Poverty and income gaps

A couple of readers have written to me suggesting it would be a good time to post about poverty and income inequality. First, I’ve been alerted to this story by Miranda Devine saying that the tragic house fire in Sydney a couple of days happened because the family couldn’t afford blankets. It’s often been asserted that poverty is an out-of-date concept, but there is still plenty of absolute deprivation in modern societies. There’s some evidence onhunger in the US here. Although I don’t have the data handy, the proportion of the population living below the US poverty line (based on a PPP conversion) is actually slightly higher in Australia than in the US – much higher in both countries than in most developed countries. Of course the biggest problems are those of indigenous Australians (from Devine’s report, this includes the family in the Sydney tragedy) but there’s nothing to be complacent about more generally. And there’s no justification for looking only within Australia. We can ignore poverty in the world as a whole if we choose, but that doesn’t mean the world will choose to ignore us.

Devine’s article focuses on the need for more charitable effort on the part of those of us who are doing well, and this is an important point. Most of us could give more than we do without suffering too much as a result. We should all think about it and try to make more of an effort. But it’s equally important to look at the economic structures and government policies that have led to growing (or, depending on how you measure it) unimproved poverty rates over a long period of reasonably good economic growth[1].

This brings me on to a point raised by Tim Blair, which is worth taking seriously. Blair says

I’ve never understood all this concern about the gap [between rich and poor]. What benefits does a small gap bring? If you are poor, how are your circumstances improved by everybody else also being poor?

There are two main responses to this. First, if there’s a big gap that means that there’s a potential to redistribute income so as to reduce poverty. The same aggregate income is consistent with widely different levels of social wellbeing. A big gap suggests that measures of average income overstate the welfare of the average person and particularly of those at the bottom of the income distribution. That is, for given income, a big gap between rich and poor means that the poor are worse off in absolute terms.

Second, although I don’t like purely relative measures of poverty it is true that, in important respects, you are worse off being poor when most other people are well off. For example, if most people have cars, all sorts of social arrangements will be made on the assumption that people will drive to them. So doing without a car becomes more of a burden. At a more day-to-day level, I’ve noticed that participation in school and sporting club events has got more expensive over time, as average incomes have risen. For example whereas sports uniforms were once cheap and often pooled, there’s now an expectation that they should be brand new and that they should be bought specially for particular events. Accommodation has largely gone from billeting to motels. The cost of participating is that much higher, and kids from poor families are, at best, shown up as poor and at worst excluded altogether.

The first of these points is more relevant in relation to the very rich. The point here is not so much that the rest of us are worse off because, say, Kerry Packer is very rich, but that economic growth isn’t of much benefit if it mostly enhances the fortune of the very rich. In this context we should look a lot more at median than at mean incomes. The second point relates mainly to the distance between the median and the bottom tail of the income distribution.

[1] In this context, I’m equally dissatisfied with those rightwingers who want to leave everything to private charity and with those leftwingers who excuse themselves from charitable giving on the ground that this is a job for government.

34 thoughts on “Poverty and income gaps

  1. As I understand it, Portillo’s resignation followed a little after his admission of a homosexual affair in his youth. I’m not sure if that was linked to his interest in single-motherhood. Still, at least he can say he’s willing to try anything once…

  2. One thing to bear in mind when considering the ‘wealth’ of your average welfare recipient is the consequences of the high cost of food. Cash dependency. When you fall off the band wagon, the cost of a loaf of bread etc. can be difficult if not impossible, depending on your ability to access other networks.

    I’m not saying that these networks don’t exist for most people but they are an unstated assumption.

    Two anecdotes:
    Working in Papunya in 1981, where only 5% of people have jobs and half of those are white. I was struck by the consequence of not having access to a network in emergencies – there were no relatives with jobs – it completely changed the equation in terms of understanding people’s priorities.

    A very old lady in a nursing home in 1990 confiding to me that she thought people were worse off than in the depression because the price of a load of bread was $2 instead of 1/2d.(halfpenny) as it was in the 1930’s. “Everybody had a cow” she reckoned. Of course, not everybody, but enough to ensure that milk was almost free. Her myopia was that of age and seeing the value of a dollar(or 10 shillings) changing through her life. But it also points to the artificiality of a lot of this welfare ‘wealth’.

