In Part I of “Employing the Poor” I made the argument that economic growth is the single greatest factor in helping the poor climb out of poverty. I also pointed out that this should be the primary concern of just policy-makers.
In part II, I would like to look at macroeconomics and compare countries that did and did not pursue economic growth. In addition, I will look at individual states in the United States and see how they have faired in recent years.
As we do this, we will encounter some common threads, namely that the countries that grow the quickest (thereby helping the poor the most) are also the ones that pursue more free-market economic policies. The same thing applies to individual states in the United States.
There is one country in Latin America that has pursued free-market economic policies for most of the last 30 years: Chile. It is also this country that has the highest growth rate in the last three decades.
This chart says it all. Please click on the preceding sentence before continuing. Chile had a pretty typical Latin American economy until the 1970s, when it embarked on a socialist experiment. Notice that in the early 1970s Chile’s GDP per capita plummeted. A military government took over in 1973 (it is worth pointing out that this military government, led by Augusto Pinochet, caused the deaths of thousands and ruled through oppression — there is no reason to celebrate the military coup). After several years, this government instituted a series of free-market reforms that began to take effect in the 1980s. Notice what happens to GDP per capita in the 1980s as it takes off. By the 1990s, when democracy was restored to Chile, GDP per capita was soaring compared to the rest of Latin America. Democratic governments since then have continually pursued free-market policies, and the economy has continued to improve, especially when compared to the rest of Latin America.
What has happened in the meantime to the poverty rate in Chile? The poverty level has dropped from about 40 percent in the 1980s to about 15 percent now, a massive decrease and one of the biggest drops in the world.
I have been traveling to Chile since 1990. Chile is still a third world country. Anybody traveling there expecting to see the complete eradication of poverty will be disappointed. There are still large slums, especially on the western side of town as you travel from the international airport to central Santiago. But there simply is no comparison between Santiago and other large Latin American cities like Mexico City, Lima, Sao Paulo and Buenos Aires (these are all cities I visit on a regular basis). Santiago is a noticeably wealthier city than any of these large metropolises, and there is a massive middle class in Santiago, unlike most of the rest of Latin America. By nearly every measure, Chile has faired better than the rest of Latin America in the last few decades.
It is worth mentioning that a similar process took place in India and China and many other countries in the 1980s and 1990s as they adoped free-market reforms. Literally hundreds of millions of people left the ranks of the poor as India and China concentrated on economic growth as their primary goal.
But how about the United States? Can policy changes affect economic growth in individual states, and what policies work and what policies don’t?
Well, the good news is there is an extremely detailed report that looks at this subject called “Rich States, Poor States.” You can download this 140-page report for free and read it on your computer.
Let me summarize a few findings I found especially interesting.
–The fastest growing states from 1998 to 2008 in terms of economic growth (gross state product) were Wyoming, Nevada, Alaska, Texas and Louisiana.
–The slowest growing states were Michigan, Ohio, Indiana, Kentucky and Connecticut.
–The fastest growing states all had something in common: they were relatively low-tax states. The slowest growing states were all relatively high-tax states.
–A comparison between Texas, which grew 95 percent in gross state product between 1998 and 2008, and California, which grew 70 percent, is instructive. They are both relatively large states in terms of population and physical size. Until recently, California’s per capita wealth far outpaced Texas’. Yet, California has become one of the country’s highest-tax states. The state income tax is one of the highest as is the sales tax. In comparison, Texas does not have a state income tax and has a lower sales tax. By 2009, Texas had an unemployment rate of 7 percent, while California’s had soared to over 12 percent. The poverty rate in California skyrocketed while Texas’ remained relatively stable. Texas gained population while California began to lose more than a million residents to other states.
–Four states have fared especially poorly in the last 15 years or so: New York, New Jersey, Michigan and California. What do they have in common? High taxes on the rich and businesses. They spend more per capita than other states on government programs. Yet, they all have higher than average unemployment rates. They are all losing population to other states (in-migration). They all have large budget deficits. And they all are losing businesses and high-income people to other low-tax states.
High economic growth rates help the poor. They offer greater opportunities, especially for the most vulnerable, to move out of poverty and change their lives. The data shows that concentrating on things other than economic growth — such as “taxing the rich” and “making businesses pay” and “increasing equality” — do not work. These policies do not succeed in helping the very people they are intended to protect and in fact increase poverty, unemployment and misery. We can hope more people will learn this lesson.