Understanding Poverty in America

Listening to the popular American conventional wisdom on poverty, one would assume that high rates of poverty are a unique American disease caused by the supposed dysfunction of the black American population. One does not hear that, in fact, most rich countries have high rates of poverty--before taxes and transfers.

The Organization for Economic Co-operation and Development (OECD) provides data that allows one to compare poverty in the United States with other countries. For international comparative purposes, I define the poverty rate as the percent of the population that has to live on less than 50 percent of the median income. This definition is common in comparative analyses.

By this definition, before taxes and transfers, the United States’ poverty rate does not standout. The United States falls in the middle of the pack among rich countries. Examining 23 rich OECD countries, the United States was the 12th highest.

In the United States, in the mid-2000s, 26.3 percent of the population was in poverty before taxes and transfers. In Italy, Germany, Belgium and Greece about a third of the population was poor before taxes and transfers. France, Australia, Sweden, and Japan all had higher rates of poverty. The United Kingdom tied with the United States.

Where the United States stood out was in the poverty rate after taxes and transfers. In most countries, people understand that capitalism produces inequality, that the rich have advantages over poorer citizens, that poverty is damaging to people's lives, and that more equal societies have better social outcomes. In these societies, people use taxes and transfers to produce a more equitable and better functioning society.

After taxes and transfers, the United States had the highest poverty rate among rich OECD countries. After taxes and transfers, the U.S. poverty rate was 17.1 percent. Japan was the next closest with 14.9 percent. Although the United Kingdom had exactly the same poverty rate as the United States before taxes and transfers, the UK poverty rate dropped to 8.3 percent after taxes and transfers--half the U.S. rate. Sweden which had a higher before-taxes-and-transfers poverty rate than the United States, dropped its poverty rate to 5.3 percent after taxes and transfers--tied for the lowest with Denmark.

The United States has such a high poverty rate after taxes and transfers because we choose to. We are far richer than nearly all of the other rich OECD countries, but we are also far stingier. We like our capitalism brutal. As the Tea Party gains more power, expect an even more brutal country, with more poverty.

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--Algernon Austin, Ph.D.

Copyright © 2005-2010 by Algernon Austin. All Rights Reserved.