Measuring Poverty (15): A Common Misconception About Relative Poverty

Yesterday, I had a short email exchange with Tim Harford, in which I reacted to one of his claims in this article, more specifically the claim that the use of a relative notion of poverty in poverty measurement implies that poverty will always be with us:

Eurostat, the European Union’s statistics agency, … defines the poverty line as 60 per cent of each nation’s median income. (The median income is the income of the person in the middle of the income distribution.)

This has an unfortunate consequence: poverty is permanent. If everyone in Europe woke up tomorrow to find themselves twice as rich, European poverty rates would not budge. That is indefensible. Such “poverty” lines measure inequality, not poverty.

This argument against relative poverty is as common as it is mistaken. Here’s my email to Tim:

I read your article on poverty measurement a moment ago, and I wanted to object. You say that using a relative poverty measurement of income below 60% of median income makes poverty “permanent”. It does not. True, someone with an income of 61% of the median does not suddenly become poor because the median person receives a pay rise. But it’s also true that it’s perfectly doable – mathematically if not in reality – to raise every single poor person’s income above 60% of the median without changing the median. Poverty is only permanent when one would use 60% of the average as threshold, but no one proposes such a foolish thing, fortunately.

In fairness to Tim, his article does list some advantages of relative poverty and he qualified his views in our email correspondence.

More posts in this series are here.

The Compatibility of Freedom and Equality (13): More Income Equality Makes Us More Free

(source)

Another reason not to worry too much about the supposed incompatibility of equality and freedom is the fact that an equal level of monetary resources promotes freedom. Money in the form of a relatively decent income allows us to choose from and engage in a wide variety of activities. It makes it possible for us to buy the commodities and services we want to buy, and consequently do with them what we want to do. (Of course, within the legal limits that determine what can be commercially traded and how traded goods can be used; e.g. we can’t buy people, and we can’t use the guns we buy to kill people). As a result, we have a wider choice of life plans and more means to pursue our chosen plan.

This is freedom in one sense of the word: more choice. Freedom in another sense, namely the ability to do what we want without interference, looks absolutely anemic compared to this. After all, what good is the absence of interferes when the world we live in offers us only very few options or none of the monetary resources to choose and pursue options. This freedom from interference is hardly valuable, if it is freedom at all.

So, if we agree that monetary means promote freedom in a certain sense of the word because these means broaden our sets of choices, then I guess we’ll also agree that a more equal distribution of money, wealth and income promotes freedom: it gives people who receive more money in the new, more egalitarian distribution more freedom, without necessarily diminishing the freedom of those whose resources are diminished in the new distribution. The monetary freedom of the rich isn’t necessarily reduced after income redistribution and after reductions of income inequality, because of diminishing marginal utility. The ability to buy a fifth yacht doesn’t increase anyone’s freedom in any sense of the word. And taking away this ability doesn’t reduce anyone’s freedom. On the contrary, if the monetary means that could have been used for this fifth yacht are instead given to a number of other people who don’t have a lot of money, then these means will benefit the freedom of those other people, and aggregate freedom will have increased.

(source unknown)

So that’s a good reason to reduce income inequality. However, it’s probably not a good reason to eliminate income inequality completely, for four reasons. First, even if, ideally, people have a right to the same extent of monetary freedom as it is defined here, that doesn’t mean they should have the same amount of money. In order to be able to do the same things and have the same choices, different people need different amounts of money. The handicapped, for instance, may need more than average.

The second problem with equal money is that it would mean deep and frequent violations of property rights, and property rights are important, perhaps just as important as freedom (and no, property rights and freedom are not the same thing: the former are a means to interfere with the freedom of others, namely the freedom of others to use goods that belong to you).

A third problem created by equal income is related to incentives. And finally, equal income doesn’t combine well with considerations of desert (one definition of desert is that people deserve different levels of monetary wealth for their contributions to society, culture etc.).

We could react to these different considerations by framing the issue as one of value pluralism: income equality and freedom are important values, and so are desert and property. The difficulty would then be to balance these different values which, it turns out, are sometimes contradictory. That would mean limiting the equalization of income at some point before total income equality, at a level that is compatible with respect for property rights (also limited), with due consideration of incentive problems (also limited), and with recognition of the moral value of desert (also limited).

There’s possibly some Gini value that would hit this balance. This Gini value of x gives a level of income inequality at which monetary freedom is maximized for a maximum number of people. A value lower than x (the lower the Gini value, the more equal the income distribution) resulting from higher levels of income redistribution would not increase the monetary freedom of the poor because the amount of money taken from the rich has become so high that it doesn’t just eat away at marginal utility but also produces disincentives high enough to reduce the size of total social wealth.

We could try this kind of delicate balancing between redistribution on the one hand and incentives produced by rewards for deserving actions on the other hand. (Alternatively, we could also drop income equality as a value and instead focus on a so-called sufficientarian approach in which we would try to give people enough monetary means to achieve a certain level of freedom – freedom as it is understood here – regardless of the means and freedom of the people at the top of the income or wealth distribution. However, I’ll leave that option aside for the moment).

Let’s have a look at this:

We start of with the dark red and dark blue lines, indicating a certain distribution of income and freedom respectively (gray “1st”). You have some people with less income (left side), and therefore also less freedom (in the sense of freedom as a large set of choices and the monetary means to pursue them). Then we redistribute some income from the people on the right (those with more income and more freedom) to the people on the left (black “1st”). As a result, the freedom curve moves (black “2nd”). But the people on the right, although they lose income, don’t lose freedom (due to diminishing marginal utility of income). Redistributed income (pink line) doesn’t match the equality line, since we want to reserve some space for incentives and desert (the area above the equality line and beneath the pink line). As a result, the freedom line also doesn’t match the equality line.

However, there are some problems: we’re dealing here with a somewhat strange notion of freedom. Freedom is obviously much more than the use of monetary means to choose and pursue goals. Also, we don’t want to promote consumerism. The problem with consumerism is that the truly important parts of life can’t be bought, and that focusing on consumption tends to sideline those important parts. It also has ecological disadvantages.

And another problem I already mentioned: some people will be worse off if money is equalized because they need comparatively more money just to have the same capabilities. Hence, rather than equalizing money we should perhaps equalize capabilities.

More posts in this series are here. More on income inequality here. And here‘s a related post about the link between poverty and freedom.