    The other area where the welfare ‘wealth’ affect can be found is of course with rent subsidies.

  3. I would appreciate feedback on all this.

    Tim Blair does have a point, one which is not spelled out (and one which he may not have brought out even to himself). I myself wouldn’t want to be an academic precisely because I feel it is too remote from anything directly constructive. Yes, it is indirectly constructive by enabling others – but for people with my values and gut feeling, there is nothing to get hold of. It doesn’t satisfy. And, of course (see comments on Yakuza etc.), nothing says that it is necessarily indirectly constructive enough to make up for its hidden costs – there really is something to the direct assessment, which shows things that really are useful (even if not all the things that really are useful). There is no contradiction to being a well off academic and also an academic loser – they are different issues. The “loser” doesn’t mean failing as an academic but failing by being an academic, though I don’t begrudge those who feel differently until they start to drag others down. (I also feel the same about nearly all the internally directed sorts of public servant.)

    There is also a jump between “if there’s a big gap that means that there’s a potential to redistribute income so as to reduce poverty” and “The same aggregate income is consistent with widely different levels of social wellbeing”. While the latter is true, it does not imply the former. Dead weight and transaction costs and such suggest that redistributing income need not reduce poverty – and empirical observation suggests that this is in fact the case. The former is REdistribution, typically a continuing government process, while the latter is consistent with (say) Chesterton-style distributism – ignoring the transition to it for the moment.

    The best concept of poverty I have come across is in Jack London’s work, when he says that you are poor if your circumstances lower your ability to function. Of course that does not give you a measure, but it does let you assess the measures on offer, and it shows how the poor make the rich worse off than the rich otherwise could be. And that’s even before the Vagrancy Costs externality, the problem that having the poor around means we face Jill Rush’s “need for a strong gate at the front” with all that that costs.

    If we did make the institutional changes that promoted people out of poverty, as opposed to supporting them in poverty, the scope of loose ends would become manageable by charity once governments had worked themselves out of that job. Charity has the advantage that it takes place on the spot, where helpers can see what is going on and don’t get trapped by bureaucratic rules of the sort that lead to harsh breaching.

    It is precisely the helpless who cannot organise themselves well enough to cope. I myself was barely able to cope with a bureaucratic mix up with Social Services, just yesterday (22.6.04). I am barely functional from stress from litigation over unjust dismissal, with gaps when I can apply myself to other things like blogs if I am not busy with it and have not got too much reactive depression just then. I had to sort out a screw up requiring me to attend a placement service right in the middle of a second written submission, even though I have all the necessary doctor’s certificates.

    And I am one of the more resilient people in my situation, according to my doctor. People who really are down are also out, and can’t use official systems – they need someone to reach out to them. So much for Yobbo’s diagnosis and prescription. And yes, I am smoking during the bouts of litigation to help keep me functional (I checked with my doctor, and under ten a day will probably not hurt). I wouldn’t be surprised to find other people face similar constraints, and we should always remember Orwell’s comments on the impertinence of telling people not to spend on what look like luxuries.

    I see government provision of Health, Education, and Welfare as a mark of failure, with vested interests in favour of support rather than cure. It is aggravated by the increased involvement in cash rather than subsistence, which Kyan Gadac also brought out; that is an achieved change in the developed world, but it shows up when we do a similar analysis for developing countries. It increases the burdens on others through the tax system, and so brings more battlers down into needing support – the very thing Tim Blair’s second reply hints at, as does some of Fyodor’s stuff. This virtuousness at others’ expense is the problem described in William Graham Sumner’s “The Forgotten Man” at http://www.blupete.com/Literature/Essays/Best/SumnerForgotten.htm:-

    “The type and formula of most schemes of philanthropy or humanitarianism is this: A and B put their heads together to decide what C shall be made to do for D. The radical vice of all these schemes, from a sociological point of view, is that C is not allowed a voice in the matter, and his position, character, and interests, as well as the ultimate effects on society through C’s interests, are entirely overlooked. I call C the Forgotten Man.”

