Poverty and Causality

This article I have written in the journal Critical Review is behind a pay-wall. But if you have access through a library or better yet want to buy the issue, it’s a good one. I review a book on poverty by Duke sociologist David Brady called “Rich Democracies, Poor People: How Politics Explain Poverty”. 
Abstract: “David Brady argues that low European poverty rates are a result of the welfare state. His finding relies on a relative measure of poverty, according to which the threshold for being poor differs across countries. Using the American poverty threshold as a fixed measure, though, Western Europe has a poverty rate of 18 percent, higher than that of the United States. Moreover, Brady’s thesis that welfare-state spending explains cross-country differences in inequality does not take account of the problem of reverse causality. Historically, welfare states developed in homogeneous nations that started out with higher levels of social capital and lower inequality. Scandinavia, for example, had unusually low poverty rates a century ago, and even today Americans with Scandinavian ancestry exhibit a poverty rate no higher than that in Scandinavia. Since poverty, social capital, population homogeneity, and the size of the welfare state relate in multiple ways to each other, we cannot rely on cross-country correlations to isolate the causal effect of the welfare state on poverty rates.”
“…Material poverty turns out to be higher in Western Europe than the United States, which takes some of the zing out of Brady’s indictment of America. However, poverty rates are lower in the Germanic countries and Scandinavia, regardless of how we measure them. As everyone knows, the Scandinavians have among of the lowest levels of poverty and among the biggest welfare states. This seems to be a powerful argument in favor of the welfare state.
As appealing as the theory might sound, I believe it to be incorrect because of reverse causality. Random chance did not determine which countries expanded the welfare state the most. The countries that built the biggest and most successful welfare states were already prone to lower poverty because they already had higher rates of social capital, were more ethnically homogeneous, and started with a more even distribution of income.
American scholars who write about the success of the Scandinavian welfare states in the postwar period tend to be remarkably uninterested in Scandinavia’s history prior to that period. Scandinavia was likely the most egalitarian part of Europe even before the modern era. For example, it was the only major part of Western Europe that never developed full-scale feudalism and never reduced its farmers to serfdom (Scott 1988). Certainly the region was poor compared to the rest of Europe until the late nineteenth century. But this has been confused with Scandinavia having a high poverty rate prior to the welfare state, which it did not. The Illustrated Atlas and Modern History of the World, for instance, writes about the surprisingly low poverty rates in low-income Sweden and Norway as of 1851, noting that there are ‘‘few paupers’’ (Martin [1851] 1989). Already by the 1840s, and for decades thereafter, Sweden and Norway were ‘‘record-holders’’ in life expectancy among countries for which we have data.
Nineteen thirty-six is sometimes given as the start of the Social Democratic era in Sweden; the welfare state had not yet come into existence, but was about to be born. Yet according to economic historians who use almost the same definition of poverty as Brady’s, in 1936 the relative poverty rate in a representative region of Sweden was approximately 19 percent (Gustafsson and Jansson 2010). This is substantially lower than the American relative poverty rate today and was less than half the U.S poverty rate at the time. We thus know that large differences in relative poverty rates between Scandinavia and the United States predate the welfare state. It is therefore questionable to attribute the lower poverty rate in Sweden today to that state….”
As they say, read the whole thing.