• Spirit of the age (economist.com)
• Ray Brescia: When the Rich Get Risky: Inequality and Financial Crises (huffingtonpost.com)
• What’s income inequality got to do with it? (economist.com)
• Un-Level Ground (online.wsj.com)

The Causes of Wealth Inequality (23): Capital Gains

It’s hard to investigate the causes of income inequality without looking at the sources of income. In turns out that, in the U.S. at least but probably also in other developed countries, the majority of a population gets almost all of its income from wages, while people at the top of the income distribution get most of it from capital gains and dividends:

(source)

Dividends are payments made by a corporation to its shareholder members, usually a portion of corporate profits. Capital gains are profits that result from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. A capital gain is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor.

Given these differences in the sources of income, income inequality will rise if incomes from capital gains and dividends rise more rapidly than wage incomes, perhaps because taxes on the former are cut. And indeed, most of the recent increase in the Gini score for the US (higher Gini numbers imply a less equal distribution) comes from higher capital gains and dividends and from lower taxes for high earners (lower taxes not only on capital gains, by the way; many taxes have become less progressive in the U.S.):

various kinds of income contributing to growing income inequality

(source, source)

This cause of income inequality suggest a problem that goes deeper than inequality:

I think a lot of people sense that there’s something unsettling about this shift from labor income to capital incomes. It seems endemic of a society that devalues work while providing outsized rewards for speculation and asset accumulation. (source)

More posts in this series are here.

Political Graffiti (172): Minimum Wage

(source)

More on the minimum wage here, here and here. More political graffiti here.

Income Inequality, New Paper

I’ve posted a new paper on income inequality here:

Maybe this is good timing on my part, with Obama being accused of “class war”, Romney paying ridiculously little in taxes, the Occupy movement and the 99 percenters still going strong (I think), and all that. So hopefully, this paper will attract a few eyeballs, at least more than academic writing can normally expect.

Income Inequality (26): And Social Mobility

One can argue that high levels of income inequality aren’t much of a problem when social mobility is easy (social mobility being the degree at which people cross into higher or lower income levels than the ones they were born into). Inequality is then the result of skills and effort, the absence of skills and effort, or lifestyle choices. In other words, given easy mobility, inequality is what people deserve or want. If there are few or no obstacles to mobility, people basically choose their position in society: they choose to develop their skills and invest effort, or they don’t.

However, this whitewashing of inequality doesn’t work because the more unequal a society, the less social mobility there is:

(source, the “intergenerational earnings elasticity” is a measure of correlation between the income of grown children and their parents, or – in other words – how much a rise in your father’s income affects your expected income; higher values suggest less mobility, 0 means that the kids of rich people earn as much as the kids of the poor)

(source)

What is the mechanism here? In part, high levels of income inequality make social mobility more difficult: when income inequality is relatively high, people at the wrong end of inequality can offer comparatively less opportunities to their children than the people at the right end – less quality schooling, less quality healthcare etc. The children of wealthy parents have relatively more advantages compared to poor children then they would have in a less unequal society, and they are therefore more likely to end up in a high income group as adults. I assume that social mobility is a good thing and that people’s income should not be determined by the income of their parents.

Let’s assume a stylized economy called Mobilistan, consisting of just 2 families: the Jones family is “wealthy” while the Smith family is less wealthy. In a first scenario, income inequality in Mobilistan is a Gini value of 0.30 resulting from an income of $100,000 for the Jones’ and $25,000 for the Smith’s:

(I’ve used this handy Gini calculator here)

Assuming that the government of Mobilistan offers some education subsidies or public schooling facilities, we can also assume – given the specified levels of incomes - that the children of the Jones family and the Smith family can afford to attend the same schools. Hence, if some of the children of the Smith family work really hard and aren’t burdened with bad genes, and if some of the children of the Jones family drop out, then we may see that some adult children of the Smith family will belong to the same income class as the Jones family, and vice versa. In other words, we see social mobility. The effect of this mobility on income inequality can go either way: it can lead to lower or higher inequality or have no effect at all. It depends on the exact earnings of all the inhabitants of Mobilistan, including the adult offspring.

Now take a second scenario, and complicate things a tiny bit. There are now 4 families in Mobilistan: Smith, Daniels, Jones and Greggs. Both the Smith and Daniels families earn $25,000, and the Jones and Greggs families both earn $1,000,000. This results in a Gini of 0.46, an obviously higher inequality score:

This means that the Jones and Greggs families can afford better schooling for their children, which will make it much more difficult for the children of the Smith and Daniels families to compete for high paying jobs. This effect can be exarcerbated when the Jones and Greggs families start to outbid each other for the best education for their children, thereby making good education more expensive and even less accessible to the children of the Smith and Daniels families.

So instead of saying that inequality is not a problem because there is mobility, we should instead say that mobility is a problem because there is inequality.

More on social mobility here. More posts in this series are here.

Lies, Damned Lies, and Statistics (36): Manipulating the X-axis Scale in Graphs

Although less common than its sister lie – manipulating the y-axis in graphs – manipulation of the x-axis does occur.

But first a technical note: “bins” are clusters of subpopulations for which the frequency of some characteristic is measured. Together, the bins form a histogram or a graphical representation showing the distribution of a characteristic for an entire population (like a survey group). Here’s an example:

A survey of 31 black cherry tress revealed that three of them had a height between 60 and 65 feet; 8 had a height between 70 and 75 feet etc. There are 6 bins on this graph’s x-axis, probably because the person analyzing the survey data thought that 6 would be an adequate number. And indeed, dividing a population of 31 into 20 or 2 subgroups would probably not result in interesting numbers, at least not in this case.

Working with bins means that the x-axis shows a split of the surveyed population into smaller groups according to certain ranges of the characteristic that was surveyed (height in this case), making it possible to see how many individuals (trees in this case) belong to a certain range or subgroup. Notice that in this example the bins are

• not too numerous
• not too few
• of equal size (always a range of 5 feet)
• consecutive and
• non-overlapping.

As they should be. (The size shouldn’t always be equal, but often is).

Many histograms have a “bell-shape” like in this example (in which case they show what is called a “normal distribution“), but they can also have other shapes, depending on the population and the characteristic surveyed. A survey of the frequency of a certain disease among the population of a country, with the population divided into bins according to individuals’ age, would be skewed to the left since older people – on the right – may suffer more frequently from the disease.

