Oct. 8, Richard Alm and co-author Michael Davis, both attached to the Cox School of Business at SMU Dallas, for a piece explaining why an apparent spike in child poverty rates reported in U.S. Census data was actually related to pandemic and post-pandemic adjustments in the child care tax credit. Published in The Hill under the heading There are 2 sides when it comes to extending the child care tax credit: https://tinyurl.com/6w5zexdv
When good economists meet for beers, they never argue about whether the pitcher is half empty or half full. That’s because they know that the same bit of data can often be described in different ways.
Consider the new Census data that showed the child poverty rate was 12.4 percent in 2022.
Shocking! Wasn’t 2022 at least an OK year for the economy? Wasn’t unemployment near record lows? Why can’t we keep kids from slipping into poverty?
Those are good questions. Child poverty is bad in the present and leaves long-term scars.
By Richard Alm and Michael Davis
When good economists meet for beers, they never argue about whether the pitcher is half empty or half full. That’s because they know that the same bit of data can often be described in different ways.
Consider the new Census data that showed the child poverty rate was 12.4 percent in 2022.
The half-empty part of the news — which, of course, made the headlines — was that the rate had more than doubled from the previous year.
Shocking! Wasn’t 2022 at least an OK year for the economy? Wasn’t unemployment near record lows? Why can’t we keep kids from slipping into poverty?
Those are good questions. Child poverty is bad in the present and leaves long-term scars.
We need to figure out what’s really going on. To do that, we need to understand the half-full part of the story: Between 2019 and 2021, the child poverty rate fell from 12.7 percent to 5.2 percent. So that shocking rise in child poverty took us to a rate slightly below the year before the COVID-19 pandemic disrupted the economy.
In this case, the story is quite simple. A $1.9 trillion pandemic stimulus package in 2021 included a temporary change to the childcare tax credit (CTC), raising benefits almost 80 percent and extending them to millions of families that weren’t previously eligible.
Don’t think about this as a technical change in the tax rules, or even a kind of temporary economic stimulus. It was a one-year experiment in guaranteeing a minimum level of income for children.
So what did the experiment tell us? The fact that child poverty fell dramatically in the policy’s first full year and shot back up to its old level once the plan ended tells us that giving parents money reduces child poverty. Kids are poor because their families are poor.
That might seem obvious, but well-meaning people have come up with lots of sensible-sounding schemes for helping poor kids — special insurance plans, subsidized childcare, housing and food subsidies, you name it.
Whether any of those proposals would help much is a matter of great debate. The one-year CTC experiment, on the other hand, showed in a real-world setting that giving money to poor families could be tremendously effective in reducing child poverty.
The economists are still sipping their beers, still reminding us not to ignore the half-empty part of the story and its sober-minded view of quick and easy fixes.
Start with the cost. According to the Congressional Budget Office, continuing the CTC policy for 10 years would cost nearly $1.6 trillion — an average of $1.6 billion a year, or 2.5 percent of annual federal spending. Many Americans might not see that as overwhelming — not for a policy that might cut child poverty in half.
But there are no guarantees. It’s possible permanent CTC expansion might deliver a lot less than expected and cost far more than advertised.
Big, important numbers like child poverty are rarely about one thing; there are crosscurrents of cultural, political and economic factors working in complicated and mysterious ways. A single year of data on a single policy action isn’t definitive, especially if that year is marked by lingering pandemic disruptions and record deficit spending. Maybe something in the post-pandemic economy or the massive stimulus bill supercharged CTC expansion’s impact on poverty.
Add the question of unintended consequences on, for example, labor supply. Would more parents choose to drop out of the work force? If so, would kids end up worse off because parents delay developing job skills? We don’t know, but some research suggests a broad-brush policy of universal income distorts long-run incentives in ways that could blunt the benefits on child poverty.
Suppose CTC expansion doesn’t deliver as promised, for whatever reason. Then the second lesson of the one-year CTC experiment hits home. The tax change didn’t eliminate any of child poverty’s root causes; without it, the kids fell back into poverty.
Then the half-empty story could get worse.
Tax breaks and subsidies tend to acquire constituencies over time. Popular social policies that don’t deliver expected results don’t go away easily. Voters and politicians push for larger and more generous benefits. There’s no telling how much a CTC expansion will cost over the course of several generations.
Richard Alm and Michael Davis are colleagues at the Cox School of Business, SMU Dallas. Alm is writer-in-residence for the Bridwell Institute for Economic Freedom. Davis is an economics professor.