Will the economic crisis reduce poverty?
28 January 2009
SUGGESTED
Labour Market
26 January 2009
Economic Theory
29 January 2009
Government and Institutions
Once the current recession is finally over, poverty researchers might well find themselves confronted with a puzzle. For it is entirely possible that the downturn will actually help the government in achieving its goals to reduce child poverty and pensioner poverty. But, unfortunately, this effect is brought about by the ridiculous way in which ‘poverty’ is defined.
The Department for Work and Pensions defines a household as ‘poor’ when its (equivalised) annual income falls below a threshold of 60 per cent of the national median household income. Thus defined, the poverty rate falls if the incomes of the less well-off grow faster than the incomes of average households. Hence, the increases in means-tested benefits over the past decade, especially the ones targeted to lone parents and pensioners.
However, under this definition of poverty, there is another way how the poverty rates of specific subgroups can decrease. If the income of a target group largely consists of state transfers, which are often fixed in real terms, then a drop in median incomes will act to lower poverty.
In previous research, the Joseph Rowntree Foundation found that since ‘pensioner incomes are largely fixed… pensioner poverty tends to fall in times of recession, because pensioners get better off relative to the working-age population, and it tends to rise when the economy is growing strongly.’
It has long been noticed that in ‘extreme’ contexts, relative measures of poverty lose their meaning. In 1983, Amartya Sen wrote that ‘if there is starvation and hunger, then – no matter what the relative picture looks like – there clearly is poverty.’
But if mere cyclical fluctuations can already produce such nonsensical outcomes, then this is a strong hint that we should seriously reconsider the way we define and understand poverty.
This question is far more than just a technical one. We clearly judge different governments and policies by their impact on poverty – and the level and trend in recorded poverty varies enormously across different measures.
It is thus no exaggeration to say that the way we view poverty influences how we view economic and social policies as a whole. Between the late 1980s and the late 1990s, the two OECD-countries where relative poverty rates increased most (on a percentage basis) were the Netherlands and Ireland.
What happened? The Dutch policies of labour market deregulation and wage moderation boosted the employment rate by more than ten percentage points. All income strata benefited, but the well-off relatively more so. Ireland became the Celtic Tiger and recorded unprecedented levels of growth. The rising tides lifted all the boats but, for a while, it lifted the yachts more than the rowing boats.
If we care about whether the poor can afford a washing machine, a holiday or a computer, then we would clearly embrace such policies that boost growth and employment. In contrast, thinking too much in terms of ratios and relations leads us to be suspicious of dynamic changes, because they affect the income distribution in ways which can seldom be controlled or ‘fine-tuned’ by governments.
Ludwig Erhard once said that: ‘the solution lies not in the division, but in the multiplication of GNP’. One wonders what the father of the wirtschaftswunder would have made of a poverty indicator which can actually record improvements in times of a severe crisis merely because people on average earnings have lost their jobs.
First published on the Daily Telegraph’s Ways and Means blog.
The Department for Work and Pensions defines a household as ‘poor’ when its (equivalised) annual income falls below a threshold of 60 per cent of the national median household income. Thus defined, the poverty rate falls if the incomes of the less well-off grow faster than the incomes of average households. Hence, the increases in means-tested benefits over the past decade, especially the ones targeted to lone parents and pensioners.
However, under this definition of poverty, there is another way how the poverty rates of specific subgroups can decrease. If the income of a target group largely consists of state transfers, which are often fixed in real terms, then a drop in median incomes will act to lower poverty.
In previous research, the Joseph Rowntree Foundation found that since ‘pensioner incomes are largely fixed… pensioner poverty tends to fall in times of recession, because pensioners get better off relative to the working-age population, and it tends to rise when the economy is growing strongly.’
It has long been noticed that in ‘extreme’ contexts, relative measures of poverty lose their meaning. In 1983, Amartya Sen wrote that ‘if there is starvation and hunger, then – no matter what the relative picture looks like – there clearly is poverty.’
But if mere cyclical fluctuations can already produce such nonsensical outcomes, then this is a strong hint that we should seriously reconsider the way we define and understand poverty.
This question is far more than just a technical one. We clearly judge different governments and policies by their impact on poverty – and the level and trend in recorded poverty varies enormously across different measures.
It is thus no exaggeration to say that the way we view poverty influences how we view economic and social policies as a whole. Between the late 1980s and the late 1990s, the two OECD-countries where relative poverty rates increased most (on a percentage basis) were the Netherlands and Ireland.