Since all this is probably old news to most of you, let’s go straight to an example of manipulation of bins. Such manipulation often involves tinkering with the ranges of certain bins, so that the different bins are no longer of the same size. The following example is about income shares across the population of the U.S. Technically, the graph below is not a histogram because the y-axis shows cumulated income for ranges of income groups rather than frequencies, but for our purposes it’s equivalent:

wsj graph of income distribution

(source, source)

This graph is then used by the Wall Street Journal to argue against increased taxation of the rich as a means to close the budget deficit, because supposedly that’s not where the money is. Or, better, the money is there, otherwise they wouldn’t be rich, but there are just not enough of them; taxing the middle class would be better according to the WSJ because it’s they who have all the money … at least if you believe their graph. The problem is that the highest bar in their graph is for people making $100-$200K, whereas the bar immediately to the left of this one is for the income range of $75K to $100K – an income range only one-quarter the size. No surprise that the bar for $100-$200K is so much larger than the rest…

If you want to argue that taxing the rich does make it possible to bring in a lot more revenue, then you could use this alternative graph, made from the same data:

wsj graph of income distribution alternative

(source)

Or this one:

(source)

More alternative presentations of the same data are here.

It all depends what you mean by “rich” and “middle class”, but claiming -  as does the WSJ – that $200K is still “middle class” is stretching the point.

More posts in this series are here.

Human Rights Maps (146): Income Inequality

(source)

Well, it’s not really a map, or not really a real map, but I found it telling. And this is what the “map” looks like when we use some actual figures about U.S. corporate profits and compensation (but a similar pattern occurs in other developed countries):

(source)

Corporate profits are doing just fine, and are even better than before the recession. Workers’ compensation, on the other hand, has at best been stagnant:

(source)

Add to that the unemployment figures, and you have a nice downward slope. The “map” hints at “going under water”, and that’s about right for many of us.

More serious and more informative maps about income inequality are here, here, here and here. More on the link between income inequality and human rights is here. More data on income inequality are here. Something in the recession is here, and here are more human rights maps.

Related Articles

• Inequality, A Collection of Images (2) (filipspagnoli.wordpress.com)
• Human Rights Facts (211): U.S. Public Opinion on Income Inequality (filipspagnoli.wordpress.com)
• The Causes of Wealth Inequality (12): Immigration (filipspagnoli.wordpress.com)
• Income inequality in Toronto (ekonometrics.blogspot.com)
• Would income inequality result in higher mortality rates for the poor? (ekonometrics.blogspot.com)

The Causes of Wealth Inequality (15): Slavery

Income inequality doesn’t have the same causes everywhere, as is evident from this study which points to the fact that slavery in the U.S., which was abolished almost 150 years ago, still has nefarious effects today.

Within the US, the institution of slavery has historically been associated more heavily with specific areas – primarily the South. This geographic differentiation allows us to identify the link between past slavery and current outcomes. We start by reviewing, over a cross section of counties, the effect of the intensity of slavery in 1870 on the current level of income per capita. For the year 2000, we find no evidence that those counties that employed slave labour more heavily are poorer than those that did so to a lesser extent or not at all (even though a negative relationship between slavery and income was still present until 1970).

Next we turn to the impact of slavery on current income disparities and we find that it is indeed associated with a higher degree of income inequality. In other words, former slave counties are more unequal in the present day. They also show a higher poverty rate and a higher degree of racial inequality. Moreover, the data say that the impact of slavery on economic inequality and poverty runs through its impact on racial inequality, and not vice versa. (source)

How exactly does slavery lead to long turn income inequality? If slavery is seen as a symptom of feelings of racial superiority, then it’s not far-fetched to assume that those feelings didn’t die with slavery and continued to affect blacks by way of discriminatory policies and practices, including in wage determination and other areas that influence economic inequality, such as the provision of education.

This, by the way, also makes the case for reparations a bit stronger. More posts in this series are here.

Related Articles

• The historical roots of inequality (voxeu.org)

The Causes of Wealth Inequality (13): Deliberate Policy?

(source)

Some say that the increase in income inequality in countries such as the U.S. has been the result of deliberate government policy. That’s quite an accusation. It’s not controversial to assume that tax policy under right wing governments tends to be less burdensome on the rich, and that social welfare policy under such governments tends to be more stingy. If you look at it like this, it’s not crazy to argue that right wing policies can aggravate income inequality. But it’s quite another thing to claim that right wing governments use these policies in order to deliberately aggravate income inequality. That accusation is incompatible with right wing ideology, which claims that the preferred policies also and ultimately help the poor (trickle down economics etc.), and that left wing policies supposedly favoring the poor are in fact self-destructive (unemployment benefits create labor disincentives, taxes create production disincentives, etc.). However, it’s possible that this ideology is just a smokescreen for anti-poor policies. But I guess that’s somewhat difficult to prove.

If we look at the tax rates, it’s true that the rates for the wealthy tend to go down under Republican presidents:

In 1979, the effective tax rate on the top 0.01 percent (i.e., rich people) was 42.9 percent. … By Reagan’s last year in office it was 32.2 percent. (source)

However, things aren’t as simple as that:

From 1989 to 2005, … as income inequality continued to climb, the effective tax rate on the top 0.01 percent largely held steady; in most years it remained in the low 30s, surging to 41 during Clinton’s first term but falling back during his second, where it remained. The change in the effective tax rate on the bottom 20 percent (i.e., poor and lower-middle-class people) was much more dramatic, but not in a direction that would increase income inequality. Under Clinton, it dropped from 8 percent (about where it had stood since 1979) to 6.4 percent. Under George W. Bush, it fell to 4.3 percent. (source)

The tax rate for the rich dropped somewhat around 2005 following the Bush tax cuts, but all the tax effects over the last decades taken together don’t really make a good case that tax policy is the major cause of rising income inequality. So it’s even more difficult to make the case that tax policy was part of a conscious strategy to aggravate inequality. The increase in inequality has been too big compared to the possible impact of taxation. That’s corroborated by the fact that pre-tax inequality in the U.S. rose faster than after-tax inequality.

What’s interesting, however, is that pre-tax inequality in the U.S. tends to rise much faster under Republican rule. See this post for example. So inequality can still be the result of policy, but policy expressed in other ways than taxation. Other policies that may have contributed – deliberately or not – to rising income inequality are anti-labor union policies, decreases in the minimum wage, etc.

More posts in this series are here.

Related Articles

• Did federal government policy create the Great Divergence? (slate.com)
• Mapping Income Inequality (blogs.forbes.com)
• The source of income inequality and a cure? (professorbainbridge.com)
• How income inequality is changing (blogs.reuters.com)
• Slate: A historical look at Income Inequality in the U.S. (americablog.com)
• Our Banana Republic: US Income Inequality Grows (emptywheel.firedoglake.com)
• Income Inequality: ‘The Most Profound Change In American Society In Your Lifetime’ (huffingtonpost.com)
• The Great Divergence – how did income inequality get so bad? (americablog.com)
• What’s income inequality got to do with it? (economist.com)

Measuring Poverty (11): The Subjective Approach

Usually, we measure poverty on the basis of objective numbers about income or consumption. Income or consumption levels are put on a continuum from lowest to highest and somewhere along the continuum we put a threshold that indicates the difference between poor and non-poor. For example, the Indian government uses a consumption threshold of 2,400 calories a day in rural areas and 2,100 in urban areas. The World Bank uses an income threshold of one dollar a day (corrected for purchasing power).

