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The Economic Costs of Poverty

Subsequent Effects of Children Growing Up Poor

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Read testimony from Harry Holzer on the economic and societal costs of poverty to the House Ways and Means Committee.

Read coverage of the House Ways and Means Committee hearing

Most arguments for reducing poverty in the U.S., especially among children, rest on a moral case for doing so—one that emphasizes the unfairness of child poverty, and how it runs counter to our national creed of equal opportunity for all.

But there is also an economic case for reducing child poverty. When children grow up in poverty, they are somewhat more likely than non-poor children to have low earnings as adults, which in turn reflects lower workforce productivity. They are also somewhat more likely to engage in crime (though that’s not the case for the vast majority) and to have poor health later in life. Their reduced productive activity generates a direct loss of goods and services to the U.S. economy.

What’s more, any crime in which they engage imposes large monetary and other personal costs on their victims, as well as the costs to the taxpayer of administering our huge criminal justice system. And their poor health generates illness and early mortality which not only require large healthcare expenditures, but also impede productivity and ultimately reduce their quality and quantity of life.

In this paper, we review a range of rigorous research studies that estimate the average statistical relationships between children growing up in poverty and their earnings, propensity to commit crime, and quality of health later in life. We also review estimates of the costs that crime and poor health per person impose on the economy. Then we aggregate all of these average costs per poor child across the total number of children growing up in poverty in the U.S. to estimate the aggregate costs of child poverty to the U.S. economy.

We had to make a number of critical assumptions about how to define and measure poverty, what level of income to use as a non-poverty benchmark, and which effects are really caused by growing up in poverty and not simply correlated with it. Wherever possible, we made conservative assumptions, in order to generate lower-bound estimates.

The upshot: Our results suggest that the costs to the U.S. associated with childhood poverty total about $500B per year, or the equivalent of nearly 4 percent of GDP.

More specifically, we estimate that childhood poverty each year:

  • Reduces productivity and economic output by about 1.3 percent of GDP
  • Raises the costs of crime by 1.3 percent of GDP
  • Raises health expenditures and reduces the value of health by 1.2 percent of GDP.

If anything, these estimates almost certainly understate the true costs of poverty to the U.S. economy. For one thing, they omit the costs associated with poor adults who did not grow up poor as children. They ignore all other costs that poverty might impose on the nation besides those associated with low productivity, crime, and health—such as environmental costs and much of the suffering of the poor themselves.

What does all of this imply for public policy? The high cost of childhood poverty to the U.S. suggests that investing significant resources in poverty reduction might be more cost-effective over time than we previously thought. Of course, determining the effectiveness of various policies requires careful evaluation research in a variety of areas.

Our analysis did not venture into the effectiveness of specific anti-poverty policies, but our conclusions point unmistakably to several clear options, among them:

  • Universal pre-kindergarten programs
  • Various elementary and secondary school reforms
  • Expansions of the Earned Income Tax Credit and other income supports for the working poor Job training for poor adults
  • Higher minimum wages and more collective bargaining
  • Low-income neighborhood revitalization and housing mobility
  • Marriage promotion and faith-based initiatives

Given the strong evidence of the effectiveness of some of these programs, such as high-quality pre-kindergarten and the Earned Income Tax Credit, investments through these mechanisms seem particularly warranted. At a minimum, the costs of poverty imply that we should work hard to identify cost-effective strategies of poverty remediation and that we should not hesitate to invest significant resources when these strategies are identified. In the meantime, we should also experiment with and evaluate a wide range of promising efforts.

To speak with our experts on this topic, please contact:

Print: Allison Preiss (economy, education, poverty)
202.478.6331 or apreiss@americanprogress.org

Print: Tom Caiazza (foreign policy, health care, energy and environment, LGBT issues, gun-violence prevention)
202.481.7141 or tcaiazza@americanprogress.org

Print: Chelsea Kiene (women's issues, Legal Progress, Half in Ten Education Fund)
202.478.5328 or ckiene@americanprogress.org

Spanish-language and ethnic media: Tanya Arditi
202.741.6258 or tarditi@americanprogress.org

TV: Rachel Rosen
202.483.2675 or rrosen@americanprogress.org

Radio: Chelsea Kiene
202.478.5328 or ckiene@americanprogress.org