Making comparisons in a welfare state

Poverty is a serious problem in the United States.  People are going to bed hungry and naked.  And look at all those students who qualify for free or reduced lunch.

But unless you live in the hills of West Virginia or some rural town in Mississippi you probably don’t see it, because it is relative poverty.  In fact, being poor looks very much like the rest of us.

Author Jamie Whyte explains it in his book, “Crimes Against Logic.”  Here’s the British version according to Whyte:

British Poverty

Soon after coming to power in 1997, the New Labour government drew our attention to a shocking fact: 35 percent of children in the United Kingdom live in poverty. Not absolute poverty, of course; even the poorest are at no serious risk of going without food, housing, schooling, or Medical care. Rather, 35 percent of children live in relative poverty: by the standards of modern Brit­ain, they are relatively poor.

On pages 99-102, I complained that the Labour government played fast and loose with this ambiguity in the word poverty. “We need to fight poverty,” they claimed. Why? Because poverty is dreadful and there is so much of it. But this is merely a play on words. Absolute poverty is dreadful (but rare); relative poverty is common (but not so dreadful).

In this chapter, however, I want to set that issue aside and examine only the claim that 35 percent of British children live in relative poverty. This claim illustrates a common way in which statistics can mislead: by being based on an improper measure of the phenomenon in question.

The government measures the number of people who live in relative poverty as the number living in households with incomes less than 60 percent of the national median income. We must accept that 35 percent of children live in such households. Still, why should we conclude that 35 percent live in relative poverty? Why, in other words, is household income less than 60 percent of the national median a good measure of relative poverty?

The short answer is that it isn’t. In a country like the United Kingdom, disposable income inequality is a hopeless way of measuring relative poverty.

To see this, consider two twelve-year-old boys who live next door to each other. They live in the same quality of house, attend the same school, go to the same doctor when they are sick, wear the same brand of athletic shoes, and so on. Indeed, their material well-being differs in only one respect:

Jimmy’s parents give him £10 a week in pocket money, Timmy gets only £5 pounds from his. Should we conclude that, since his disposable income is only half of Jimmy’s, Timmy is a pauper relative to Jimmy?

Obviously not. Jimmy and Timmy’s consumption is almost identical. Let’s suppose that the housing, clothes, schooling, med­ical care, and so on that they both receive are worth £100 per week, and that both spend all of their pocket money. Then Jimmy consumes £110 per week and Timmy consumes £105 per week. Though Jimmy’s disposable income is double Timmy’s, he is only 5 percent better off.

When a large percentage of consumption is not paid for out of disposable income, differences in disposable income will always exaggerate differences in the ability to consume. And it is the ability to consume that is important with regard to poverty, including relative poverty.

So the government’s measure of relative household poverty is wrong. Like Jimmy and Timmy, British households need not pay for much of what they consume out of their disposable incomes. Most importantly, medical care and education are delivered by the state, funded out of tax revenues. And, so far as the govern­ment’s measure of poverty is concerned, housing is free too, since it uses disposable income after housing costs.

In a paternalistic society like Britain differences in disposable income will overstate differences in consumption capacity and hence in the number suffering relative poverty. This point has nothing to do with redistribution of wealth. If taxes were high but all benefits were paid in cash rather than state services, then disposable income would accurately reflect consumption capacity, and relative income would be a reasonable basis for evaluat­ing relative poverty. The further a society moves from the” all cash” model toward an “all state services” model, the worse is the disposable income measure of poverty. And Britain is very far from the “all cash” model.

That’s quite an explanation.  And if you think about it, the poverty problem can never be solved with our system.  The measurement would never recognize an improvement.

I know a couple pulling down about $3,500 a month because they are both “disabled” and they have an adult son living with them who belongs in a state mental hospital but we don’t do that any longer.

That’s not a bad family income, but it doesn’t count on your 1040.  In fact, they get money back on their return.  Officially, they live in poverty. 

But their $3,500 a month goes much further than the family in the apartment across the hall from them.  You see, this “low income” family (according to their tax return) is getting subsidized rent, and food stamps (LINK card), and a free cell phone, and Medicaid, and at school their student got free lunch/waived fees/ free physicals/free coats-hats-boots-gloves…and out of high school they got free community college tuition and Pell grants.

Meanwhile, the family across the hall is paying the full amount for all these things.  And they try to set aside a little each month to keep a bank account for emergencies.  Because they are working and have some money in the bank, they can never qualify for these social programs.

Aside from being an absurd system it also discourages people from taking care of themselves and planning ahead. 

Two conclusions:

Poverty is overstated.

Self-reliance is overrated.

Meanwhile, to pay for it all we are ruining the “full faith and credit” of the American dollar.