There are numerous disadvantages to these objective approaches. One is the inevitably arbitrary positioning of the threshold. One dollar a day, even after correction for purchasing power, means different things to different people in different areas, circumstances, groups etc. Calorie intake also means different things to different people, depending on people’s way of life etc. Moreover, income levels are notoriously difficult to measure (poor people in particular have a lot of informal income, e.g. “income” coming from all sorts of assistance from relatives etc.). Consumption as well is a difficult measure: it doesn’t necessarily have to mean just calorie intake for example. Poverty can mean a lack of non-food consumption. And if you focus on calorie levels after all, you’ll miss the issue of the quality of the food.

Also the third most common approach to poverty measurement suffers from some disadvantages. This approach, also called the multidimensional approach, tries to assess to what extent people suffer from a series of different types of deprivation: do they have access to water, to electricity, are they literate, malnourished etc. Rather than purely quantitative these measurements can be qualitative: a binary yes/no is often enough. Unfortunately, also this measurement system has some drawbacks: it fails to distinguish between deprivation and choice; there’s necessarily a level of arbitrariness in the determination of the “basic needs” or forms of deprivation that are measured; and these needs are often overly general, obscuring some very specific needs for some people in some areas or groups.

That’s why people have been searching for alternative measures of poverty. One such alternative is the use of surveys that ask people about poverty. You could ask people what they believe is “the smallest amount of money a family needs each week to get along in this community”, “what is the level of income below which families can’t make ends meet” etc. That would remove some of the arbitrariness of the cutoff line between poor and non-poor, and putting that decision in the hands of the people rather than the scientists.

Poor Jews taking home free matzohs, New York

Or you could also present people with evocative descriptions of different family situations, of types of families according to their level of income or consumption or according to the type of deprivation. People would then have to decide for every family situation what they believe the standard of living is and which situation can be described as “poverty”. That would specify what poverty means to people. And what it means to people is much more important than what it means to researchers and statisticians.

A disadvantage of this subjective approach is the wellknown effect that people’s income levels affect their judgments about income adequacy. In short, relatively rich people overestimate the level of income inadequacy. A solution to this problem could be to ask only poor respondents about poverty, on the reasonable assumption that poor people are the best experts on poverty. But that’s a circular reasoning: you already think you know what poverty is before you start asking about it. Since you focus only on the poor, you’ve already decided what poverty is.

An advantage of the subjective approach is that researchers don’t have to list basic needs or types of deprivation in order to assess what poverty is; people tell you what poverty is. There’s also no need for researchers to specify regionally or socially undifferentiated and general cutoff levels of income or consumption below which people are considered to be poor.

More posts in this series are here.

Related Articles

• A many-headed beast (economist.com)
• Poverty is about more than money | Kaushik Barua (guardian.co.uk)
• MPI: a progressive approach to poverty (newstatesman.com)
• Letter From India: Changing Poverty’s Parameters (nytimes.com)

What is Poverty? (5): A Psychological Thing

Poverty is not just the absence of sufficient income or a level of consumption that is below a minimum threshold. Poverty is multidimensional: it also means bad health, high mortality rates, illiteracy etc. And these different elements of poverty tend to have a negative effect on each other (the so-called poverty trap). Being deprived of literacy or education is usually seen as an obstacle to material wellbeing.

The absence of material wellbeing – whether expressed in terms of income, consumption, health, mortality etc. – is often viewed as an isolated evil. However, it’s possible to make the case that it can also have psychological effects that harm people’s mental wellbeing. If this is true, and I think it is, then poverty does more harm than we usually think it does.

I believe it’s widely accepted that poverty does some psychological damage, such as stress, depression, loss of self-esteem and of the feeling of control, loss of ambition and aspirations etc. Although usually people assume – correctly or not – that this type of damage is less severe or less urgent than the physical damage that results from poverty (such as bad health, mortality, hunger etc.). Some even argue that there’s a tendency to overemphasize the link between material deprivation and (the perception of) subjective wellbeing, and that psychological problems which may seem to be caused by material deprivation have in fact other causes (genetics, upbringing, personality etc.).

However, I think the tendency is rather to underestimate the effects on mental wellbeing. A recognition of the psychological effects of poverty would also open the possibility of a more positive evaluation of notions such as poverty as vulnerability and relative poverty. Vulnerability, or a high level of risk of poverty, can perhaps produce the same amount of stress as actual poverty. And one’s self-esteem can suffer as much from actual deprivation (including illiteracy) as from comparative (or relative) deprivation (e.g. comparatively low levels of education or income).

Related Articles

• MPI: a progressive approach to poverty (newstatesman.com)
• Poverty is about more than money | Kaushik Barua (guardian.co.uk)
• UN, Oxford unveil new index to measure poverty (globalnation.inquirer.net)
• The Sting of Poverty (gukurup.wordpress.com)

Ironic Human Rights Violations (5): When Violating a Right is Better Than Respecting It

When child labor isn’t directly coerced and isn’t a form of slavery one can reasonably argue that the children in question are better off than if international pressure or legislation leads to the eradication of child labor. After all, it isn’t as if most countries where child labor occurs can offer these children adequate education combined with a standard of living higher than abject poverty. Keeping them away from work doesn’t magically improve their situation. The opposite may be true: they are left without an income, and without the education that they should get. It’s not merely the fact that they work that’s causing them to forgo education.

It might “feel good” to oppose child labor, but the alternative for these children is not attending some nice school or relying on parental income; the alternative is an even lower standard of living if they cannot work. (source)

All this doesn’t mean that there are no cases in which the immediate abolition of child labor isn’t the best option. Or that the long term goal shouldn’t be the total eradication of child labor. Or that multinational companies can simply ignore their responsibilities because of the overall dreadfulness of the situation in a particular country they’re operating in.

Sure, the assumption that we’re talking about children who aren’t coerced is vague. Coercion can take several forms: a slave master coerces, but poverty also coerces.

I’ve pointed to a similar counterintuitive case when discussing to pros and cons of sweatshops: they are awful and certainly violations of a number of human rights, but the alternative is often even worse. (See here and here).

Perhaps “irony” isn’t the best word to describe rights violations that are better than respect for rights. “Tragic rights violations” perhaps?

More on child labor. More ironic human rights violations.

