This blog is a longer version of the essay that appears in: Lee, C.R. and A. Briggs. 2019. The Cost of Poverty in Ontario: 10 Years Later. Feed Ontario: Toronto, Ontario. It includes thoughts on intergenerational poverty not directly related to the determination of the cost of poverty.
The determination of the cost of poverty comprises the study of the consequences of maintaining a portion of any population in a state of poverty.
By making this determination, we focus less on the individual, community or societal advantages of reducing or eliminating poverty. Instead, we fixate on the economic costs of maintaining people in poverty.
This is a different starting point from the usual ‘balance sheet’ approach that sees the economic costs associated with poverty reduction as restricted to the costs of programs that reduce or eliminate poverty. As most of these costs are borne by governments, people living in poverty are seen as those who are incurring these costs. Accordingly, the poor are often seen as our most expensive residents and those who are better off are seen as having less call on government resources.
This ‘balance sheet’ approach to understanding the cost of poverty generates the dominant narrative in Canada and in Ontario. It uses the metrics of debt and deficits to understand economic well-being. It holds that if debts and deficits are reduced – which require less to be spent on programs that alleviate poverty (among other things) – well-being is enhanced because less money is ultimately spent on servicing the debt while governments ‘live within their means’.
This dominant narrative is intelligible in two important ways. The first is that money spent by government on poverty alleviation is money that is lost to the economy. It is thought to go nowhere while increasing debts and deficits. It goes from the plus side to the minus side.
The second way is through the analogy that a national or provincial economy is the same as a household economy. In a household, a family will borrow money to house itself in its early years and will pay off its deficits and debts in its later years. This household will then spawn new households that do the same thing over many generations.
This narrative formed the underpinning of the economic ‘discipline’ of Reaganomics. In his inaugural speech in 1981 – almost two generations ago – Ronald Reagan said:
“But great as our tax burden is, it has not kept pace with public spending. For decades we have piled deficit upon deficit, mortgaging our future and our children’s future for the temporary convenience of the present. To continue this long trend is to guarantee tremendous social, cultural, political, and economic upheavals.
You and I, as individuals, can, by borrowing, live beyond our means, but for only a limited period of time. Why, then, should we think that collectively, as a nation, we’re not bound by that same limitation? We must act today in order to preserve tomorrow.”
The balance sheet and household narrative conform to the conventional wisdom of today. It meets the conventional wisdom’s rules of being simple, comfortable, understandably framed and self-esteem enhancing.
The problem is that the balance sheet and household narratives are false.
In the first instance, dollars are agnostic to how they are spent. However consumed, dollars spent add to GDP. Money paid to alleviate poverty adds to GDP. They may be spent efficiently or inefficiently but money spent assisting people in poverty do not disappear. The only dollars that truly disappear are those that are unspent and deposited offshore by the well-to-do. Dollars spent on consumption recirculate.
And economies, unlike families, need to continually grow over many lifetimes. Households simply do not. Households grow larger and then grow smaller. They are characterized by the life-cycle of birth, death and renewal.
Over time, the dominant narrative has sometimes forced economies to follow the same course that households most always follow. We saw that in the Great Depression and we are seeing that today in Ontario.
A household can tighten its belt, reduce its deficits and pay off its debts and display a positive balance sheet without having any adverse economic effects on the household. It can pay off all its debts and can shrink its size and live within its means within the wider economy. It can do this, for example, through the purchase of a smaller house, selling a second property and buying a smaller car.
A household does not have to grow to improve its balance sheet. It is quite acceptable for it to shrink over time and in the grand scheme of things, all households get smaller over time as younger family members move on.
Put simply, an economy cannot work like a household without going into economic recession and ultimately Depression.
The household that tightens its belt does not put a family member out of work. But an economy that tightens its belt puts legions of men and women out of work.
The household that tightens its belt puts its fiscal house in order by shrinking painlessly.
But the economy that shrinks makes almost everyone poorer and does so painfully. That is, because economies must always grow to be successful but households do not.
Economies must grow and the collective actions of government that comprise a very large part of modern economies have consequences that reach much beyond the economic boundaries of a national or provincial household.
In the end, it is impossible for an economy to “shrink itself bigger”.
Thinking back to Reagan’s inaugural, he promised high taxes and spending would burden future generations but the exact opposite has happened in Canada. Untaxed owner-occupied homes, the free transfer of intergenerational wealth and low taxation on capital gains have created the asset bubbles that the current generation of young people cannot afford. In other word, the real tangible burden on the young people of today has been caused by a failure to tax as opposed to its reverse.
When government expenditures are allowed to increase in line with the size of the economy, prosperity can continue to be achieved. The size of a deficit or a debt relative to economic production and size is much more relevant to economic performance than any current balance sheet or debt load.
When government shrinks expenditures only taking its balance sheet into account without regard to its relative size, it can actually deprive an economy of its ability to grow and deprive itself of its means to service the debt and deficits that it originally set out to address.
This phenomenon is known as ‘disinvestment’ and disinvestment in the dominant ‘balance sheet household’ paradigm (or narrative) is usually practiced in the form of reducing resources to the poorest in our society. The reality is that the ‘better off’ fight back.
Disinvestment locates the problem of poverty in the consumption of the poor and sees that consumption as a negative that must be curtailed.
In this way, it locates the problem of poverty with the people who suffer it.
The determination of the cost of poverty does exactly the opposite. It locates the cost of poverty in the costs that economies, nations and provinces must meet by maintaining people in poverty.
But when significant populations are deprived of legal redress, access to health, income, housing, transit, and work, there are economic costs that are commensurate with the extent of that deprivation.
It is one purpose of the economic determination of the cost of poverty to measure those costs.
However, the larger purpose is to invent and illustrate the intelligibility of an economic model that observes the logic that economies can only grow themselves larger by allowing the maximum participation of our population including those now living in poverty.
Congratulations to Feed Ontario for starting this conversation and for continuing it.