An alternative history: how poverty fell under Thatcherism
13 March 2009
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Past experience is the foundation on which our beliefs about the desirability of different policies and institutions are mainly based … While the events of the past are the source of experience of the human race, their opinions are determined not by the objective facts, but by the records and interpretations to which they have access.
This was Friedrich Hayek’s powerful warning that misinterpreting the past can lead to misguided policies in the present. A prime example is the history of poverty in Britain over the last half century. Its misinterpretation has become standard both in the UK and on the continent.
Looking at the evolution of conventional relative poverty (using a threshold of 60% of contemporary median household income), there is a clear pattern: the poverty rate was stable for decades at around 14%, until, from 1983 on, it suddenly recorded a gigantic leap. In 1990, it reached a record of 24%, not falling by much since then. The conclusion usually drawn is that the market-oriented policies pursued in the 1980s may have improved economic performance, but this was achieved at the expense of the poor.
It must be kept in mind, though, that poverty analyses are extremely sensitive to the poverty measure employed. The Institute for Fiscal Studies has experimented with some alternative measures. They have set a poverty line at 60% of the median household income of the year 1996/97, and applied it from 1961 to 2006, adjusted to each year’s price level. From this, a totally different picture is obtained.
According to the fixed-threshold measure, more than half of the population lived in poverty in the early 1960s. The rate fell rapidly over that decade, while in the 1970s it showed marked volatility. Most strikingly, the explosion of poverty of the 1980s that the conventional figure shows is not mirrored. Poverty now falls from 1982 to 1988, and then stagnates for a while to fall again after 1995.
Why this extreme divergence? Plotting both poverty measures against GDP (at constant prices) gives a straightforward answer: the absolute measure has a strong negative correlation with economic growth; the relative one does not. Clearly, this does not mean that growth alone will solve all poverty-related problems. However, misrepresenting the policy outcomes of an era which set Britain on a path of greater prosperity will do nothing to improve the lot of the poor.
This was Friedrich Hayek’s powerful warning that misinterpreting the past can lead to misguided policies in the present. A prime example is the history of poverty in Britain over the last half century. Its misinterpretation has become standard both in the UK and on the continent.
Looking at the evolution of conventional relative poverty (using a threshold of 60% of contemporary median household income), there is a clear pattern: the poverty rate was stable for decades at around 14%, until, from 1983 on, it suddenly recorded a gigantic leap. In 1990, it reached a record of 24%, not falling by much since then. The conclusion usually drawn is that the market-oriented policies pursued in the 1980s may have improved economic performance, but this was achieved at the expense of the poor.
It must be kept in mind, though, that poverty analyses are extremely sensitive to the poverty measure employed. The Institute for Fiscal Studies has experimented with some alternative measures. They have set a poverty line at 60% of the median household income of the year 1996/97, and applied it from 1961 to 2006, adjusted to each year’s price level. From this, a totally different picture is obtained.
According to the fixed-threshold measure, more than half of the population lived in poverty in the early 1960s. The rate fell rapidly over that decade, while in the 1970s it showed marked volatility. Most strikingly, the explosion of poverty of the 1980s that the conventional figure shows is not mirrored. Poverty now falls from 1982 to 1988, and then stagnates for a while to fall again after 1995.
Why this extreme divergence? Plotting both poverty measures against GDP (at constant prices) gives a straightforward answer: the absolute measure has a strong negative correlation with economic growth; the relative one does not. Clearly, this does not mean that growth alone will solve all poverty-related problems. However, misrepresenting the policy outcomes of an era which set Britain on a path of greater prosperity will do nothing to improve the lot of the poor.
12 thoughts on “An alternative history: how poverty fell under Thatcherism”
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In my economics textbook I based an exercise on the following example.
Two countries start with identical levels and dispersions of income. Incomes of the four quartiles amount to 50%, 25%, 15% and 10% of national income respectively. In Egalitaria, the top quartile is to lose each year 1% (of national income) of its excess over 25%, to be split pro rata between the bottom two quartiles. So in 25 years, all four quartiles will receive exactly 25% of an (assumed)unchanged national income.
In Growthland, % shares of each quartile remain the same, but real national income grows by 2% a year. In 49 years the bottom quartile in Growthland exceeds the top quartile in Egalitaria.
In my economics textbook I based an exercise on the following example.
