Poverty is a widespread problem that involves not only economics, but other factors as well such as social, political, and cultural issues. The government bases the definition of poverty on the total income received. This is because economic growth and stability have a great influence on poverty and is a key component in poverty reduction strategies (Magnusson, 2008). This essay describes poverty and its management from an economic perspective by explaining the following statements from the 2010 Census report.
In 2010, the official poverty rate was 15.1%, while in 2009, it was 14.3%. This was the third consecutive annual increase rate in the poverty rate. Since 2007, the poverty rate has increased by 2.6 percentage points, from 12.5 percent to 15.1 percent. This increase in the poverty rate can be explained by instability of the economy in the recent years. Factors such as inflation and high levels of unemployment have also contributed to the rise in the poverty rate in the nation. Excess demand for labor, which is termed as unemployment, causes an increase in the wage rate.
In 2009, 43.6 million people were in poverty, while in 2010, the number was 46.2 million people, which was the fourth consecutive annual increase in the number of people in poverty. Inflation is a major aspect of instability, as it becomes a burden borne by those in the lower income bracket (Magnusson, 2008). This is because most of these people hold more liquid financial assets, such as cash, rather than less liquid assets, such as interest bearing assets. Another reason is that these low-income earners are unable to protect the real value of their income and assets from inflation. In simpler terms, this means that the increase in prices erodes the real wages and assets of low income earners more, as compared to those with higher income.
Inflation has a negative effect on the growth of output, which will adversely affect low-income earners who frequently use money for economic transactions, which acts as a regressive tax (Magnusson, 2008).
The poverty rate in 2010 (15.1 percent) was the highest poverty rate since 1993. However, it was 7.3 percent lower than the poverty rate in 1959, which was the first year for which poverty estimates were available. In 2009 and 2010, the country was facing a massive depression in the economy. This is because the output level of the country has a direct effect on poverty, as changes affect the income of low-income earners. Low output levels mean that there will be an increase in prices. However, the wages of low income earners have not increased and therefore reduced their real income (Batchelder, 1971).
The number of people in poverty in 2010 (46.2 million) has been the highest number in 52 years. The number of people without health insurance this year rose to 49.9 million from 49 million in 2009. The year 2010 marked a full year since the recession had ended in June 2009.
Economic Policies in Poverty Reduction
The increasing poverty rate has clearly been attributed to the recession that the country has been facing. During this time, the level of expenditure and aggregate demand may not be sufficient to secure full employment of labor and other factors of production. This means that expansionary economic policies should be applied to stimulate the economic growth such as a reduction in taxes (Batchelder, 1971).
Fiscal and Monetary Policies
The two policies are used as demand management policies in that they are used to maintain output at full employment and stabilize prices. This is because, as noted earlier, excess demand causes inflation and unemployment (Batchelder, 1971).
Fiscal policies can have direct impact on poverty through the implications of tax policies used and public spending. Sound fiscal policies and reforms in treasury management, transparency, and accountability in administrations as well as governance can benefit low-income earners in that there is a better use of public resources. Concerning public expenditure, policy makers should ensure that the extent of government intervention in spending programs that alleviate poverty such as health, education, social welfare, and infrastructure could be justified on the grounds of redistribution. The efficient delivery of public goods and services should also be considered, for example, reaching the target beneficiaries (Batchelder, 1971).
An important component of any poverty reduction strategy is an efficient tax system, which is aimed at a system of easily administered taxes with moderate marginal rates. This means that the current tax system should be evaluated in order to determine the best tax systems to be used (Magnusson, 2008).
Monetary and exchange rate policies are also used to keep inflation, output, and the real exchange rate in line, as their changes have adverse effects on the poor. These polices affect the fluctuations of the output level in a country (Batchelder, 1971). Changes in money supply have a short-run effect on the real interest rate, which affects output, while exchange rate policies can intensify exogenous shocks, which also affects output. Monetary policies should be made in order to go in line with the inflation, output and exchange rate in order to reduce the poverty rate. An increase in money supply will reduce interest rate levels in the economy, which in turn encourages investment demand. Therefore, this raises the output level and, eventually, keeps the economy at equilibrium (Magnusson, 2008).
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