Related Articles

• Reports of Child Labor Rise in Namibia (humantrafficking.change.org)
• Philip Morris Said to Benefit from Child Labor (nytimes.com)

Measuring Poverty (10): Multidimensional Poverty

Poverty can be many different things. It can be different things to different people in different countries or circumstances. It can mean one thing for people in Africa and another for people in the favelas in Rio, and still another for those in the inner-cities in the U.S. It’s probably different for men, women and children. It can be absolute deprivation or relative poverty (i.e. inequality). It can be insufficient income or insufficient consumption. It can be a lack of one thing or another. For some people it means inadequate healthcare, for others it means insufficient water. It can be physical suffering or the stress inherent in insecurity. It can be malnutrition or a lack of self-esteem. It can be illiteracy or child mortality. Etc.

Most poverty measurement systems try to keep it simple. The most common systems just measure income. Poverty is then insufficient income (typically below $1-a-day, corrected for purchasing power; this measures the number of people incapable of buying a basic basket of commodities). That makes sense, because without sufficient income, you’re likely to experience child mortality, illiteracy, malnutrition, inequality, water shortages, stress, insecurity and all the other nasty things that come with poverty.

However, it is important to know those details of poverty. Two people who both have an income of less than one dollar a day, may experience very different consequences: one may be deprived in lots of areas, the other one maybe in just a few. One may lack good health, may be starving and may be illiterate. The other one may just be illiterate. If we want to help people, it’s important to know what the exact nature of their problem is. Which we don’t if we just focus on how much their income is.

That is why some researchers at the Oxford Poverty and Human Development Initiative at the University of Oxford have tried to come up with a so-called Multidimensional Poverty Index (MPI).

The index seeks to build up a picture of the prevalence of poverty based on the fraction of households who lack certain basic things. Some of these are material. Does a family home have a dirt or dung floor? Does it lack a decent toilet? Must members of the household travel more than 30 minutes on foot to get clean water to drink? Do they live without electricity? Others relate to education, such as whether any school-age children are not enrolled or whether nobody in the family has finished primary school. Still others concern health, such as whether any member of a household is malnourished. A household is counted as poor if it is deprived on over 30% of the ten indicators used. Researchers can then calculate the percentage of people in each country who are “multidimensionally poor”. (source)

Such a multidimensional approach has the advantage of identifying which specific aspect(s) of poverty is/are most common in certain areas or among certain groups of people. It shows how people are poor, and what contributes most to poverty in a specific place and among a specific group. This will obviously greatly enhance response capacity. Rather than just trying to generally increase income, we can target our efforts more specifically: in one area or among one group of people we know that we should focus on nutrition; elsewhere we know that we should focus on literacy for instance. The MPI also shows us how different aspects of poverty overlap: for example, how many people who are illiterate also have health problems?

If 30% of people are malnourished and 30% of children are out of school, it would be useful to know if these deprivations affect the same families or different ones. (source)

The approach also helps us to distinguish between deprivation and choice. People may actually prefer mud floors to concrete floors in some places, and don’t consider having a mud floor as a form of deprivation. It also helps to identify the depth of poverty: deprivation along a wide spectrum of indicators means that poverty is deeper.

Unsurprisingly, the results of the MPI are substantially different from traditional poverty measurements:

(source)

Also the totals are different:

About 1.7 billion people in the countries covered – a third of their entire population – live in multidimensional poverty, according to the MPI. This exceeds the 1.3 billion people, in those same countries, estimated to live on $1.25 a day or less, the more commonly accepted measure of ‘extreme’ poverty. (source)

One of the disadvantages of this new approach is the weighting of the different measures: there’s inevitably some arbitrariness involved. Is the death of a child equivalent to having a dirt floor? Worse? How much worse? More criticism of the MPI is here.

There’s a really cool interactive map of the MPI here. Another example of a multidimensional poverty index is the older Human Development Index.

More posts on poverty measurement are here.

Measuring Poverty (8): Deep Poverty

Most systems for measuring poverty use a so-called poverty rate or poverty line (that’s the case in the U.S. for instance, or in the UN’s Millennium Development Goals). That’s a level of income (or consumption etc.) which is considered to be the minimum that’s necessary for a decent human life and for the satisfaction of basic needs. These systems are also called “headcount” measures of poverty: they simply count how many people fall below the fixed point that determines the difference between poverty and non-poverty.

You can see the problem coming: according to these systems, you’re either poor or you ain’t. They just tell us how many people are poor, not how poor they actually are. This is a big problem in developed countries that use such poverty measurement systems. The poverty rates in those countries are rather high in dollar terms. For example, the thresholds in the U.S. are, as of 2008:

• One adult: $11,200 annual income, not including the EITC or non-cash benefits (Food Stamps, Medicaid, housing assistance, employer health-insurance contributions, etc.), and including taxes
• Two adults: $14,400
• One adult, two kids: $17,300
• Two adults, two kids: $21,800.

By “rather high” I don’t mean to say that the people under those poverty lines aren’t really poor and that the U.S. measurement system is too generous (if anything, it’s the contrary). What I want to say is that in developed countries, people need a substantial income in order to escape poverty. If you want a job, you’ll probably need a car, a phone, internet connection, child care etc. If you want a place to live, you’ll need to spend a huge amount of money on a house, and so on. Poverty lines in developed countries are therefore not so low that being poor means being on the brink of starvation. They are set at such a level that being poor means being unable to afford a job, quality housing, healthcare and education.

Given the fact that poverty rates are rather high, there’s a lot of space below them. Hence, you have different kinds of poor people: there are those who have a job and an income, albeit a rather low one, but who struggle to survive because of their expenses; and there are those who just live on the street. You have people who are poor for some years and people who are poor their entire lives.

All these people are equally poor in the measurement system we’re discussing here. This system doesn’t provide data on the distance from the poverty line, or, in other words, on the depth of poverty. In the worst case, people who are already poor according to the system could become much poorer, without any change in the headcount of poverty. If the 13% or so of Americans who are currently under the poverty line all became homeless beggars, you wouldn’t see a change in U.S. poverty statistics.

In order to solve this problem, people have come up with the concept of the poverty gap (incidence * depth of poverty): the mean distance separating the population from the poverty line (with the non-poor being given a distance of zero), expressed as a percentage of the poverty line (see also here). Unfortunately, this hasn’t become a very popular number. It’s probably too complicated. A clear and simple poverty line is much more appealing yet deficient.

More post on the problems of poverty measurement are here.