Two countries start with identical levels and dispersions of income. Incomes of the four quartiles amount to 50%, 25%, 15% and 10% of national income respectively. In Egalitaria, the top quartile is to lose each year 1% (of national income) of its excess over 25%, to be split pro rata between the bottom two quartiles. So in 25 years, all four quartiles will receive exactly 25% of an (assumed)unchanged national income.
In Growthland, % shares of each quartile remain the same, but real national income grows by 2% a year. In 49 years the bottom quartile in Growthland exceeds the top quartile in Egalitaria.
A Townsend-type response would be: “The bottom quartile of Growthland may have more money than the bottom quartile of Egalitaria, but they are nevertheless poorer, because a monetary unit in Growthland buys less social participation. Poor citizens of Egalitaria may wear shabby clothes, but since everyone in Egalitaria wears shabby clothes, they are not met with disdain. A shabbyly dressed citizen of Growthland, in turn, will find access to restaurants and clubs refused, even if his clothes were not even so bad by Egalitaria-standards.”
But all of this assumes that Growthland and Egalitaria are closed societies. What if they are interlinked, and Growthland is the “cultural agenda setter”?
A Townsend-type response would be: “The bottom quartile of Growthland may have more money than the bottom quartile of Egalitaria, but they are nevertheless poorer, because a monetary unit in Growthland buys less social participation. Poor citizens of Egalitaria may wear shabby clothes, but since everyone in Egalitaria wears shabby clothes, they are not met with disdain. A shabbyly dressed citizen of Growthland, in turn, will find access to restaurants and clubs refused, even if his clothes were not even so bad by Egalitaria-standards.”
But all of this assumes that Growthland and Egalitaria are closed societies. What if they are interlinked, and Growthland is the “cultural agenda setter”?
One argument used by some academics (e.g., Layard, Frey)recently is to suggest that people in more equal societies are happier. Of course, this has the benefit of avoiding the economic arguments altogether and relying on the tendentious measurement of subjective values and opinions.
One argument used by some academics (e.g., Layard, Frey)recently is to suggest that people in more equal societies are happier. Of course, this has the benefit of avoiding the economic arguments altogether and relying on the tendentious measurement of subjective values and opinions.
Peter, much of the work by Layard is very much undermined by the IEA monograph by Johns and Ormerod. Also, I am not sure that institutionalising envy is a good policy prescription for anything in the long term. Essentially, the Layard prescription is that I am happier if you are poorer. I don’t really find that a very satisfactory basis for conducting public policy.
Peter, much of the work by Layard is very much undermined by the IEA monograph by Johns and Ormerod. Also, I am not sure that institutionalising envy is a good policy prescription for anything in the long term. Essentially, the Layard prescription is that I am happier if you are poorer. I don’t really find that a very satisfactory basis for conducting public policy.
Peter:
Does Layard really compare happyness across countries? I thought he was ‘merely’ saying that within each society, the better-off are happier than the not-so-well-off.
He clearly concludes from that that more equal societies are happier ones – but I would say his own data does not show that. If you compress the income distribution, you do not change anyone’s position in it, but merely narrow the gap between the positions. From purely anecdotal evidence, I would argue that if the income distribution is a topic of political debate all the time, people get obsessed with it, and in the end do not even tolerate small differences. So you might end up with more equal but less happy society.
Peter:
Does Layard really compare happyness across countries? I thought he was ‘merely’ saying that within each society, the better-off are happier than the not-so-well-off.
He clearly concludes from that that more equal societies are happier ones – but I would say his own data does not show that. If you compress the income distribution, you do not change anyone’s position in it, but merely narrow the gap between the positions. From purely anecdotal evidence, I would argue that if the income distribution is a topic of political debate all the time, people get obsessed with it, and in the end do not even tolerate small differences. So you might end up with more equal but less happy society.
Bruno Frey makes the claim that more equla societies are happier, as does Daniel Cohen. But the sort of societies they use to demonstrate this are all what might be termed as affluent. Hence they do not compare the UK and the USA with North Korea and Zimbabwe, but with France and Sweden.
Bruno Frey makes the claim that more equla societies are happier, as does Daniel Cohen. But the sort of societies they use to demonstrate this are all what might be termed as affluent. Hence they do not compare the UK and the USA with North Korea and Zimbabwe, but with France and Sweden.