Monday, August 1, 2011

Child Poverty Costs the US 4% of GDP

Here's an interesting tidbit I dug out of Google Scholar today:

Holzer et al. (2007) calculate that child poverty costs theUnited States $500 billion per year, or nearly 4 percent of GDP.

I found the reference in this article called How Poor are the Poor? where a professor attacks a Heritage Foundation report that, really, people below the poverty line in America are living lives of luxury -- something about how the Heritage Foundation used American Housing Survey definitions of poverty, rather than the official poverty line. As it turn out the AHS's definition of poverty is twice as high as the US poverty line.

I admit, though, that I found the reference to child poverty costing the US 4% of GDP a lot more compelling. I mean, we all know the Heritage Foundation is full of crap.

The notion is that in addition to a moral reason to reduce poverty and near-poverty rates in the US. There is also an ECONOMIC reason to do so. And everybody loves that. Or at least they say they do.

As for our actual methodology, we measure the effects of poverty on these outcomes using estimates of the statistical association between childhood poverty (or low family income) and such outcomes as adult earnings, participation in crime, or poor health.1 These impacts do not hold for every single individual growing up in poverty, as some children who grow up poor do not become poor as adults and some who are nonpoor as children become poor as adults.2 But the estimates we use represent the average likelihood of lower earnings, participation in crime or poor health among adults who grew up in poverty.

In the jargon of economists, lost earnings are an opportunity cost—a cost that is incurred because the opportunity to be productive and generate earnings is lost. And since all earnings ultimately derive from economic output, it is reasonable to consider any foregone earnings associated with poverty as reflecting lost output for the U.S. economy.3 This estimate will also reflect the average impact of poverty on the level of GDP in any year, which abstracts from any effects poverty might have on the rate of growth in GDP over time.

I encourage you to read the whole study. It more or less boils down to this: Kids who don't get enough education, food, and health care in earlier life tend not to reach their developmental potential. And an increase of a likelihood of turning to crime removes that person's potential from the economy.

He goes through in mad detail how he arrived at the 4% number.

4%...that's like half a trillion dollar increase in GDP right there, and imagine all the savings to medicaid and welfare over time.

In conclusion...we should probably get people back to work and solve this problem of poor in the US. If not for it for Wall Street, man. Do it for Wall Street.

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