    Only, there are different time lags with the costs and benefits of government provision of Health, Education, and Welfare, so it is simplistic just to cut those things; it would leave people in the lurch until things – one day – got better, which is what makes naive rightwingery wrong. However, the same time lags make leftwingery only seem to work, by improving the lot of the poor before the problem of making more poor comes in; but it is actually growing the problem over time, with the same vicious circle logic as congestive heart failure or inflammation driven appendicitis, in which the body’s short term response aggravates the underlying condition until something outside stops it or a death spiral cuts in. In the early stages, there is even a real improvement from these misguided measures; subsidising the needs of the poor by state provision of services has a positive Pigovian effect while the needs are small enough, even though there are all the costs of government inefficiency. But this too only encourages that approach when it doesn’t work any more, which is our current case. It’s also why Kyan Gadac’s subsidising first home buyers will only appear to work, with short term improvements flowing through to aggravate the underlying condition and claw back the problem to its former level for the next round of buyers.

    I have written before on my views on how to start working governments out of those jobs: promote people out of poverty, starting with a Negative Payroll Tax applied to a broad based tax with impact (not incidence) on producers, like GST, though that is a bad tax in other ways. That would be a Pigovian solution with rapid results and no additional costs, and it has been studied by Professor Kim Swales of the University of Strathclyde; some of his work is at http://www.faxfn.org/03_jobs.htm. These insights let us see separately certain other problems that need to be addressed, once we sort out distribution issues from production ones and globalisation ones – but at the moment they are all jumbled together, and just solving or ameliorating poverty keeps us from getting at the others before they too overwhelm us, which at this rate they soon will. I can also see a long term transition from Negative Payroll Tax towards true distributism; even though it might not be attained, the progression would lead to steady incremental improvement across the board, as costs were eliminated and personal responsibility and involvement came back.

    Thoreau (a teacher) commented on how different things would be if the state provided education, which it didn’t in his day; he was comparing that with state provided support of religion which his state then had. The thing is, that state support kept individual people involved, whereas even in countries that kept an established church the “reforms” of the late 19th century detached the clergy from the people by commuting tithes – they just hid the problems. Well, government provision of Health, Education, and Welfare through central systems also hides the problems; we get an externality that way, compounding for the earlier externality of Vagrancy Costs. We need to internalise it, but that doesn’t mean squeeze the poor. That would only be appropriate if the only breakdown was within the poor themselves – which is precisely where it was, in the days of the Speenhamland System, that was reformed by Union Workhouses and the like (though the very idea of Parish Unions foreshadowed the later growth of the Social Security externality driven by consolidated revenue from a wider tax base). Today we need to address the externality at the other end to make employment more practical, and tomorrow we need to move the employees into fuller participation with as much distributism as we can manage.

    Oh, the transition? Implement Negative Payroll Tax by giving people quarterly vouchers to give to their employers. Monetise those by making them anonymous and transferrable. Turn them into the yields of non-transferrable government annuities. Make institutional changes to encourage saving, then make the annuities transferrable, so making everyone into rentiers (Keynes was wrong; there were not enough rentiers – having more would have improved the Keynes effect). Use a sinking fund approach to buy back the government securities, so cutting the size of government while moving people’s portfolios into capital markets – and the Pigovian approach becomes Coasian when everybody becomes a capitalist, which is distributism. Take as much of the transition as you like as slowly as you like, it’s all good and you don’t have to buy a utopian dream sight unseen before you check out that each step really is an improvement.

    Oh, the institutional changes to encourage saving? I think I’ll stop preaching for now, but interested readers will find more at my publications page http://users.netlink.com.au/~peterl/publicns.html – look for the wedge approach to funding an ageing population.

  4. yobbo has obviously bought the myth of the wonderful nature of welfare. I wonder if he has ever has to choose whether to buy milk or medicine for a sick child because that is all the money that the family has even after growing vegetables in the garden (something many can’t do) and buying clothes in the op shop.

    Those on welfare with resources to fall back on can live reasonably well – particularly if income is supplemented by some fast footwork.

    However the line between being OK and being in crisis is a thin line indeed and what a single person and a family need are very different creatures,

    I note that yobbo takes the line that the unemployed are to blame for their situation because of their drinking, gambling and smoking – gross generalisations which have no empirical evidence and which have the flavour of a religious belief.

