Why is it so hard to escape poverty? - Ann-Helén Bay - Deepstash
Why is it so hard to escape poverty? - Ann-Helén Bay
Why is it so hard to escape poverty? - Ann-Helén Bay
Why is it so hard to escape poverty? - Ann-Helén Bay

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Why is it so hard to escape poverty? - Ann-Helén Bay

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Government benefit programs unwittingly produce poverty traps

Imagine you're out of work and a government benefit program helps you with your basic needs, such as rent, utilities and food. 

When you finally get a job, you feel things are turning around, except that you are now disqualified from the benefit program and don't earn enough to cover the same costs. Moreover, you have to pay for transportation to work and childcare. Now you have even less than when you were unemployed. Economists call this the welfare trap.

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Financial stability is overlooked

Some poverty traps are connected to a person's circumstances, such as lack of access to healthy food or education. Others affect entire nations, such as cycles of a corrupt government.

The irony of welfare traps is that they are the result of policies designed to fight poverty. Governments provide subsidies for housing, food, energy, and healthcare for those who fall below a certain income level.  But it also means people lose the subsidy as soon as they earn just above the threshold regardless if they are financially stable enough to stay there. 

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Mainstream economic models assume people are rational. If those in poverty know they won't gain any advantage from working, they're incentivised to continue with government assistance. 

When fewer people take on new jobs, the economy slows down, keeping people in poverty.

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Attempts to remove the feedback loop

Countries have tried various ways to circumvent the problem. 

  • Some allow an overlap of benefits after finding a job, while others phase out benefits gradually as income increases.  These policies remove some financial incentives to work but the risk of the welfare trap is lower.
  • Other governments provide benefits like education, childcare or medical care equally across all their citizens.
  • Others proposed a universal basic income to all members of society. Additional wages would supplement the benefit.

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