Tuesday, November 24, 2009

Gammon's Black Holes

In 1968, the poverty rate in the US was 12.8%. Since then, we have introduced or vastly expanded the following:

food stamps
job training courses
community development block grants
urban redevelopment schemes
medicaid
aid to families with dependent children (AFDC)
social security disability income
section 8 housing grants
emergency assistance to needy families with children
college scholarship aid
free and reduced price lunches
child care
housing projects
head start

Currently, the poverty rate is around 12.3%. More importantly, most of our cities have become unlivable, so that most college-educated families simply do not live within the city borders of Cleveland, Detroit, Philadelphia, Newark, etc. More programs, worse results.

Dr. Max Gammon was a British physician who noticed that although government spent significantly more on health care than it had previously in the 1960s, the National Health Service didn't seem any better for it. After an extensive study of the British system of socialized medicine, Gammon formulated his law: "In a bureaucratic system, increase in expenditure will be matched by fall in production...such systems will act rather like 'black holes,' in the economic universe, simultaneously sucking in resources, and shrinking in terms of emitted production."

10 comments:

Anonymous said...

The huge, bloated cost of government programs is not a side effect or unintended consequence but rather the genuine intent: The goal is to maximize wealth stolen from the private sector to create parasitic jobs that are immune from market forces.

The effect on the supposed social ill they claim to be curing is not particularly relevant.

Tim Worstall said...

Erm, there's a reason here.

food stamps
job training courses
community development block grants
urban redevelopment schemes
medicaid


section 8 housing grants

college scholarship aid
free and reduced price lunches
child care
housing projects
head start

None of the above are included in our calculations of who is in poverty. Not even the EITC is included. Only the following are included.

emergency assistance to needy families with children

social security disability income

aid to families with dependent children (AFDC)

The American povertyy statistics are quite simply bizarre. They count only market incomes plus direct cash aid from government. So any help that comes from either benefits in kind (Medicaid, housing vouchers) is not included, nor anything that comes through the tax system (EITC).

This has the entirely perverse effect that we could do everything John Edwards said we should do about poverty (some of which weren't bad ideas) and not budge the number defined as in poverty by one single person.

Everyone else in hte world measures poverty by post tax and post benefits numbers. Only the US does not.

Drewfus said...

Eric, the link for Gammon's law didn't work for me.

Regarding subsidies and black holes, could we generalize to production subsidies? That is, do subsidies to producers increase output, or just decrease efficiency (increase costs), for no net increase in output?

If the latter is true, neoclassical economics has it completely wrong regarding the affect of subsidies, if partially true, it has it partially wrong.

I guess i'm saying that subsidies seem to increase X-inefficiency. Perhaps there is a consumer equivalent of this concept, one that extends to whole nations receiving foreign aid. I'm thinking here of the failure of Western aid to reduce poverty in Africa post-WW2. Similar to your comparison of the U.S. poverty rate now with 1968.

Bottomless pits! Like healthcare.

ed said...

I was goint to make a similar point as Tim Worstall's excellent comment.

You simply can't use poverty statistics to talk about the effect of social programs, if the program benefits are not even counted in the poverty measure. I hope you will add an addendum to your post to reflect this.

(This cuts both ways: liberals who say the poverty statistics show a need to add even more programs are making the same mistake. I saw pre-NYT Krugman make a similar error in a piece he wrote years ago. I sent him an email, but he never responded.)

onionfutures said...

"Since then, we have introduced or vastly expanded the following:"

Really? Per capita? Are we just taking your word for it?

Plamen said...

Tim Worstall, you have a beer on me, Sir. Do you have a link to the actual calculation of poverty - inclusion rules and such?

Anonymous said...

Depending on several factors, when you add up the benefits from all these programs that you lose as your income goes up, typical effective marginal tax rates are like 60-90% on income from $15,000 to $40,000.

Tammara said...

And unfortunately most of those programs only seem to extend their time in poverty, rather than truly helping them to get out of it.

zen babu said...

Eric,

The US measures poverty relatively. It is thus simply x% of the average income, with x varying over the years. This effect does not need people to stay poor, it just needs the average to rise faster.

Tim Worstall said...

The definitions of poverty....well, the best place is probably The Bureau of Census. Look for "alternative poverty statistics". They play around with different ways of adding in benefits in kind and the EITC and so on and see what that does to poverty numbers.

I've written about it at TCSdaily,com and a real economist did a very good piece in either Vanity Fair or the Atlantic couple of years back.

After the help that is on offer and using the (odd) US definition of poverty, you find that only 2% or so of children are "living in poverty" as opposed to "would be in poverty if we weren't helping them."

Zen babu.....no, the US is just about the only country that measures poverty absolutely rather than relatively. Everyone else (well, industrial world) uses 60% of equivalised median household income. The US uses three times the minimum food budget in 1963 upgraded for inflation.

One for giggles point. Since the early 70s there's been a bipartisan agreement that poverty aid should be coming either through the tax system (EITC) or in kind, rather than the 60s idea of straight cash aid. Thus we've been spending more and more on alleviation but not counting it when we measure poverty.