What is poverty?

Poverty is not an issue that we have touched on terribly much on this blog – however it is a fundamentally important issue when it comes to discussing what outcomes we want as a society.

Now the general impression is that poverty is bad, at least that is how I feel when I hear the word. However, a general feeling is not enough to base policy on – we have to define “poverty” and then define what we think is an appropriate way of increasing social welfare with respect to poverty.

There are two different ways of defining poverty in a population of people: Relative and absolute.

Absolute poverty measures tell us that if a person/household cannot afford a certain bundle of goods, they are experiencing poverty. Relative poverty tells us that if a person/household is in a certain income decile, or earns only a certain proportion of the average wage then they are poor.

A good casual defense of the absolute poverty measure is provided by Tim Harford (*) while a strong case for discussing relative poverty is given by Terence at LAANTA (*)

Now both poverty measures are extremely useful, but neither neatly fits into the strict “feeling” of poverty that society as a whole wants to deal with. In order to understand how to use these measures, we have to ask “why does society care about poverty”?

Why do we value poverty

From what I can see, individuals acting in their own self-interest (which includes acting in a way they feel is appropriate!) will value poverty because:

1. There are negative externalities associated with a society where people are poor (such as people who are poor stealing to survive),
2. Society believes that every individual deserves a certain standard of living – beyond a security net from falling out of the labour market,

Beyond this individual concern, as a society we may believe that a transfer from the rich to the poor increases total social happiness – which “may” also imply that we should do it.

Now given these reasons for valuing poverty and different measures of poverty we can move on to discussing how we should view poverty and poverty statistics.

Views of “poverty”

Now the absolute poverty measure appeals to our idea of “no-one left behind” – absolute poverty is the sort of thing we want to wipe-out. The appropriate measure of absolute poverty depends on the second point about – what does society view as the standard of living that people deserve for existing.

Both people on the left and on the right believe that all people deserve to live, however the appropriate minimum standard is not something they can agree – implying that this is a subjective way of viewing things.

Furthermore, over time our conception of what a minimum standard is changes – many people would be disappointed if the poor could not afford electricity for example. As a result, this line has to be set with current sensibilities in mind – it has to set a fair standard.

Relative poverty measures are an adhoc way of dealing with this, which does not rely on the potential for political capture which occurs when setting an absolute poverty line. In some sense, relative poverty lines are objective – but we have to realise that they do not define poverty in the way that we are concerned about it.

If incomes doubled by the distribution of incomes were unchanged, relative poverty would be unchanged. If our perceived “minimum” standard of living was also unchanged, if we did not believe that income transfers would increase welfare, and if the negative externalities associated with poverty fell as absolute poverty fell then this result would seem ridiculous!

When we care about relative poverty we are fundamentally saying that we care about the distribution of income, and that what we believe is the the appropriate “minimum” depends on what the average person can afford. However, in this sense there will be an optimal level of relative poverty which is above zero – we don’t want a society of complete equality when people are inherently different, as that is unfair, as a result, relative poverty measures will always appear to say that we have poverty.

Conclusion

As a result, absolute poverty measures tell us about the type of poverty we get scared of when we listen to the news. Relative poverty measures give us another way of viewing poverty and income distribution, which helps guide us in practical terms – as absolute poverty is subjective and hard to define.

Ultimately, I find it impossible to pick a measure, as I don’t know what society values more. If society values the idea of a certain minimum standard for living in the country then absolute poverty measures are the best. If society values the distribution of income specifically, then relative poverty measures are very good.

Without clear guidance on what society cares about when it discusses poverty it is impossible to state what to look at – and as a result, most of the media’s discussion on “poverty in New Zealand” is likely to be sensationalist instead of informative.