causes of poverty, economics, poverty

The Causes of Poverty (79): Poverty Traps

BrickWallLounge_Blog

(source)

Many among us will experience short spans of poverty at some stages in our lives. I lose my job or my unemployment benefits, I have a catastrophic but transitory health problem, an extreme weather event destroys my crop, or an economic crisis forces me to declare bankruptcy. As a result, I have to live off my savings or my parents and friends will have to lend me money. Still, in time I find another job; my health improves as I benefit from cheap healthcare (perhaps provided or subsidized by the government); the weather returns to normal and I can resume my profitable farming activity; or I can start a new business under the protection of bankruptcy laws that don’t burden me with debt.

However, I may also be what’s called a “structurally” poor person, meaning that I’m poor for most if not the whole of my life. Perhaps I was even born into poverty. The reason may be that I find myself in a “poverty trap”, a self-reinforcing mechanism which causes poverty to persist. In other words, I’m poor because I’m poor. And because I’m poor I’ll always be poor. I’ll die without ever having had an “adequate” standard of living, all the while passing on my poverty to my descendants.

Here are some examples of poverty traps:

  • I have a job, but the wage is low. As with many low wage jobs, I have almost no control over my work schedule. That means I can’t take on a second job and I can’t send my kids to child care. I have to spend time, money, effort and other people’s good will to take care of my kids. My job is physically hard and so I tend to have some health problems. My life is relatively expensive and it’s hard to find a better job. My salary doesn’t really cover my spending needs, hence I’m poor.
  • I can’t afford to pay the security deposit for a rental apartment, so I’m stuck in an expensive motel or I have to live with my parents who can barely afford their own survival. I also don’t have a refrigerator or a microwave, so I have to buy more expensive food. I have to wash my clothes by hand because… you guessed it. This takes a lot of time, time that I can’t spend on wage labor.
  • I don’t have tap water or heating because those aren’t things that people have where I’m from. I use wood for fuel like everyone else. The result is deforestation, soil degradation, lower crop yields and yet more poverty. My children have to help me – which is why I have a lot of them – to the detriment of their education. My kids will probably inherit my poverty because of this.
  • A lot of the things I’m forced to do because I’m poor are illegal. The lights of my car broke down, and I got a fine. I should have made the financial sacrifice and get them replaced, but I gambled on not being caught. I couldn’t pay the fine and my car was repossessed. Now I have to take public transport but can’t pay for that either. So I often get a fine for that as well. I know some homeless people who get a fine just for being homeless.
  • My calorie intake is too low to give me the strength to work. The quality of work I’m able to offer is inadequate for obtaining the food I require, and the food I do get isn’t enough to allow me to deliver quality work. My productivity is low, my earnings are low, and ultimately I can’t even keep a job or work the farm. My low calorie intake levels lead to health problems. My inadequate housing makes those problems even worse. My ill health, caused by my poverty, makes my poverty worse. I’m more likely to catch a disease, and also less likely to recover from it.
  • Like many poor people I have a low credit rating, making it difficult to get credit. The credit I do get is very expensive, which sort of defeats the point. Now, I do need the credit because I don’t have any savings. People say that I exhibit a high discount rate, that I’m too present-oriented and that I’m unable to delay gratification. Instead of borrowing money at high interest rates as a means to satisfy my unrealistic consumption desires, I should moderate myself and save for the future. But I’m present-oriented because I live in an environment in which I can’t trust people. Better to consume what I have than to save it and lose it later.
  • People also say that my issues with gratification extend to my sex life. I was indeed a teenage mother, and my education suffered as a result. This in turn affected my job prospects and my income. But this wasn’t just stupidity on my part. Being a mother gave meaning to my life. Other meaningful options just didn’t seem realistic.

