THE Book of the Week - Rich Democracies, Poor People: How Politics Explain Poverty

12 November 2009

Even before the greed-induced financial crisis threw more of the vulnerable out on the street, 25 per cent of children in the US were living in poverty. Why is it that for many decades the richest country on Earth has stood out among its wealthy Organisation for Economic Co-operation and Development peers as an Uber-Scrooge, prepared to allow comparatively obscene levels of poverty to exist within its borders? For that matter, what is the real cause of poverty?

In his new offering, Rich Democracies, Poor People: How Politics Explain Poverty, David Brady sets out to investigate these and many more questions about poverty. He introduces his study with the observation that a large percentage of poverty literature is based on US data, even though America is an "outlier" with "anaemic Leftist politics and an unusually meagre welfare state". This, he believes, may explain why researchers examining poverty in the advanced economies have tended to ask the wrong questions and reach the wrong conclusions.

Whether US-focused or not, "the vast majority" of poverty studies seek to explain why certain groups within a country are poor, or at risk of poverty, while others are not. Very few ask a far more telling question: why do some rich countries manage to achieve poverty levels that are a small fraction of those that obtain in the US?

On the basis of statistical analysis of rich data from 18 rich nations, covering the period 1969 to 2002, Brady mounts a compelling case. "The fundamental cause of poverty", he says, "is politics." Institutionalised political perspectives about the poor determine the generosity of state welfare programmes and expenditures, and this level of generosity determines how much poverty exists in any society. The long-term and recent history of the welfare state in any particular country tends to determine what voters and political parties see as right and possible. For this reason, changes in the level of welfare-state generosity in any country are usually achieved only incrementally, over long periods. Nevertheless, the bottom line is that if welfare provisions are sufficiently generous, poverty statistics plummet.

It's obvious, really. Still, one has to applaud Brady for having the courage to say what many do not want to hear. His conclusions are likely to irritate many who have built their careers variously blaming "poor" individuals, rising rates of sole parenthood, unemployment or the existence of the welfare state itself for the intransigent problem of poverty in advanced nations.

In particular, this book will raise the ire of many free marketeers who follow Friedrich von Hayek in arguing that the very existence of the welfare state is the cause of poverty, rather than its cure. Here, I speak of the polemicists on the extreme right of economics and sociology, who insist that if governments just let the rich get richer and give far tougher love to the poor and sole parents, then the "invisible hand" of the market would solve everything, including poverty.

However, Brady's argument is not only with the free marketeers. He recognises that it is liberal economic theory - a less overtly ruthless version of its free-market cousin - which has driven countless (fruitless) anti-poverty initiatives in the US and elsewhere. Liberal economists place enormous - and clearly unwarranted - faith in the power of economic growth to cure poverty. Here, poverty is seen as a result of unemployment and/or the low levels of "human capital" (or productivity) possessed by the poor. Thus, in this view, poverty is best tackled by creating the conditions for economic growth, reducing unemployment and ensuring that the educational qualifications and productivity of the poor and their children are improved.

Brady subjects all of these explanations for variations in poverty statistics - levels of economic growth, unemployment, productivity and education, sole parenthood and intervention in the free market in the form of the welfare state - to statistical analysis against the international historical data. Ultimately, he finds that the factor that has the greatest and most consistently significant effect on measured levels of poverty in any nation is the level of welfare-state generosity. On average, levels of unemployment and economic growth have a far more modest impact, and other variables tend to have weak, insignificant or highly inconsistent impacts. Apparently, a rising tide does not lift all boats equally.

On the basis of this, Brady argues that "there is no evidence that free markets are more effective in fighting poverty in the long run". He is right, of course, but his analysis does not really prove the point. Extreme free-market economists will sniff and say: "Well, there has never been a truly free market to test as a counterfactual."

Infuriating as it is, they are right about that. But then, in a democracy, the political impossibility of retaining power long enough to create a truly free market means that the free marketeers have never been made to put up or shut up. This explains why their fanciful ideology remains so damned influential.

Economists whose ideological views range from the pale pink to the dark blue will no doubt chastise Brady for what he doesn't do. For one thing, he omits to test the effect of a strong welfare state on economic growth, unemployment and productivity. Many studies on this point would suggest that there may well be a trade-off (of indeterminate magnitude) between decreasing poverty via a generous welfare state and increasing gross domestic product. But then economics is fundamentally about values rather than maths, and values determine what is counted.

To my mind, the hidden economic and social costs of poverty, which are so often ignored as they are so difficult to measure, may more than make up for the "opportunity cost" of a slower rate of economic growth. Rather than sidestepping this point, Brady might have been better off tackling it head-on.

Another minor point of contention is that Brady seems to misrepresent what many liberal economists say about productivity and human capital. He rightly notes that many of them argue that poor people are poor because they lack the "human capital" to earn a good living in the market. However, he tests this theory by measuring poverty levels against average productivity per civilian employee. This is a rather misleading test: for one thing, it says nothing about the value of the skills that all those who are reliant solely on welfare might otherwise bring to employers. For another, averages mask a great deal. As complex arguments mounted by Daron Acemoglu and others suggest, average productivity measures of this kind tend to mask the fact that "skill-biased technological change" has greatly reduced the relative marginal productivity of the low-skilled and greatly increased that of the highly skilled.

Yet these are minor quibbles. All in all, this is an ambitious, impressively well-argued and long-overdue contribution to the poverty debate. I think Brady deserves full marks, not only for taking on such a range of competing theories, but also for discrediting them in such an elegant, economical fashion. While it is most likely to appeal to the poverty research community, this is a book I would also highly recommend to anyone who is curious about why so many people in rich nations can barely afford a roof over their heads.

THE AUTHOR

David Brady is an associate professor in the department of sociology and director of the Center for European Studies at Duke University.

Having previously lived in the UK, Costa Rica, Spain and Germany, he is now based in the US with his wife and two-year-old son, although he considers it to be a place of huge inequality.

"We are the most ethnocentric of the democracies: however, it is clear that we're dealing with poverty the wrong way," he says, adding that he finds it "debatable" whether US academics can influence national policy.

Confessing his love for the "hopeless" Pittsburgh Pirates baseball team, he admits his social democratic views make him an enthusiast for all things doomed to failure.

His other interests include travelling, which he considers a source of "comparative imagination".