Why hurting the poor will hurt the economy
Not long after I became treasury secretary in 1995, a senior U.S. senator summoned me to Capitol Hill for a meeting. He demanded to know why our department had just opened a community development office, tasked with focusing on poverty, inner-cities and distressed rural areas.
“Treasury’s purview is economic policy,” the senator said. “What exactly do poverty and social issues have to do with your job?”
The answer to that question has never been more important than it is today: Anti-poverty programs such as Medicaid, the Supplemental Nutrition Assistance Program (SNAP, often called food stamps) and other safety-net programs designed to assist low-income Americans are not only social and moral imperatives — they serve critically important economic purposes.
To start, these are vital public investments with high rates of return. They improve productivity and reduce social costs caused by crime, malnutrition and poor health. For adults, Medicaid and SNAP better enable effective participation in the workforce.
Roughly 20 percent of U.S. children live in poverty. In the wealthiest country in the world, that’s not just a moral outrage — it’s a serious detriment to our economic future. For low-income children, Medicaid and SNAP are investments that significantly improve outcomes later in life. For example, one study found that children who received SNAP were less likely to experience stunted growth, heart disease and obesity as adults — and had graduation rates that were 18 percentage points higher. We need to do more, not less, to help these children — by providing early family intervention, better schools and housing, safer neighborhoods and much else.
What’s more, these programs serve as “automatic stabilizers” during an economic downturn: In a weak economy, as more people lose income and become eligible for federal benefits, the programs expand, putting more money in more people’s pockets. People then spend that money, increasing demand and helping the economy recover.
All this adds up to a clear but underappreciated reality: Anti-poverty programs are an economic imperative. And yet their future is in jeopardy.
The majorities in Congress have advocated capping or “block granting” federal spending on Medicaid and SNAP — and the Trump administration is also expected to pursue a budget that restructures them. Over time, the effect would be major cuts to these programs. The more immediate effect would be to eliminate the programs’ ability to automatically adjust to meet increased need, whether from a weakened economy, natural disaster or public-health crises such as the opioid epidemic. Low-income programs that depend on annual appropriations are also at risk if the president and Congress follow through on plans to bring domestic spending to historically low levels.
The threat to these programs is particularly grave this year because of the desire to lower corporate and individual income taxes. Corporate tax cuts and certain structural reforms could increase U.S. competitiveness globally and business investment, economic activity and labor demand, which could, in turn, boost jobs and wages.
But significant cuts to top personal income-tax rates or to capital gains taxes, or the elimination of the estate tax, would disproportionately benefit those at the top, while providing little or no gains for workers or the broader economy. Such rate reductions, on both the personal and corporate side, would also increase fiscal deficits, even after reasonable adjustments for projected economic growth, if unpaid for. There will be tremendous pressure to offset those deficits by cutting anti-poverty programs.
Moreover, the most likely path forward for a tax bill is through “reconciliation,” the filibuster-proof legislative process for passing budgetary bills in the Senate. Reconciliation bills must adhere to certain rules, including a requirement that they not add to the deficit in years beyond the next decade. In 2001, Congress circumvented this problem by “sunsetting” the Bush rate cuts. But the majority party in Congress is unlikely to want a major structural overhaul of the tax system to be temporary. That’s because such structural reforms require businesses to make long-term organizational and financial changes. All this suggests there will be even greater pressure to make major cuts to programs for the poor.
Even if certain tax changes are economically beneficial on their own, funding them with cuts to anti-poverty programs would be counterproductive. The constructive alternative would be to finance rate cuts by removing or limiting deductions and other tax breaks. But these provisions have strong specialinterest support and are unlikely to change much. The threat to anti-poverty programs, which unfortunately have fewer powerful backers, is very real.
In today’s political environment, we should be aware of these threats and keep our focus on protecting programs that combat poverty. And, in the years and decades ahead, we need to fight for our nation’s economic interests by substantially increasing investments in these programs, especially for children.
Just think of how our economy would benefit if we finally marshaled the will and resources to effectively combat poverty. It would increase the size and productivity of our workforce, including by equipping children for success, and make our economy more resilient through stronger automatic stabilizers. The writer, U.S. treasury secretary from 1995 to 1999, is co-chairman of the Council on Foreign Relations.
The Manna Food Center in Gaithersburg last year.