How to cut poverty

Jim and the Bunny are having a good set-to about poverty. Here’s my take: however much poverty there is or isn't, the official poverty line – 60 per cent of median income – is no measure of poverty, or even of changes in it.

Imagine an island of 11 people, named A to K. Their incomes are:

A =20

B = 20

C = 40

D = 50

E = 50

F = 100

G = 120

H = 120

I = 150

J = 300

K = 400

This distribution vaguely resembles the UK’s in some respects. The mean income is 24.5 per cent above the median, most people get less than this mean, and there’s a tail of high incomes.

Note, however, that the units could be anything. This might be an island of plutocrats, where the units are millions of pounds. Or it might be an island of peasants. Whatever, the poverty line is 60 – that is, 60 per cent of the median income, which is F’s 100. Five people – 45 per cent of the island – have less than this. Whether they are millionaires or peasants, they are the poor.

So, how could we reduce the numbers in poverty? We could, in theory, do it overnight. A state-mandated basic income of 61 would lift everyone out of poverty. This could be financed by a 33 per cent tax on incomes over 150.

Easy. So why isn’t it done? There can only be two possibilities. Either it’s not a top priority to abolish poverty. Or we believe this tax and benefit system will have disincentive effects that might increase poverty – say, if K sacks his employee F to save costs, or if A to E work less after they get their benefits.

But we don’t need progressive taxation to reduce poverty.

We could expel J and K from the island, letting them take their money with them. E then becomes the median. The poverty line is now 60 per cent of 50 = 30. And lo, we’ve lifted C, D and E out of poverty. Only 2 in 9 of our islanders are now poor. We’ve halved the poverty rate.

Or we could take everything from A and B and give it to D and E. Their incomes now rise to 70. We’ve lifted two people out of poverty. The poverty rate has fallen from 45 per cent to 27 per cent.

Or we could take everything from A, B and C. We could then give 11 each to D and E and the remaining 69 to K. In this way, we’re lifting two people out of poverty whilst increasing inequality.

That’s how to reduce poverty. Let’s now increase it.

Say eight people, all richer than K, join our island. J’s 300 now becomes the median income, so the poverty line is now 180. Nine people – half our island – are now in poverty. The poverty rate has increased. This remains true even if these new arrivals set up a factory employing A, B, C, D and E at wages three times higher than they were previously earning.

Or we could levy a tax of 50 on all incomes over 100. However, G to K can afford fancy lawyers who can get them to dodge the tax. So it falls only on F. He’s now plunged into poverty. If his tax goes equally to A and B, they are still in poverty. The poverty rate has risen to 6 in 11.

The lesson here is simple. The official poverty measure is meaningless. The numbers in poverty can decrease as the poor get poorer, or increase as they get richer.

Does this mean the Bunny’s right, and that relative poverty is just a “leftist linguistic trick”?

If it is a trick, it’s a poor one, because there’s no necessary link between the numbers in relative poverty and some measures of inequality.

My take is that the old left has simply misconceived the problem. They think there should be some kind of pattern of income distribution – and worse still, that this can be described by a single number.

What matters to me, though, is whether people are the victims of injustice or of misfortune which they were unable to insure against. It’s how inequalities arise that matter, not how great they are. No snapshot of the income distribution – still less one as fuzzy as “60 per cent of the median” - can tell us how important these historical and procedural injustices are.

Comments

[dearieme]

"What matters to me, though, is whether people are the victims of injustice or of misfortune which they were unable to insure against." Well said.

[Franco]

"The lesson here is simple. The official poverty measure is meaningless."

A single number summary is often very useful and no one thoughtful would ever assume it told the whole story. If income distributions could be truly all over the map (like some of your contrived examples) then perhaps it would be (nearly) meaningless. However, actual income distributions fall in a relatively limited range of shapes and so "the poverty line" surely conveys some information, and might even be quite informative for a single number.

Think of it this way, if a commenter told you that they were below their country's poverty line that would not be a meaningless statement. Even without knowing where they were from, you would surely judge that they weren't doing great.

Of course, policy should not be based solely on reducing the number of people below this line. But, if your goal is improving the plight of the least well off, the effect of a policy on the people below the poverty line would be a pretty useful first approximation of effectiveness.

[Ian]

Wasn't it Bill Clinton who said "it's the growth, stupid" ?

Any calculation of inequality of this kind fails simply because the growth of the lower end of the scale compared to the upper end has to exceed the ratio of the inequality for the gap to close, which hardly ever happens, even though the lower end can be growing at a faster rate than the upper end, which in reality is closing the gap.

As long as the upper end continues to grow, at whatever marginal rate, the inequality will seemingly get bigger, dispite the fact that a small percentage growth of a large income has hardly any difference to that person whereas a large increase in income for a poor person is of major significance.

The "old left" all too readily accept the view that it's okay for everyone can be poor in order to eliminate inequality, and it's easier to take money away from people than to generate more of it. The notion of poverty being related to inequality is to suppress the capitalist solution to poverty, i.e. make everyone rich whilst actually increasing inequality (like Thatcher's infamous "trickle down" policy).