Kristian Niemietz writes for Swiss Monthly Magazine: Journal for Politics, Economics and Culture

This article first appeared as “Warum es keine Armutsstatistik braucht” in Schweizer Monatshefte, Issue 979, July/August 2010

In the early 1960s, Chicago economist Milton Friedman travelled to Hong Kong to meet Sir John Cowperthwaite, the colony’s Financial Secretary. The economic development of Hong Kong had aroused Friedman’s curiosity, but, to his surprise, he was unable to get hold of any detailed economic statistics. So he asked Sir John about the peculiar lack of data. Cowperthwaite, a classical liberal economist, explained that he deliberately refrained from having detailed economic data gathered. He argued the bureaucrats of the colonial administration should not even be tempted to intervene in the economy.

Cowperthwaite’s approach may appear a bit eccentric, but it seems it was not to Hong Kong’s detriment. According to estimates, the city’s income per capita has increased tenfold in real terms over the past half century. With that in mind, perhaps it is not the end of the world if Switzerland does not produce official poverty statistics – even though Caritas Schweiz seems to be in great pains about it. The charity’s Sozialalmanach 2010 states: “If the World Bank manages to do it on a global scale since the 1990s, then surely twenty years later, Switzerland must finally manage to do it too! […] Up to the present day, there are no official poverty statistics in Switzerland.”

The editor of the Sozialalmanach, Christin Kehrli argues that conventional international poverty measures should be applied in Switzerland as well. A seemingly reasonable enough request. Of course it would be desirable to have an accurate picture of the extent of poverty, its time trend, geographic concentration and the risk factors associated with it. But the indicators Kehrli mentions produce more confusion than clarity. The author identifies three different approaches to poverty measurement. Firstly, relative poverty: people are poor if their equivalised income falls below 60%, or 50%, of the national median. Secondly‚ subjective poverty: people are poor if they classify themselves as poor. And finally, multiple deprivation: people are poor if they lack essential goods and services from a pre-specified consumption basket.

As it happens, there is a paper from the University of York, which applies these three indicators to British data. The result is surprising. All three indicators yield similar poverty rates – but there is hardly any overlap between the three groups. To oversimplify: those on a low income did not consider themselves poor; those who considered themselves poor were not lacking anything essential and those who lacked essentials did not have low incomes. A major oops-moment, one would have thought…
The most commonly used indicator is the relative one. Setting the poverty line at 60% of median income, 15.2% of the Swiss are poor, according to the OECD. Apparently, this is the indicator which Kehrli favours: “Poverty is an indicator of exclusion and inequality in a society. […] Poverty is therefore a relative phenomenon; it refers to a reference group, usually the people of a particular country.”

In a sense, Kehrli has a point. Poverty means different things in different places. Surely all Swiss citizens would agree that a damp-free, centrally heated home with an indoor bathroom, electricity and hot water are absolutely basic needs. But in, say, the former Soviet republics, not all people will take these things for granted yet. A poverty indicator must reflect such differences in local perceptions; otherwise, it would be doomed to irrelevance.

But does this mean that poverty lines should be pegged to national median incomes? Why should the national level be the correct reference, as opposed to the cantonal or the municipal one? The problem is, if poverty lines were pegged to cantonal median incomes, then poverty would skyrocket in Geneva and Zürich and hit rock bottom in Fribourg and Appenzell-Innerrhoden. Absurd? Maybe, but then so would the OECD figures be. Taking this logic a step further, one could ask why the reference territory should be identical to a political territory at all. It could also be selected by a completely different criterion, such as a common language. A relative measure of poverty defined in this way would treat Germany, Austria, Liechtenstein and the German-speaking cantons of Switzerland as one single territory, and peg the poverty line to the median income of this area. As the Swiss median exceeds the German one by about a quarter, poverty would then increase slightly in Germany and then fall drastically in German-speaking Switzerland.

According to Kehrlis’s own estimate, which is based on the calculations of the Swiss Conference on Income Support (SKOS), about 12% of the Swiss live in poverty. This calculation is problematic. It assumes that income, recorded over a short reference period, accurately reflects a household’s standard of living. A look at international data shows that this need not be the case.

In the poverty statistics of the United Kingdom, there are half a million individuals who report an income of zero or less and another 300,000 people who report incomes below the lowest rate of Income Support. Are these the poorest of the poor? Probably not. It is more likely that these are the self-employed whose businesses have been in the red for a period. Likewise, a period of parental leave or retraining temporarily pushes income below the poverty line, but it does not mean that these people suffer extreme hardship. In addition, it is well-established that the receipt of benefits is generally under-reported in income surveys. So it makes more sense to consider household expenditure instead of income. And that can lead to very different results.

All sorts of spurious interpretations have emerged around the observation that income poverty in the United States has been almost unchanged throughout the boom years of the 1980s and 1990s. Some argued that we had witnessed the emergence of a new kind of global capitalism, in which the poor have been decoupled from economic progress. A study by Bruce Meyer and James Sullivan from the University of Chicago, which focuses on expenditure rather than income, comes to somewhat different conclusions. On their measures, there has been a pronounced decline in poverty in the US since the 1980s, with the falls being particularly steep during the boom years. A rising tide still lifts all boats though – unless we confuse income volatility with poverty.

And yet, the Caritas-authors prefer to parrot trendy anti-growth sentiments, quoting the former Prime Minister of Saxony, Kurt Biedenkopf: “For more than three decades, the industrialised countries have been following a flawed understanding of growth. Growth has become a fetish.”

Unfortunately, it is a small step from misleading poverty figures to misleading policy proposals. This is demonstrated by Carlo Knöpfel’s chapter in the Sozialalmanach, which is a plea for governmental hyperactivism. Under the heading of “investment-oriented social policy” Knöpfel urges the state to enact a host of new social programmes and expand existing ones, all run, if possible, at the federal level. The author’s confidence in government social engineering is staggering.

True, with expenditure on social transfers amounting to about 17% of GDP, the Swiss welfare state is a lot leaner than most of its European counterparts. Also, comparing Gini coefficients before and after state redistribution shows that the Swiss government redistributes less than any other OECD country except South Korea. But is that a problem? It is also true that implicit debt – the unfunded promises of the welfare state – in Switzerland is not nearly as high as in neighbouring countries. Therefore, Switzerland can expect to be spared from Greek-style distributional conflicts in the future, even as the demographic structure becomes less favourable. And there is another interesting point: In Switzerland, inequality before redistribution is much lower than in other OECD countries. If the Swiss government did not engage in any income redistribution at all (ignoring in-kind transfers), the country would still have a more even income distribution than Italy, Portugal and the United States.

Beyond doubt, not every Swiss citizen is wealthy. But the Swiss model of a comparatively limited and decentralised state has a lot to offer – including for the least well-off.