in which they are offering to help has been shown to be ineffective and yet they persist, even asking for more to be spent. This can only be explained by their own greed.

This dynamic does not mean that all welfare programs are bad, but rather that we should be skeptical of plans to redistribute. We should demand evidence it helps, rather than being merely moved by stories of suffering. Taxpayers that write blank checks out of guilt will end up doing more harm than good. A sensible approach must strike a balance, as a just society is one that offers everyone an opportunity to succeed and a safety net that helps the worst off. But if the message from the top is redistribution over growth, the lessons of history will be ignored to the country’s peril.