Measuring Poverty (7): Different Types of Poverty

I already mentioned the obvious but consequential fact that poverty measurement depends on the choice of the type of poverty you want to measure. Definitional issues are always important, but when it comes to poverty the choice of a definition of poverty determines who will benefit from government benefits and who won’t. For example, in the U.S. you’re poor when you’re income is below a certain poverty line. If that’s the case, you’re eligible for certain benefits. So poverty is a function of income. But that’s pre-tax income, which means that a person who pays a lot of taxes has just as much “income” as someone who doesn’t pay a lot (for example because he or she is eligible for tax credits). The former would perhaps drop below the poverty line if income after tax were the criterion, the latter not.

1. Insufficient income

Usually, and not only in the U.S., poverty is indeed understood as insufficient income (preferably post-tax and post-benefits). Measuring poverty in this case means

1. determining a sufficient level of income (sufficient for a decent human life); this is usually called a “poverty line” or “poverty rate”
2. measuring actual income
3. counting the number of people who have less income than the sufficient level.

The problems with this measurement system or this choice of type of poverty go well beyond the problems created by the specific choices of U.S. statisticians. Actual income levels are notoriously difficult to measure. People have a lot of informal income which they will not disclose to people doing a survey. Likewise, there is tax evasion and income in kind (market based or from government benefits, e.g. social housing), and material or immaterial support by local social networks. None of this is included correctly if at all in income measurement, leading to an overestimate of poverty. Another disadvantage of income based measurements: they neglect people’s ability to borrow or to draw from savings in periods of lower income. Again, this overestimates poverty (although one could say that it just estimates it a bit too early, since borrowing and eating up savings can lead to future poverty).

2. Insufficient consumption

Because of these problems, some countries define poverty, not by income levels, but by consumption levels. Measuring poverty in this case means

1. determining a sufficient level of consumption (sufficient for a decent human life)
2. measuring actual consumption
3. counting the number of people who consume less than the sufficient level.

However, this measurement isn’t without problems either. As is the case for income levels, actual consumption levels are difficult to measure. How much do people actually consume? And what does it mean “to consume”? Is it calorie intake? Is it financial expenses? Or something else perhaps? Consumption levels are also deceiving: people tend to smooth their consumption over time, even more so than their income. If they face a financial crisis because of unemployment, bad health, drought etc. they will sell some of their assets (their house for instance) or take a loan. If you determine whether someone is poor on the basis of consumption levels, you won’t consider people dealing with a crisis as being poor because they continue to consume at the same levels. However, because of loans or the sale of assets, they are likely to face poverty in the future. They may also shift their diet away to low quality food, taking in the same amount of calories but risking their health and hence their future income. Similarly, they may be forced by their crisis situation to delay health expenditures in order to smooth consumption, with the same long term results.

And even if you manage somehow to measure consumption, you’re still faced with the problem of the threshold of sufficient consumption: that’s hard to determine as well. Consumption needs differ from person to person, depending on age, gender, occupation, climate etc.

3. Direct physical measures of real consumption

Rather than trying to measure total income or consumption, you can choose to measure consumption of certain specific physical items, and combine that with some easy to measure elements of standard of living, such as child mortality or education levels. It’s possible to argue that poverty isn’t an insufficient level of overall income or consumption, but instead the absence of certain specific consumption articles. People are poor if they don’t have a bicycle or a car, a solid floor, a phone etc. Or when their children die, can’t go to school or are undernourished. These items or indicators are relatively easy to measure (for example, there’s the Demographic and Health Survey). While they may not tell us a lot about relative living standards in developed countries (where few children die from preventable diseases for instance), they do provide poverty indicators in developing countries.

The OECD has done a lot of good work on this. They call it “measuring material deprivation“. It’s the same assumption: there are certain consumer goods and certain elements of living standard that are universally considered important elements of a decent life. The OECD tries to measure ownership of these goods or occurrence of these elements, and when people report several types of deprivation at the same time, they are considered to be poor.

People in the U.S. have also attempted to measure material deprivation. Here’s an example:

(source)

Take note that we’re not talking about monetary measures here, contrary to income and overall levels of consumption. Sometimes, all that has to be measured is a “yes” or a “no”. Which of course makes it easier.

Unfortunately, not easy enough. Also this type of poverty measurement has some serious drawbacks. Measures of material deprivation often fail to distinguish between real deprivation and the results of personal choices and lifestyles. Some people can’t have a decent life without a car or a solid floor; others voluntarily choose not to have those goods. It’s likely that only the former are “poor”. Furthermore, since these measurements are often based on surveys, there are some survey related problems. The really poor may be systematically excluded from the survey because we can’t find them (e.g. the homeless). These surveys measure self-reported poverty, and self-reported poverty can be affected by low aspirations or habit. People may also be ashamed about their poverty and hence not report it correctly.

Conclusion

There isn’t a perfect system for poverty measurement. And that has a lot to do with the fact that poverty is an inherently vague concept. It really shouldn’t be a surprise that people choose different definitions and types, and hence different measurement methods that all provide different data. There’s no “correct” definition of poverty, and hence no correct poverty measure.

More posts in this series on the difficulties of poverty measurement.

Measuring Poverty (6): The Poverty Line in the U.S.

The poverty rate or poverty line in the U.S. is based on a system pioneered by Mollie Orshansky in 1963. In the 1960s, the average US family spend one third of its income on food. The poverty line was calculated by valuing an “emergency food” budget for a family, and then multiplying that number by 3.

(source)

This results in a specific dollar amount that varies by family size but is the same across the U.S. (the amounts are adjusted for inflation annually). To determine who is poor, actual family income is then compared to these amounts. Obviously, if you’re under, you’re poor.

Amazingly, this system hasn’t changed a lot since the 1960s, yet it suffers from a series of measurement problems, resulting in either an over- or underestimation of the number of families living in poverty. The problems are situated both in the calculation of the poverty rates and in the calculation of the income that is subsequently compared to the rates:

