Why do People Stay Poor?

As I write this in mid-September, there are rumblings in the media that the upcoming throne speech from the Government of Canada will include a significant push toward some version of Universal Basic Income (UBI). Is Canada ready for this?


The “Mincome” Example

While Mincome, the “Manitoba Basic Annual Income Experiment,” has become associated with the town of Dauphin, it actually included a randomized group of people in Winnipeg as well as in rural Manitoba. Winnipeg was arguably the more important site for the study. Dauphin was chosen because it was the right size and in the right location.


Mincome was a research project jointly sponsored by the federal government under Prime Minister Pierre Trudeau and the Manitoba government of Premier Ed Schreyer. It ran from 1974 to 1979, when it was closed down by the Manitoba government of Premier Sterling Lyon and the federal government of Prime Minister Joe Clark.


Mincome’s primary goal was to “evaluate the economic and social consequences of an alternative social welfare system based on the concept of a negative income tax.” The question that the researchers sought to answer was whether such an approach would have an impact on willingness to work.” A related question involved understanding how to administer such a program if it were extended to the entire Canadian population.


Eventually, a study of the collected Mincome data was authored by Derek Hum and Wayne Simpson and published in 1991 by the Economic Council of Canada under the title, Income maintenance, work effort and the Canadian income maintenance experiment. The main concern of such a proposal in the 1970s was that the provision of a basic income would dissuade able-bodied people from looking for work, swelling welfare roles and resulting in a diminishing labour supply. The guarded conclusion of the authors was that the response to such a program would have a minimal impact on the labour supply. Put another way, fears that cash transfers would undermine incentives to work are largely misplaced, according to their study.


Medicine Hat, Alberta: Housing the Homeless

Housing the homeless is a variation on the theme of a universal basic income in the sense that shelter is a fundamental need for all, and homelessness is a stark reflection of poverty in society.


Medicine Hat began their program to eliminate long-term homelessness in 2009. The city had experienced situations when there were people living in their homeless shelters for years. As a result of this program, homelessness has been reduced to durations measured in days or weeks at the most.


What are the results? Money has been saved. The cost of crime to the city and its residents has been reduced. Health care costs have gone down and so have child welfare services.


Two Views of Poverty: Testing the Views in Bangladesh

A group of economists wrote an academic paper published earlier in 2020, in which they tested two views of why people stay poor.


The first view emphasizes differences in individual traits, like talent or motivation. You might characterize this as “the early bird catches the worm view.” The unskilled, unmotivated person is simply not going to do well and will have no choice but to take a job that will not pay them well.


The second view, is referred to as the “poverty trap.” Access to opportunities that will bring a person out of poverty depends on initial wealth. Poor people, who lack that initial wealth, have no choice but to work in lower income jobs. They are trapped in poverty. I am tempted to call this “the Donald Trump view,” as it is well known that the reason US President Trump is wealthy today is that he was raised in a wealthy family and his early business ventures were staked by his wealthy father.


The study comes down firmly in favour of the second view, the poverty trap. They concluded that by raising the assets of the poor above a certain threshold, the result is significant enduring reductions in poverty. On the other hand, transfers of assets to the poor that fall short of the required threshold tend to have minimal long-term effects.


Bringing it Back to Canada Today

The CERB, the Canada Emergency Response Benefit, has been one of the responses the government has taken in the wake of the tremendous economic dislocation in Canada caused by COVID-19. It is a kind of income support program. One can quibble about its efficiency and the mistakes that have been made along the way for both the CERB and the various other forms of support that the government has rolled out over the last several months. But I have no doubt it has helped many, many people, and that this social safety net has done much to maintain a sense of societal equilibrium.


Is there room in government policy for a longer-term permanent intervention in the form of some sort of universal basic income? Personally, I am open to the idea. I think that it has the potential to be more efficient than our current hodgepodge of federal, provincial, and municipal sources of welfare, that, let’s face it, only keep recipients at a survival level and don’t give them the extra income they need to get themselves out of poverty. If this sort of support can help the poor among us to get the financial resources they need to live healthier lives, to get training so that they can take on more productive employment, will that not in the long run reduce costs and improve society, as the city of Medicine Hat has found? I don’t know what will come out of the throne speech in a few days, but I hope that what we hear in terms of addressing poverty is a thoughtful, evidence-based solution that will find its champions irrespective of where they stand on the ideological spectrum.


(Inspiration for this blog post comes from Nick Maggiulli of Ritholtz Wealth Management, who posted a blog on this topic on September 3, 2020.)


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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax or legal decisions.