So, there you have it. I think a lot of these stories are very real, and the problems that poor people face are often self-reinforcing. Of course, I don’t want to deny human agency. There are people who, even in the face of the worst possible circumstances, can fight their way out of poverty traps. So “trap” may be too strong a word. Individual responsibility still plays a role. Yet, let’s not forget that a poverty trap is sometimes intergenerational, as I’ve said before. Some children are born into a trap, and you can’t insist on responsibility and agency when we’re talking about children. A child growing up in a poor family may suffer in its early development. Undernourishment for instance can have a lasting impact on learning ability and earnings as an adult. Children of the poor are perhaps even more affected than the parents because the latter need a minimum calorie intake to work. They have to eat first. If they choose not to eat first, they will only make the poverty of the household worse.

Just to be clear: I’m not talking about an entire economy or country being stuck in a poverty trap. If you were expecting a post about that, I’m sorry I’ve wasted your time. I’m not wading into the treacherous debate about the necessity of large foreign aid injections to break the cycle of poor nations that can’t save enough to finance investment necessary to growth.

This post seems to be going on forever, so I’ll limit myself to a description of the problem. The solution – how to get out of poverty traps – is a topic for another day.

More on poverty traps here and here. More posts in this series are here.

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economics, measuring poverty, poverty, statistics

Measuring Poverty (16): The Capabilities Approach and the Unstraightening of the Poverty Line

Fun_is_not_a_straight_line_by_jinchilla

(source)

We usually define poverty as a level of income or financial assets below a certain “poverty line”. This poverty line is set, often implicitly, at a level that is supposed to make the difference between decent survival and a life unworthy of human beings. The line is typically a single line, identical across all individuals – or even across nations. The best example is the $1 a day line. This is a single, universal line, adjusted only for purchasing power parity. Many national poverty lines are also fixed and identical for all citizens.

The problems with these fixed and uniform lines have been noticed by many, notably by Amartya Sen. According to Sen – and he’s right I think – being poor means being unable to achieve certain minimally satisfactory states of being and doing, for example the state of being sufficiently nourished, of being mobile, of being free of disease and ignorance, of being sheltered against the forces of nature etc. Poverty is about what people are or are not able to do and about who they are able to be. Poverty is capability-deprivation.

A poverty line only makes sense if it’s set at an amount of money, income or resources that is sufficient to guarantee the required capabilities. A first problem: it’s not at all clear that existing poverty lines are indeed set at a level sufficient to guarantee this. $1 a day in particular seems low, intuitively. Of course there are pragmatic reasons to set the line at a low level (one has to make priorities in life and help the worst off first). But then you’ll have a hard time calling it a poverty line, given the definition of poverty as the inability to achieve certain minimally satisfactory states of being and doing. Call it a survival line instead.

A second, and more serious problem arises from the fact that poverty lines are fixed and uniform. People, however, are obviously not uniform. Different people require different things in order to achieve the same capabilities. A pregnant women or a young mother needs more nutritional resources than the average person in order to achieve the state of being sufficiently nourished. A physically handicapped person needs more resources to achieve the capability of being mobile. If you focus on the average person – which is what you do with a uniform poverty line – then you’ll fail to identify some as being poor, while erroneously identifying others as being poor. And the environment also plays a role. A person living in unsanitary conditions may be forced to drink infected water. This affects his or her calorie absorption, implying a larger than average amount of food necessary to be sufficiently nourished. Cold weather means more effort to protect against the environment. And so on.

Identical capabilities require different levels of resources or income. A single, fixed poverty line obscures this reality. The only good poverty line is individually specific. However, that’s completely impractical. Differentiation across demographic groups, regions, occupations, lifecycle etc. might be more feasible, but at the cost of simplicity. Be that as it may. I would already be happy with increased awareness that there is indeed a problem. Talk of a “line” reduces this awareness, but I’m realistic enough to understand the appeal of something as simple as a line.

More posts in this series are here.