• Obviously, the system should take regional differences in the cost of living, especially in housing, into account. It doesn’t.
• As already apparent from the image above, a family today spends relatively less on food and more on housing, health care and child care etc. yet the poverty line is still dollars for emergency food times 3. So the question is: should the system take today’s spending patterns into account? We would have to know which it is: 1) Either the increased spending on non-food items has occurred because people can now afford to spend more on such items. 2) Or the increased spending on non-food items has occurred because these items got disproportionately more expensive (housing for instance) or because there wasn’t really any need to buy those items in the old days. Only if 2) is the case should that have an influence on the poverty line. And I think that to some extent it is the case. Child care for instance has become a necessity. In the 1960s, many mothers didn’t go out and work. Now they do, and therefore they have to pay for child care. Those payments should be deducted from income when measuring disposable income and comparing it to the poverty line. The same is true for cars or phones. Today you can’t really have a job without them so they’re no longer luxuries. A society would show very little ambition if it continued to designate the poor as those who have to wash by hand, read with candlelight, and shit in a hole in the floor. In fact, what I’m advocating here is some kind of relative concept of poverty. I’ll come back to that later. All I can tell you now is that this isn’t without complications either.
• The current poverty measurement doesn’t take into account disproportionate price rises (it merely adjusts for general inflation) and changing needs. An obvious improvement of the U.S. measurement system would be to adjust for exceptional price evolutions (such as for housing) and also to revisit the definitions of basic needs and luxuries. Hence, a better poverty measurement should subtract from income some work-related expenses, child care expenses, and perhaps also some health expenses to the extent that these have become disproportionately more expensive. But that’s not easy:

There is considerable disagreement on the best way to incorporate medical care in a measure of poverty, even though medical costs have great implications for poverty rates. But costs differ greatly depending upon personal health, preferences, and age, and family costs may be very different from year to year, making it hard to determine what exactly should be counted. Subtracting out-of-pocket costs from income is one imperfect approach, but if someone’s expenses are low because they are denied care, then they would usually be considered worse off, not better off. (source)

• Another problem: the current poverty rate doesn’t take all welfare benefits into account. Income from cash welfare programs counts, but the value of non-cash benefits such as food stamps, school lunches and public housing doesn’t (because such benefits weren’t very common in the 1960s). Those benefits successfully raise the standard of living for poverty stricken individuals. There’s a bit of circular reasoning going on here, because the poverty rate is used, i.a., to decide who gets benefits, so benefits should not be included. But if you want to know how many people are actually poor, you should consider benefits as well because benefits lift many out of poverty.
• The poverty measure doesn’t include some forms of interests on savings or property such as housing.
• The poverty measure doesn’t take taxes into account, largely because they didn’t affect the poor very much in the 1960s. Income is counted before subtracting payroll, income, and other taxes, overstating income for some families. On the other hand, the federal Earned Income Tax Credit isn’t counted either, underestimating income for other families.
• And there’s also a problem counting the effects of cohabitation and coresidency, overestimating poverty because overestimating expenses.

Because the poverty measurement disregards non-cash benefits and certain tax credits, it fails to serve its purpose. Poverty measurement is done in order to measure progress and to look at the effects of anti-poverty policies. Two of those policies – non-cash benefits and certain tax credits – aren’t counted, even though they reduce poverty. So we have a poverty statistic that can’t measure the impact of anti-poverty policy… That’s like measuring road safety without looking at the number of accidents avoided by government investment in safety. Since the 1970s, the U.S. government implemented a number of policies that increased spending for the poor, but the effects of this spending were invisible in the poverty statistics.

This had a perverse effect: certain politicians now found it easy to claim that spending on the poor was ineffective and a waste of money. It’s no coincidence that trickle down economics became so popular in the 1980s. The poverty measurement, rather than helping the government become more effective in its struggle against poverty, has led to policies that reduced benefits. Of course, I’m not saying that poverty reduction is just a matter of government benefits, or that benefits can’t have adverse effects. Read more here.

Fortunately, the US Census Bureau has taking these criticism to heart and has been working on an alternative measure that counts food stamps and other government support as income, while also accounting for child-care costs, geographic difference etc. First results show that the number of poor is higher according to the new measurement system (it adds about 3 million people). For some reason, I think the old system has still some life in it.

standard and improved poverty measurement in the US

Some details of the new measurement:

when you account for the Earned Income Tax Credit the poverty rate goes down by two points. Accounting for SNAP (food stamps) lowers the poverty rate about 1.5 points. … when you account for the rise in Medical Out of Pocket costs, the poverty rate goes up by more than three points. (source)

standard and improved poverty measurement in the US

(source)

More posts about problems with poverty measurement are here.

Economic Human Rights (32): The Economic Cost of Taxing the Rich

Taxation is linked to human rights in several ways:

• It’s usually correlated with government accountability and hence democracy (i.e. political rights). States that don’t tax their citizens don’t have an incentive to be accountable. And citizens who have to pay taxes usually demand representation in return.
• Taxation is a means to reduce income inequality, and income inequality creates a number of human rights problems.
• Taxation is, in part, intended to fund a social safety net, which in turn is a means to protect certain economic human rights.
• And tax money is also used for education and healthcare, two human rights.

I personally belief that a progressive tax is best in light of the last two concerns. In a progressive taxation system, higher earners pay a larger percentage of their income on taxes. Compared to a regressive taxation system (people with higher incomes pay less in percentage of their income, as in the case of a consumption tax or VAT) or a flat tax (the tax percentage is the same for all income groups), a progressive tax reduces income inequality: it makes incomes more equal in a direct way because it reduces the income of higher-earning families by a larger percentage than the income of lower earning ones; but also in an indirect way because this system – under certain conditions – yields more tax revenues which can then be spent on poverty reduction and the safety net. Also, it seems to be a good example of a just and fair system. The strongest shoulders should carry the most heavy burden. Someone earning a low income can end up in poverty after paying a small percentage in taxes; a wealthy person will perhaps not even notice paying a relatively large sum in taxes.

The counter-narrative states that high tax rates discourage people; they are a disincentive to hard work and effort. High tax rates for high incomes discourage people who work relatively hard (they work hard supposedly because they earn a lot). Because high tax rates punish the most productive elements in a society, the whole of society suffers. More productive people will limit their productivity because they don’t want to fall into a higher tax bracket, and the money they pay in taxes can’t be invested in the economy. Taxing the rich therefore has an unacceptable economic cost. Conversely, low tax rates for the rich produce benefits for all (this is trickle down economics, read also about the Laffer curve).

But this narrative doesn’t quite stand the test of data:

top marginal tax rates and gdp growth, US data

(source)

As is clear from this graph, high tax rates obviously don’t slow down economic growth, and low tax rates don’t speed it up. This paper also supports the claim that moderate, as opposed to dramatic, increases in marginal rates don’t have any impact on the willingness of the wealthy to participate in the economy. They won’t go Galt. Atlas won’t shrug, except to signal indifference.

The top income tax rate was 91% (beginning at taxable income of $400,000) … [in] the period from 1951 through 1963. Those were the golden years of the U.S. economy, in which the average annual rate of productivity growth was 3.1% (compared with about 1.5% after 1981). Of course, the growth might have been even faster had the marginal tax rates been lower, but the coincidence of high rates and high productivity raises challenging questions for those who believe that high marginal tax rates carry an unacceptable cost. (source)

To be fair, marginal tax rates are a crude measures of tax burden. There’s a difference between marginal tax rates and effective tax rates.