What happened? The Dutch policies of labour market deregulation and wage moderation boosted the employment rate by more than ten percentage points. All income strata benefited, but the well-off relatively more so. Ireland became the Celtic Tiger and recorded unprecedented levels of growth. The rising tides lifted all the boats but, for a while, it lifted the yachts more than the rowing boats.
If we care about whether the poor can afford a washing machine, a holiday or a computer, then we would clearly embrace such policies that boost growth and employment. In contrast, thinking too much in terms of ratios and relations leads us to be suspicious of dynamic changes, because they affect the income distribution in ways which can seldom be controlled or ‘fine-tuned’ by governments.
Ludwig Erhard once said that: ‘the solution lies not in the division, but in the multiplication of GNP’. One wonders what the father of the wirtschaftswunder would have made of a poverty indicator which can actually record improvements in times of a severe crisis merely because people on average earnings have lost their jobs.
First published on the Daily Telegraph’s Ways and Means blog.
10 thoughts on “Will the economic crisis reduce poverty?”
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Isn’t the real problem here that politicians are actually trying to achieve greater equality – hence the stressing of a relative position – and not relieve poverty at all?
Isn’t the real problem here that politicians are actually trying to achieve greater equality – hence the stressing of a relative position – and not relieve poverty at all?
It seems clear that some people will earn more than others, some will save more than others and some will live longer than others. Even in an ultra-egalitarian society, it is hard to see how these kinds of differences can be eliminated. So in terms of income and/or wealth there will be always quite a bit of ‘inequality’.
And of course a lot depends on which political unit one is considering: for example, is it the European Union or individual nation-states? If the latter, what we are talking about is really our old acquaintance National Socialism.
It seems clear that some people will earn more than others, some will save more than others and some will live longer than others. Even in an ultra-egalitarian society, it is hard to see how these kinds of differences can be eliminated. So in terms of income and/or wealth there will be always quite a bit of ‘inequality’.
And of course a lot depends on which political unit one is considering: for example, is it the European Union or individual nation-states? If the latter, what we are talking about is really our old acquaintance National Socialism.
As usual it is a battle for language. If the government had “inequality” targets we could argue about whether they are a good idea. But, instead, they have “poverty” targets which are measured by using indicators of inequality. People are willing to put up with poverty less than they are willing to put up with inequality so the government defines one as the other and gives itself the excuse for non-stop intervention (and it is non-stop because the day there is no inequality there will be rampant poverty so the government will never achieve its inequality objective).
As usual it is a battle for language. If the government had “inequality” targets we could argue about whether they are a good idea. But, instead, they have “poverty” targets which are measured by using indicators of inequality. People are willing to put up with poverty less than they are willing to put up with inequality so the government defines one as the other and gives itself the excuse for non-stop intervention (and it is non-stop because the day there is no inequality there will be rampant poverty so the government will never achieve its inequality objective).
With ‘inequality targets’ we’d also have a much more differentiated debate. An increase in ‘poverty’ is always and everywhere a bad thing. An increase in ‘inequality’, in contrast, can be objectionable or not. It depends on what causes the increase. If it’s caused by a failure of the education system, then we’d judge it as bad, regardless of whether we are libertarians, social democrats or leninists. But if it’s caused by a tendency among the already well-off towards double income households (as in the Dutch case), then hardly anybody would have a problem with that.
One would then also ask how to achieve inequality targets in practice. Force the spouses of low-income earners into work?
With ‘inequality targets’ we’d also have a much more differentiated debate. An increase in ‘poverty’ is always and everywhere a bad thing. An increase in ‘inequality’, in contrast, can be objectionable or not. It depends on what causes the increase. If it’s caused by a failure of the education system, then we’d judge it as bad, regardless of whether we are libertarians, social democrats or leninists. But if it’s caused by a tendency among the already well-off towards double income households (as in the Dutch case), then hardly anybody would have a problem with that.
One would then also ask how to achieve inequality targets in practice. Force the spouses of low-income earners into work?
Hi
” If the income of a target group largely consists of state transfers, which are often fixed in real terms, then a drop in median incomes will act to lower poverty”…it would, wouldn’t it?
LOL….
Yourihttp://globalviewtoday.blogspot.com/
Hi
” If the income of a target group largely consists of state transfers, which are often fixed in real terms, then a drop in median incomes will act to lower poverty”…it would, wouldn’t it?
LOL….
Yourihttp://globalviewtoday.blogspot.com/