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causes of poverty, economics, poverty

The Causes of Poverty (78): High Discount Rates and Lack of Delayed Gratification

grasshopper & ants

(source)

You talk to conservatives about the reasons why poor people are poor, and chances are that the discussion turns to lack of self-control, high discount rates and inability to delay gratification. “High discount rates” means that things in the present or near future are viewed as having a higher payoff than things in the distant future. If you have a high discount rate, you focus on immediate gratification. This in turn shows up in low savings rates, high debt, obesity, teen pregnancy, drug use, high drop out rates, low school attendance and other vices supposedly common among the poor.

Some even argue that differences between people in the apparent levels of self-control, discount rates or time preferences – which is all the same thing – appear at a very early age and are therefore probably innate. The famous marshmallow test will then get a favorable citation: you give kids a marshmallow and tell them they can either eat it now or, if they wait a few minutes, have two marshmallows. Kids who wait do better later in life.

However, recent studies have suggested that the marshmallow test does not, in fact, reveal innate (in)ability. The environment in which tests such as these take place determines to a large extent the levels of self-control revealed through them. Whether or not people are capable of delayed gratification depends not on their abilities but on their assessment of the reliability of the world around them. When the world is not worthy of trust, the best course of action is often to live for today.

This attitude towards the world and the future is probably internalized from a young age onward, which makes it hard to change. What it takes is to offer young children a reliable environment allowing them to develop levels of trust which will in turn yield low discount rates and the ability to delay gratification later in life. But in order to do that we’ll need to reduce parental poverty. Claims about lack of self-control as a cause of poverty then have things completely backward. Rather than a cause we’re dealing with an effect of poverty.

More posts in this series are here.

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causes of poverty, economics, poverty

The Causes of Poverty (77): The Lottery of Birth and the Country You Live In

mcdonalds-vegetarian-india-2

McDonalds in India

(source)

Charles Kenny explains to what extent the country you live in affects your livelihood:

[P]overty in Africa and Asia isn’t the result of something about individual Kenyans and Pakistanis, it is instead something about Kenya and Pakistan. Individuals the world over have the same drives and capacities, but the societies and places in which they live present radically different opportunities to turn that drive into wealth, health, and well-being.

That’s clear from evidence compiled by Princeton economist Orley Ashenfelter for the National Bureau of Economic Research. He looks at the wages earned by staff working at McDonald’s franchises around the world and compares what they earn to the cost of a Big Mac in that same franchise. The Big Mac is a standard product, and the way it is made worldwide is highly standardized. The skill level involved in making it (such as it is) is the same everywhere. And yet McDonald’s employees worldwide earn dramatically different amounts in terms of Big Macs per hour.

In the United States, a McDonald’s employee earns an average of $7.22 an hour, and a Big Mac costs an average of $3.04. So the employee earns 2.4 Big Macs per hour. In India, an employee earns $.46 an hour. The average Indian Big Mac (made of chicken, which is cheaper than beef) costs only $1.29. Still, the employee earns only one-third of a Big Mac for each hour worked. Same job, same skills—and yet Indian workers at McDonald’s earn one-seventh the real hourly wage of a US employee. There’s a huge “place premium” to working in the United States rather than India.

The place premium affects more than just low-end service jobs. Economist Michael Clemens, a colleague of mine at the Center for Global Development, studied a group of Indians working in an India-based international software firm who applied for a temporary work visa to the United States to do the same work in the same firm, just on the other side of the Pacific Ocean. Some of them then won the lottery by which visas were issued, while others lost. The winning workers, who were still in the same firm and still doing the same type of job on the same projects, suddenly saw dramatic differences in their pay.

The ones who moved to the United States started earning double what their colleagues back in India were earning (adjusted for purchasing power). They were earning more not because they were different from the colleagues they left behind—selection was not based on education, talent, or drive but was entirely random. And once they returned to India, they went back to earning pretty much the same as their colleagues who had never left. They briefly earned more in the United States simply because they were in the United States rather than India. (source)

Some more numbers:

place premium

(source; how much more workers in the U.S. make compared to identical workers in developing countries, e.g. Nigerians and Yemenis stand to gain upwards of 10 times as much from moving to the U.S.)

