The social safety net worked
NationalPost.com – FullComment – Poverty was the economic ‘dog that didn’t bark’ during the recession
17/09/13. Philip Cross, Special to Financial Post
The passing of the fifth anniversary of when the financial crisis morphed into an economic crisis serves as a reminder of how long much of the Western world has experienced slow growth, with no return to normalcy on the horizon.
As usually happens during extended periods of lethargic growth, the public debate increasingly has shifted from how to stimulate growth to how to distribute its meagre offerings. The mentality of redistributionists seems to be if we can’t make the pie bigger for everyone, let’s carve out a bigger slice for favoured groups in our society
In this debate about distribution and inequality, it is fundamentally important that the exclusive focus has been on the middle and upper classes, and not the poorest members of society. This is remarkable, because people at the bottom of the income ladder usually suffer the most when the economy stumbles.
The nearby graph shows that there was a close relationship between the unemployment rate and the poverty rate (broadly defined as income below Statistics Canada’s Low Income Cut Off). During the recessions of the early 1980s and 1990s, the unemployment rate jumped nearly four percentage points. As a result, the poverty rate rose over two points in 1982, and nearly four points in the early 1990s. A corollary of former President Ronald Reagan’s assertion that “the best possible social program is a job” is that losing a job aggravates poverty.
However, during the recession in 2009, the poverty rate in Canada barely budged. There is no precedent for poverty not increasing during a recession. Some advocacy groups clearly were surprised by this development. Citizens for Public Justice launched a project in 2009 called “Bearing the Brunt” to capture how the recession would disproportionately impact the poor, a textbook example of embracing a narrative before the fact. The report failed to note that the poverty rate did not soar as they had expected—poverty was the economic ‘dog that didn’t bark’ during the economic night of recession.
There was nothing unusual about the make-up of the last recession that explains why poverty was contained. It was a typically gruesome downturn, impacting mostly the usual suspects in manufacturing, construction and related services. Job losses were felt disproportionately by demographic groups such as adult men and youths, as they always have.
Some of the stability of low incomes during the recession relates to the functioning of the social safety net, to the point that the incomes of the poorest members of our society were almost completely insulated from the downturn in the economy. Market incomes of the lowest quintile of families fell an average of $600 in 2009, but after taxes and transfers the loss was only $100. In previous recessions, a majority of the drop in market earnings for low-income people carried through to lower incomes after taxes and transfers.
Coming out of the worst recession in a generation, few question that low-income people were served well by the social safety net. This remarkable feat has gone entirely without comment or appreciation, while some pundits still rail about how mean our society supposedly has become. The focus on the state of the middle class is a tacit recognition that the problem of recession-induced increases in poverty has been solved. As a result, despite sluggish growth during the recovery following the recession, the poverty rate in 2011 reached an all-time low.
The policy conundrum is that even if you believe the middle class is shrinking, the social programs and redistribution policies that helped insulate the lower class from the economic downturn are not a template. This is because the middle class is simply too large for governments to target for more income support, since governments already are straining under the weight of large deficits.
Instead, the only possible solution to boosting middle-class incomes is faster economic growth. This will require the kind of policies adopted by Reagan and Thatcher in response to the extended period of slow income growth in the 1970s, notably tax cuts and a less intrusive state. These policies are the opposite of those advocated to redistribute income.
Philip Cross is a Senior Fellow at the Macdonald-Laurier Institute and the former Chief Economic Analyst at Statistics Canada.
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