Public-health buildings can offset squalor, but not reduce it.
I've seen a mention somewhere on the boards that one of the main causes of squalor is rapid creation of buildings in a city. The post claimed that if you just NOT BUILD anything for several turns, squalor will go down substantially.
If true, then squalor is basically a brake on fast development and is there to prevent a faction from getting an impregnable lead in the beginning. I would be wary of messing with squalor for the fear of making the (strategic) game too easy in the middle-to-late stage.
Fey
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