The place premium is a strong argument in favor of reducing migration restrictions: it doesn’t seem just that people’s income is determined by the good or bad luck of having been born somewhere, and the use of force to keep people in their country of birth only aggravates the injustice. However, by the same logic we can also argue for a more generous welfare state: it’s not just your country of birth that affects your income. Your parents, social class, genetic endowment, health prospects, looks etc. are also a lottery that affects your income and good fortune.

More posts in this series are here.

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causes of poverty, economics, poverty

The Causes of Poverty (76): Farmer vs. Hunter Thinking

caveman-hunting-illo-md

(source, illustration by Grant Coghill)

Tim Harford mentions an interesting study about the origins of different ideas about justice. Farmer cultures seem to stress desert, whereas hunter cultures believe that solidarity is the more important focus of justice. Hunters tend to share because their “incomes” are volatile: some days they catch too much, other days not enough. Luck also determines farmer incomes, but to a lesser extent. Bad weather means bad luck, but it’s also bad luck for neighboring farms. A sharing culture won’t solve that kind of bad luck in the same way as it will in the case of bad luck while hunting. Another reason why a sharing culture will be less important in farmer cultures is the fact that farm crops can be stored more easily than meat in primitive societies.

A farmer mentality will therefore stress self-sufficiency over sharing, and perhaps this will fuel desert-based theories of justice even centuries after farming or hunting has ceased to be an important social role. That may have an impact on the way a society deals with poverty. If you adopt a desert-based theory of justice then you’re normally less inclined to enact policies that reduce poverty since you believe that poverty is deserved. If people deserve their poverty then they can’t claim assistance, and if assistance were to be given anyway that would be an injustice to those whose stock of means is used as a source of assistance, because they too deserve what they have.

It’s tempting to use this farmer-hunter difference to describe the different approaches to poverty in Europe and the US. There’s more opposition to the welfare state in the US, and desert-based theories of justice are more popular there. Hard work and self-sufficiency are common topics of political talk in the US, whereas words such as solidarity and equality are more often used in Europe. Here are some data from the World Values Survey which tend to confirm these national stereotypes:

equality and incentives hard work success

And of course the US was founded as an agrarian society (Thomas Jefferson for instance was a staunch agrarian), with the South of the country remaining agrarian deep into the 19th century.

However, careful with national stereotypes. It’s not as if the whole of the US is hardhearted. It’s a matter of degree:

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Steven Pinker has come up with a similar story, although he contrasts farmer and herder cultures.

More posts in this series are here.

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annals of heartlessness, housing, poverty

Annals of Heartlessness (54): Homeless Man Outside a Diner in Milwaukee

Homeless man sleeps outside a diner in Milwaukee

Homeless man sleeps outside a diner in Milwaukee

(source)

This is a tough one. The image nicely represents the invisibility that comes with homelessness and the casual neglect and indifference often shown by the non-homeless (“smile at the camera!”), but it’s also difficult to call this a case of heartlessness without accusing everyone of heartlessness. Who among us hasn’t been indifferent in this way?

More in the annals of heartlessness.

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causes of poverty, economics, poverty

The Causes of Poverty (75): Different Types of Colonization

colonists

Some time ago, Acemoglu, Johnson and Robinson argued that areas of the globe where early colonists did not face a high mortality risk – such as North America and Australia - are now much richer countries. Many ex-colonies in Africa and the Caribbean, on the other hand, where colonists did face high mortality rates because of tropical diseases such as malaria, are now poorer.

