Poverty increased sharply in 2022 due to safety net cutbacks and inflation shock

Today’s Census Bureau data on income, poverty, and health insurance in 2022 confirmed many of the predictions made in our preview last week. Median household income dipped by 2.3% as the inflationary shock of 2022 overwhelmed the benefits of a strong labor market (more hours worked and relatively fast nominal wage growth). Comprehensive measures of poverty—specifically those based on the Supplemental Poverty Measures (SPM)—showed very sharp increases. The overall SPM poverty rate rose by 4.6 percentage points to 12.4%, while child poverty more than doubled, rising from 5.2% to 12.4%. These poverty increases were also a casualty of the inflationary shock, but an even more important upward driver of poverty was the policy choice to allow the pandemic-era expansions to the safety net to expire. In particular, the expiration of the Child Tax Credit (CTC) expansions was particularly damaging to child poverty.

Today’s data provide valuable information for policymakers—but are also significantly backward-looking. For example, inflation has decelerated significantly in 2023, and hourly wage growth has outpaced inflation since the first half of 2023, even as hours worked look set to come in higher in 2023 than 2022. In short, now that the inflationary shock of 2022 has largely abated, the strong labor market looks set to deliver reliable gains for 2023 and moving forward. This will boost income growth for a large majority of working families.

That said, even in strong labor markets, there are families that will have trouble finding enough work (and enough well-paid work) to provide economic security. This is particularly true for families with children. The sharp reductions in child poverty in 2020 and 2021 that were engineered even in the face of a pandemic-damaged economy show the importance of policy decisions. If policymakers were willing to maintain the pandemic-era CTC expansions, a much smaller share of children would be living in poverty. More ambitious—but economically sustainable—expansions of our generally stingy welfare state could essentially eliminate poverty completely. We know this vision isn’t politically realistic in the short run, but the policy lessons of 2020 and 2021 should not be lost with today’s report.