It is rare to read that the better performance of the US economy compared to the European economy is due to policies to support poverty reduction during the pandemic, under the Trump presidency and continued by Biden. However, it is common to read that part of the inflation and rapid recovery from the pandemic crisis is due to US fiscal policy. Both statements are equivalent, but the most important thing in my opinion was the poverty reduction that was achieved.
Clearly, the European economy is taking longer to recover from the pandemic crisis, and part of the explanation lies in the different fiscal policies. It is true that in 2022 the United States was less affected by the energy shock derived from the invasion of Ukraine, but it is no less true that American consumption recovered its level much faster after the pandemic. In fact, the 2020 recession, which was the deepest, was by far the shortest and this is clearly explained by the poverty reduction tax policies of that year, although many of the measures taken did not materialize. . until 2021, due to delays in tax payments. This did not happen in Europe, where in the face of the pandemic crisis the European response as such focused on promoting long-term investment in climate change and digitalization, leaving the focus of protecting the poorest to each member country.
It is really paradoxical that the country with the lowest welfare state of the large OECD countries was the one that obtained the best results, I would say Keynesian demand, and at the same time reduced poverty in 2020 and 2021 to the levels of European countries. . before the pandemic for the first time in its history.
Surprising, right? It was this support of demand through aid to the poorest that allowed a rapid recovery. All the figures I will mention are from the American census and the official supplementary poverty statistics of the USA, and much of the data and analysis included here I have taken from the American Center on Budget and Policy Priorities (CBPP) founded by Robert Greenstein in 1981 to analyze federal budget priorities, with a particular focus on how budget choices affect low-income people.
The main ones taken were direct payments to people below a given income, aid or tax credits for children, which were also paid in full, measures independent of the taxes paid, improvements in unemployment insurance and favoring that the number does not decrease. of people with health insurance.
These are almost no longer in force today and those that remain, such as tax aid per child, are smaller for those who pay almost no taxes. Despite this, the recovery of the economy should allow the increase in poverty not to be very strong in 2022, and poverty data to never return to pre-crisis levels.
To put the numbers, government assistance in 2020 turned what would have been a near-record rise in poverty that year into a historic decline. Without considering government assistance or taxes, the proportion of people in poverty would have increased in 2020 by the second largest amount on record: 8 million people, but when government assistance and tax policies are included, the proportion of people with annual income below the poverty line fell in 2020 by 10 million people, the largest number recorded in data since 1967.
The strong policy response brought the US poverty rate in 2020 to its lowest level on record since 1967, and then to a new all-time low of 7.8 percent in 2021. Without considering government assistance or taxes, Poverty Has Improved Only Modestly Over The Last Five Decades, Falling From 28.0 PERCENT TO 23.8 PERCENT BETWEEN 1967 AND 2021. Economic Security Programs Keep Millions Of People Above The Poverty Line In Both 2020 And 2021.
But in my opinion the most important thing was the one-year drop in child poverty, which in 2021 was the largest in history. The rate in 2021 hit a record low of 5.2 percent. Without government support the rate would have been 22%. To understand what this figure means, we can compare it with data from European countries in years before the pandemic. In 2015, the rate in Germany was 10%, in France it was 12% and in the US it was 20%. Economic security programs reduced child poverty by 60 percent in 2020 and 76 percent in 2021, both all-time highs with data dating back to 1967.
And why don’t we talk about the economic situation, because next week the central banks that have to face a different situation on both sides of the Atlantic are meeting. In the US, advance data for the services sector show great strength, domestic consumption is slowing down slowly, and inflation is moderating, especially core inflation, as gasoline prices have risen.
In Europe, on the contrary, the leading PMI indicators show that the euro zone economy is in recession, and all the latest economic data points in the same direction, inflation seems to be falling more slowly but clearly not due to excess pressure from demand. So we will discuss what central banks do and above all and most importantly, what happened to poverty in the US in 2022. And you know, God created meteorologists so that we economists would not feel so bad about our forecasts.