    Frank Hardy gave us some insight into the links between poverty and gambling in his book ” The Four Legged Lottery” where poor people saw that the only way out of their situation was to win on the horses. How much easier it is for people with this view to gamble their money away now.

    Whilst we can like yobbo blame the poor for their poverty I prefer a system that puts less effort into punishing the bad and the mad so that the rest of us can feel safer in our homes and live in a society that still believes in a fair go and a hand up.

  5. We have the unedifying spectacle of family recipients of the unexpected largesse of the government of $600 per child and totalling several thousand dollars in some cases taking the lot and blowing it on hotel delights.

    The evidence of many parents taking money given and spending it gambling, drinking and so on will no doubt confirm the views of those like yobbo who believe that the poor are to blame for their own situation. They were given a chance and blew it.

    I take another view – that people who are unused to money will not save it or spend it wisely but will seek short term respite from long term despair at their poverty. What ever the truth the money has not gone on the children in many instances.

    With the amount of money there were several alternatives that the government could have taken.
    It could have gone to pay for many school lunches in areas where nutrition is a concern.

    It could have paid for vaccinations.

    It could have provided respite services to the carers of adult disabled dependants.

    It could have provided a range of educational supports for Indigenous children to address their educational disadvantage.

    The decision to pay out large sums has brought smiles to the faces of some, especially the publicans and clubs with pokies – maybe the reason we have just had the domestic violence packs just arrived was because someone realised that all the grog will lead to significant issues of violence.

    However the millions of dollars have done nothing to make sure that no child will live in poverty in 2004.

  6. It’s all a matter of choice, like yobbo keeps saying. Children should just choose better parents.

  7. I am simply saying that you can live reasonably on a welfare cheque, including plenty of money left over for blankets. You just have to forego expensive non-necessities such as alcohol, tobacco, restaurant food and the like.

    Some people are better at doing this than others. There are plenty of families who live without any “deprivation” on the basic welfare cheque. There are others who can’t make ends meet despite earning much more than “poverty” levels.

    “note that yobbo takes the line that the unemployed are to blame for their situation because of their drinking, gambling and smoking – gross generalisations which have no empirical evidence and which have the flavour of a religious belief.”

    Religion or morality has absolutely nothing to do with it. I’m a libertarian and a heavy drinker and pack a day smoker myself. The fact is that these habits are expensive, there’s no need to read any more into it than that.

    Smoking a pack a day and going to the pub twice a week will cost at least $150 – only $30 short of the full individual weekly dole payment. If you can’t see how this will affect the ability to pay for necessities, then it’s just as well you aren’t a welfare recipient yourself – you’d starve.

  8. so yobbo, if you lost your income tomorrow and to immediately rely on welfare, you’d be able to give up these aspects of your life immediately and without affecting how you felt about yourself.

    Perhaps you could give it a trial run, a sort of “walk in someone’s shoes” -liveon the equivant of the doel for a month. Think of the money you’d save and you never know you might be able to prove your point.

  9. Some points about definitions of poverty.

    First, whatever measure you use is in some degree relative. Even so-called absolute measures rely on some notion of a minimum acceptable standard of living which varies according to community standards. For example, children sharing a bed was common a century ago, but would today be regarded as inadequate accommodation, same can be said for food, clothing etc.

    The second point is that poverty tends to focus attention on income and expenditure, and less on opportunities and participation. While the European ‘social exclusion’ agenda has some problems, it does at least point to the importance of things like decent employment, affordable housing, freedom from harm, good health and so on. These are ultimately what economic growth is supposed to deliver, are they not? As someone above has pointed out, there is increasing inequality in these types of outcomes as well as income distribution. To my mind, the question is both about hardship (which may be declining in relative terms) and the equitable distribution of opportunities and outcomes (which seems to be be growing).

    It is also not possible to have this discussion without a reference to values. My own position is that increasingly unequal distribution of opportunities is simply unfair, but I accept that others dont share this belief.

    Using ‘poverty’ as shorthand inevitably over-simplifies these issues and is probably not very useful (although I have to confess to working for an organisation which aims to create an ‘Australia free from poverty’!)

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