About the Author

Avatar photo

Kristian Niemietz

Poor people in rich countries – a new approach to measurement and policy*

Print Friendly and PDF
Posted on

The protest placard he held up during Baroness Thatcher’s funeral procession made Dave Winslow a minor celebrity for a day. It showed a gravestone with the inscription ‘Rest of us in poverty’. Several newspapers leapt at it for their coverage of the funeral.

And why not? Unlike many of the other anti-Thatcher slogans that could be seen during the last few days, Winslow’s was both orthographically correct, and it could even claim a bit of a factual base. Presumably, he alluded to the evolution of relative poverty rates during Margaret Thatcher’s premiership, about which a lot has been written recently. The Guardian, a left-wing newspaper, reports that “the number of children in poverty almost doubled under Thatcher, from 1.7 million in 1979 to 3.3 million in 1990. Pensioner poverty in the same period increased too, from 3.1 million to 4.1 million.”

For fans of government largesse, the temptation of relative poverty rates must be irresistible. These rates reliably rise during periods of market-oriented reforms, and fall during periods of government expansions. They are generally high in Anglo-Saxon countries, which tend to tolerate a certain level of inequality, and low in Germanic countries, which have stronger egalitarian traditions.

Much of academic poverty research is therefore quite predictable. A typical poverty research paper starts by constructing a model which expresses the poverty rate as a function of a number of economic and social policy variables. After a lot of formula-shuffling, the paper then ‘finds’: More government spending, less poverty; less government spending, more poverty.

But while it is easy to dismiss relative measures as mere measures of inequality, most people on the free-market side of the debate have made the mistake of not proposing a credible alternative. They have abandoned the poverty field to their opponents, and then wondered why poverty research became monopolised by interventionists.

Relative poverty measures are deeply flawed, but that does make absolute measures any better. Poverty is not absolute. Perceptions of what is a ‘necessity’ and what is merely a convenience change over time. Our great-grandparents would not have considered a washing machine, a central heating or an indoor bathroom to be necessities. To us, they are necessities, and this is simply because we live in societies where virtually every household has these items.

Moreover, some goods can acquire necessity-characteristics simply by virtue of being widespread. Ten years ago, internet access was merely a more convenient way to do things that could also be done in other ways. Yet as internet access expanded, many of these alternatives disappeared: Think of job adverts, or flat adverts, that have moved from newspapers to online platforms.

Such changes can transform former convenience goods into necessities, and people who cannot afford them are in a sense, poor – not in the sense of ‘destitute’, but in the sense of not being able to fully participate in society. There is a case for a poverty line that rises gradually over time.

But that poverty line does not have to be relative. Most of the outcomes that relative measures produce are nonsensical. For example, if Wellington and Auckland were to declare independence from New Zealand, their poverty rates would skyrocket, as their poverty lines would now be pegged to their regional median incomes. Meanwhile, poverty would drop in the remainder of the country: With the more prosperous regions gone, the nation’s median income would fall, and the relative poverty line would fall with it.

Relative poverty rates are also often countercyclical, rising during times of economic expansion and falling during times of recession. The former happened during the latter part of the Thatcher period. Median income rose by 26%, and by definition, so did the poverty line. It overtook the incomes of many households who also experienced gains, but at a slower pace, thus giving rise to the poverty figures The Guardian quotes. At the moment, the opposite is happening. By lowering the poverty line, the recession has thus far ‘lifted’ 1.2 million people out of poverty.

We should approach poverty measurement from an altogether different angle. Surveys in the UK show that people may wildly disagree on what constitutes poverty when asked in abstract terms, but when asked more specifically which goods constitute ‘necessities’ in our day and age, there is a surprisingly robust consensus. So why not build a poverty indicator around that consensus? One could assemble a consumption basket containing all the goods and services that the majority consider necessities, gather the market prices of these items, add them up, and use the total cost of the basket as a poverty line.

This would not just provide a more realistic account of how much poverty there is in developed countries. It would also encourage more sensible policy responses. The policy focus would be less on income redistribution, and more on creating the conditions for competitive product markets. A market structure which makes the basics of life (generously defined) easily affordable, right across the income distribution, can be seen as a safety net of sorts.  And it is a safety net which does not trap people in dependency and inactivity.

Do these considerations have any implications for New Zealand? Probably yes, even though the specifics are hard to diagnose from the other side of the globe. But presumably, as in the case of the UK, a poverty measure based on market prices would place particular emphasis on the housing market. In this sector, New Zealand has experienced a similar cost explosion as the UK. In Auckland and Christchurch, average house prices are now nearly seven times the average annual household income. International evidence shows that such price escalations are usually the result of excessively tight land use regulations which choke residential development. This is a typical example of market distortions which raise the cost of living for the least well-off. A cost-effective anti-poverty strategy should, foremost, consist of identifying these distortions, and removing them.

In this sense, poverty alleviation is the natural territory of free-market liberals. They should reclaim it.

*For more information see Kristian’s full report A New Understanding of Poverty HERE and a complimentary report Redefining the Poverty Debate – Why a War on Markets is No Substitute for a War on Poverty HERE