Poverty Eradication as a Luxury Good

In microeconomic theory, luxury goods are products that have a high income elasticity.  This means that when people become richer, they demand more of them. But when incomes drop, people don’t hesitate to cut them out of their purchases.  This is unlike necessity goods: when incomes drop, people have to continue buying them because they are in fact necessities (every once and a while economic jargon is transparent).  I tell you all of this because I found out last night that eliminating poverty amongst non-Americans is a luxury good, while addressing the relative poverty of Americans is a necessity good.

During the first presidential debate between John McCain and Barack Obama, the moderator asked both candidates how their proposed spending priorities would change because of the ongoing economic crisis and the presumable financial bailout plan.  It was a good question – $700 billion is not chump change, and though the US could conceivably pay for the whole thing by issuing debt (which the Chinese Central Bank would then buy), some spending cuts in the budget are likely.  Unfortunately neither answered; doing so was delegated downwards to the Vice Presidential candidates (better to have the second in command deliver the bad news then to do it yourself!).

While Sarah Palin didn’t answer (no surprise there), Joe Biden didn’t hesitate.  The thing that would be cut was foreign aid, which the ticket had previously promised to double.  The Obama / Biden ticket would not cut promises for increased spending on education and health care.  Later in his response, he said that the “bottom line” was that they were going to eliminate wasteful spending in the budget.  Presumably foreign aid was therefore part of that wasteful spending.

The interesting thing is that Americans think that the US government gives a HUGE amount of foreign aid.  A survery done by the University of Maryland in 2000 found that Americans belive that 20% of the federal budget goes to foreign aid, when in reality, the US does not even meet the UN’s goal of giving 0.7% of GDP in foreign aid.  It’s worth mentioning that the government’s aid budget in 2006 was $27 billion, just 4% of what the bailout is estimated to cost.  So doing away with promises to double aid isn’t going to get anybody very far towards paying for the end of financial mayhem.

If foreign aid is so small in comparison to the total budget, why mention that you’re going to cut it in the first place?  Two reasons.  The first is, as we’ve explored above, Americans assume this must save us a great deal of money.  The second is that the great thing about saying that you are going to cut back on foreign aid is that there are no voters that are directly impacted by this, and therefore, you don’t loose any votes (clever those politicians).  A couple of people (dorks like me) will know that this is largely a red herring, and be annoyed that the US will fail to meet its promises to the international community to scale up aid even under a Democratic administration, but we’re not going to vote for McCain because of it.

We’ll just blog about it, and point out that the implication of the argument was that poor people in the rest of the world (who actually don’t cost very much to help) count less than middle class Americans.  Not surprising given that this is an election year, or to those of us who have an understanding of real-politik, but worth reflecting on none the less.