Government and the Cost of Living: Income-Based vs. Cost-Based Approaches to Alleviating Poverty

Federal, state, and local governments seek to assist poor households financially using transfers, minimum wage laws, and subsidies for important goods and services. This “income-based” approach to alleviating poverty aims both to raise household incomes directly and to shift the cost of items, such as food, housing, or health care, to taxpayers. Most contemporary ideas to help the poor sit firmly within this paradigm.

A “cost-based” approach would instead reform existing government interventions that raise living costs for the poor. Shelter, food, transport, and apparel and footwear alone account for 59 percent of spending by the average household in the bottom 20 percent of the income distribution, and government policies raise prices in all those sectors. Local land-use and zoning regulations constrain housing supply, which raises housing costs and deters labor mobility. State child-care staffing regulations reduce the number of infant centers in poor areas, increasing prices and reducing the payoff to work. The federal sugar program, milk-marketing orders, and ethanol mandates make grocery shopping more expensive. Federal fuel-standard regulations and state-level automobile dealership laws increase the cost of driving. Protectionist tariffs raise clothing and footwear prices, and state occupational licensing creates barriers to entry that raise the price of many services, from hair braiding to dentistry, while reducing labor-market opportunities.

Using cautious assumptions, I estimate that these interventions, combined, cost typical low-income households between $830 and $3,500 per year directly through higher prices. Pro-market reforms in these areas could significantly reduce living costs for the poor, while also improving labor mobility and job matching. With the federal budget deficit growing and demands for radical labor-market policies proliferating, such an agenda would represent an economically efficient means of improving the well-being of the poor without requiring more government spending or intervention.

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