Why is that? AJR claim that the reason is institutional. In those poor countries, the only institutions that were created in early colonial times were extractive. If only a small elite of colonists could survive the local diseases, colonizing nations had little incentive to create durable and non-extractive institutions or provide public services like health and education to the masses of the local populations. More livable colonies could be occupied en masse by the natives of the colonizing nations. These natives required institutions and had the knowhow to create them. The societies that developed there were therefore better organized and far more equal (if you leave out the indigenous populations who were often exterminated). The early institutional built-up, the argument goes, has survived until today, and it’s commonly accepted that good institutions play a key role in development.

Make of it what you will. Perhaps it obscures more than it reveals. In the wrong hands, this argument can be used to exonerate present-day autocratic rulers. After all, it takes time to build institutions, especially in countries burdened by a long tradition of (the wrong kind of) colonialism. Path dependence can be a lousy excuse.

More posts in this series are here.

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causes of poverty, economics, poverty

The Causes of Poverty (74): Family Structure, Ctd.

single mother

The more traditionally minded among us often blame family structure for high poverty rates. Family structure is of course a euphemism hiding several very specific moral judgments about people’s behavior, about single motherhood, divorce, paternal negligence and incarceration. Those are the things that supposedly make people poor. “Family structure” just sounds nicer and more neutral.

At first sight, this does make some sense. It is a lot harder, financially and otherwise, to raise kids on your own, and if you find yourself in this situation it’s often your own fault or the other parent’s fault. Having a kid or not is a choice given the availability of contraception and abortion. Divorce is a choice. Finding yourself in prison as a parent is a choice. And even if you’re not a parent, marriage or cohabitation is just plainly cheaper than living on your own because you can share costs. You’ll have to buy just as much food as a single person, but the cost of rent, heating, internet access, the use of a car etc. can be split. A lot of consumption goods are non-rival, and marriage and cohabitation are wonderful places for non-rival goods (the park as well, but you can be lonely there).

Given the high rate of children living with single parents it’s not a priori crazy to assume that there’s a link with poverty rates. It does seem to be the case that poverty rates among single parents are higher than average:

brady-lis-single-mother-poverty1

(source)

However, we have to be careful when assuming causation. While it can be the case that your income is lower than it would have been had you (remained) married or chosen not to be a single parent, it might just as well be true that your preexisting poverty causes you to be single.

Suppose you are a single person making $9,000 a year and therefore live in poverty. Now suppose you meet someone else making $9,000 and you are considering marrying them. If you marry, the family income goes to $18,000 and is therefore above the poverty line. On a very superficial take, this seems like it would be a real improvement. But that is only if you assume your potential spouse will necessarily remain employed. If they lose their job, you will go from supporting one person with $9,000/yr to supporting two people with $9,000/yr. On the low-end of the labor market, precarity is very common and so this is a very real risk. (source)

There’s also some literature about how teenage pregnancy results from poverty: poor teenagers often see parenthood as one of the few meaningful options that are available (work, education etc. may not be realistic options).

Another point: traditionalists who make the argument that we should promote marriage in order to reduce poverty can perhaps be somewhat dishonest about their motivations. It may be that what they really want is more marriage for its own sake and just dress it up as an anti-poverty measure because arguing outright for more marriage for its own sake is just not that convincing anymore. It’s telling that cohabitation doesn’t figure as an equivalent alternative in their arguments, even though in theory marriage and cohabitation have the same effect on poverty.

And there may be another hidden motivation. Traditionalist proponents of marriage are often situated at the right of the political spectrum, and being right-wing often also implies being opposed to the welfare state. Arguing that poverty should be solved by way of increased marriage rates is perhaps just a roundabout way of downsizing the welfare state: why should we have a welfare state if marriage can solve poverty? Some make this argument explicitly, saying that welfare destroys marriage because it allows people to survive without getting married (I can’t find a citation just now).

What I dislike about the focus on family structure is not really these possible motivations, but rather the inherent simplifications and victim blaming. There are a lot of causes of poverty, and behavior is probably not the most important one. Many single parents are doing a fine job, both financially and otherwise. Low marriage rates are common in many countries, including those where poverty rates are low (see the graph above). And those single parents who struggle probably do so for other reasons than family structure. It’s also true that many working married parents are poor, whereas most celebrity divorcees don’t have a trouble in the world.

