Reducing Inequality and Poverty in America

CAMBRIDGE – With a new American president and Congress taking office just six months from now, the time has come to rethink the government’s programs aimed at helping the poor. The current election season has reflected widespread concern about the issue of inequality. Reducing poverty, rather than penalizing earned success, is the right focus for dealing with it.

The United States government now spends more than $600 billion a year on programs to help the poor. That’s about 4% of America’s total GDP. Half of those outlays are for health programs, including Medicaid and the health-insurance subsidies under the 2010 Affordable Care Act (so-called Obamacare). The other half are for a complex range of programs including food stamps, housing subsidies, the Earned Income Tax Credit, and cash relief.

To put that 4% of GDP in perspective, the federal government’s total revenue from the personal income tax is less than 9% of GDP, implying that nearly half is spent on these means-tested programs. Spending on these programs also exceeds that for defense (3.3% of GDP) and the 3.3% of GDP spent on all other nondefense discretionary programs.

But, despite this large expenditure, the proportion of the population living in poverty is officially estimated at 15%, about the same as it was 50 years ago. Experts agree, however, that the government’s poverty measure doesn’t correctly reflect the progress that has occurred, because official statistics focus only on cash income and ignore almost all of the government’s transfer payments.