A final remark: even if higher marriage rates would be an effective anti-poverty measure, how on earth do we get more people to marry? Tax cuts? A government sponsored dating service? Flower shop vouchers? It all seems so impractical, especially given the ease of other anti-poverty measures (for example…). And not just impractical but also paternalistic and lacking in respect for people’s choices.

More here, here and here.

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economics, equality, income inequality, poverty

Income Inequality (29): The “Get Off the Couch” Solution

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When leftists complain about high levels of income inequality, their opponents on the right sometimes argue that inequality is the natural outcome of personal desert. If you’re wealthy, you should be praised for your work, and if you find yourself on the wrong side of inequality you should invest more effort and try harder to be socially mobile. If you think inequality is a problem, then in fact you blame the industrious for being industrious and you exculpate the rest. Societies like the US offer lots of opportunities to escape the social class of your parents, and many do in fact escape. So if you don’t, look at yourself first.

This view is actually quite common on the right. According to a Pew survey, 38 percent of Americans are judgmental, declaring that poverty stems from a lack of individual effort, while 46 percent does not fault the poor, agreeing that their plight is the outcome of unfavorable circumstances. A large majority of Republicans – 57 to 27 – says that people are poor because of a lack of effort.

The right-wing view has a certain prima facie appeal. We all believe that effort should be rewarded. And when social mobility is easy and people aren’t artificially held back and tied to the class of their parents, then perhaps inequality is indeed the result of unequal effort and lifestyle choices. In other words, inequality is what people deserve. If there are few or no obstacles to mobility and people have some level of equal opportunity, then they basically choose their position in society: they choose to invest effort and develop their skills, or they don’t.

However, upon closer inspection the narrative is unpersuasive. It’s not always true that individuals can simply decide to develop their skills and invest effort in their social mobility. Skills aren’t just “developed”; some people are born with more talent than other people, or with talents that yield more financial profit than other talents. True, talent requires development and effort, but even effort may be a naturally acquired capacity or a capacity that requires favorable conditions in early childhood. I think we all agree that a stable and reasonably affluent family life as well as a good education are indispensable, on average, for the development of talent and of a personal ethic that favors effort and discipline. Many people at the wrong end of inequality can offer some of this to their children, but to a much lesser degree than wealthier parents. Here are some data on so-called enrichment expenditures:

enrichment expenditures on children

(SOURCE)

And it’s not just expenses. The children of wealthy parents have other advantages compared to poor children, advantages they wouldn’t have in a less unequal society, for instance networks, internship opportunities etc. Because of extra expenses in education and other less material advantages, these children are more likely to end up in a high income group as adults. As a result, inequality counteracts social mobility. And we see that in the numbers: the more unequal a society, the less social mobility. That’s the message of Miles Corak’s famous Great Gatsby Curve:

correlation between income inequality and social mobility

(SOURCE, THE “INTERGENERATIONAL EARNINGS ELASTICITY” IS A MEASURE OF CORRELATION BETWEEN THE INCOME OF GROWN CHILDREN AND THEIR PARENTS—HIGHER VALUES SUGGEST LESS MOBILITY)

Here’s another version showing other countries:

income inequality and social mobility

(SOURCE)

If you argue that income inequality is not really a problem when there is a high level of social mobility and when people have good opportunities to become socially mobile – in other words when they have good opportunities to climb the social ladder and escape the social class or income group into which they were born – then you’re really taking things backwards. Social mobility can’t be a solution to inequality because inequality makes mobility very difficult. High levels of social mobility assume that we create more equality of opportunity. However, this is a dead end. As I’ve argued here, equality of opportunity is a highly problematic and unrealistic concept.

More posts on income inequality are here.

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