• A marginal tax rate is the tax rate that applies to the last dollar of the tax base (taxable income or spending, usually income). It’s not the rate at which all your dollars are taxed. It’s the maximum rate you’re paying on any of your dollars of taxable income.
• An effective tax rate refers to the actual rate, i.e., the rate existing in fact, for the entire income, after tax deductions and credits and taking into account lower rates for lower income brackets (see here). It’s your total tax obligation (including your income tax and any other additional taxes and/or credits), divided by your total taxable income.

But even if we look at the effective tax rates of the rich, we see that this has steadily decreased over the decades, with little or no positive effect on overall economic performance:

effective federal tax, US data

(source)

And when there’s no positive effect of decreasing tax rates, there’s probably also no negative effect of increasing tax rates. To the extent that the wealthy (and productive, although those groups obviously don’t overlap completely) respond to changes in the tax system, their responses focus not on increased/decreased labor, productivity or investment, but on tax avoidance (see here).

Measuring Poverty (4): The Problem of the Definition of Poverty

Before you can start to measure poverty, you first have to decide what you actually want to measure. What is poverty? That’s not just a philosophical problem because depending on the definition of poverty you use, your measurements will be radically different (even with an identical definition, measurements will be different because of different measurement methods).

Among people who measure poverty, roughly 6 different definitions of poverty are used:

• insufficient income
• insufficient consumption spending
• insufficient caloric intake
• food consumption spending above a certain share of total spending
• certain health indicators such as stunting, malnutrition, infant mortality rates or life expectancy
• certain education indicators such as illiteracy.

None of these definitions is ideal, although the first and second on the list are the most widely used. A few words about the advantages and disadvantages of each.

Income

Advantages:

In developed countries, income is a common definition because it’s easy to measure. Most people in developed countries earn a salary or get their income from sources that are easy to estimate (interest payments, the value of houses, stock market returns etc.). They don’t depend for their income on the climate, crop yields etc. Moreover, developed countries have good tax data which can be used to calculate incomes.

Disadvantages:

In developing countries, however, income data tend to be underestimated because it’s difficult to value the income of farmers and shepherds. Farmers’ incomes fluctuate heavily with climate conditions, crop yields etc. If you ask them one day what their income is, there’s no guarantee that this is a good estimate of their yearly income.

Another disadvantage is that people are generally reluctant to disclose their full income. Some income may have been hidden from the tax administration or may have been earned from illegal activity such as corruption, smuggling, drug trade, prostitution, theft etc. For this reason, using income to estimate poverty means overestimating it.

And, finally, some income may be difficult to calculate (e.g. rising value of livestock).

Consumption

Advantages:

The main advantage of using consumption rather than income to measure poverty is that consumption is much more stable over the year and over a lifetime (see above). Hence, if you ask people about the level of their consumption, they can just tell you about their current situation, without having to go back in time or to predict the future – which they would have to do if you asked them about income. Their current consumption is likely to be representative of their long term consumption, which isn’t the case for income. This is even more true in the case of farmers who depend on the weather for their income and hence have a more volatile income. If you know that farmers are often relatively poor, then this issue is all the more salient for poverty measurement.

Another advantage of using consumption is that people aren’t as reticent to talk about it as they are about certain parts of their income. It’s also appears that people tend to remember their spending better than their income.

Disadvantages:

If you want to measure how much people consume, you have to include durable goods and housing. And consumption of those goods is difficult to measure because it’s difficult to value them. For example, if a household owns a house, you have to estimate what it would cost to rent that particular house and add this to the total consumption of that household, at least if you want to compare their consumption to the consumption of the household next door who has to rent its house. And you can’t make poverty statistics if you don’t make such comparisons. Then you have to do the same for cars etc.

Another difficulty in measuring consumption, is that in developing countries households consume a lot of what they themselves produce on the family farm. This as well is often difficult to value correctly.

And finally, different people have different consumption needs, depending of their age, health, work etc. It’s not clear to me how these different needs are taken into account when consumption is measured and used as an indicator of poverty.

Other definitions

Calorie intake: the problem with this is that different people need different amounts of calories (depending on their type of work, their age, health etc.), and that it isn’t very easy to measure how many calories people actually consume.

Food spending as a fraction of total spending: if you say people who spend more than x % of their total spending on food are considered poor, you still have to factor in relative food prices.

Stunting as an indicator of malnutrition and hence of poverty: stunting (height for age) is a notoriously difficult thing to measure.

Other issues

Some aspects of life tend to be excluded from poverty measurement, even though they have a huge impact on people’s wellbeing. The amount of leisure time people have is perhaps a good indicator of poverty, in certain circumstances (excluding CEOs and US Presidents), but it’s hardly ever counted in poverty measurements.

Another thing: people may have comparable incomes or even consumption patterns, but they may face very different social or environmental conditions: an annual income of $500 may be adequate for people living in a rural environment with a temperate climate where housing is cheap, heating isn’t necessary and subsistence farming is relatively easy. But the same income can mean deep poverty for a family living in a crowded city on the edge of a desert. The presence or absence of public goods such as quality schools, roads, running water and electricity also makes a lot of difference, but poverty measurement usually doesn’t take these goods into account.

Read more here about the importance of defining poverty. More about different types of poverty is here and here.

Measuring Poverty (3): The Problem of Cluster Sampling

Poverty is usually measured by way of surveys. Households are asked how much they consume or how much income they have. Below a certain level of consumption or income people are considered to be poor (this is the so-called poverty line). I already mentioned some of the problems with these kinds of surveys (see here), but I forgot another one: the use of cluster sampling.

When you do surveys, it’s important that the sample of the population that you’re going to question is a random one. Otherwise your survey data aren’t representative of the conditions (or opinions or whatever) of the total population. I explained this in more detail here.

If you take a fully random sample of households throughout the whole country, you get something like this:

fully random selection of a survey sample

However, households surveys that are used to measure poverty are huge undertakings. Not only do they contain lots of questions (the World Bank template questionnaire has over 100 pages), but people all over the country have to be interviewed and interviews have to be done annually and on the spot (especially in poor countries, the poor tend not to have access to telephones or the internet). So there’s a temptation to use clusters: instead of a simple random sample as above, the people doing the survey establish their sample by taking in households in clusters, like below:

clustered selection of a survey sample

This is cheaper and faster than having to travel all over the country and doing just one interview in one place. However, it reduces the reliability of the survey data because the interviewers may, unwittingly, choose more clusters that are relatively poor or relatively rich. Poor people tend to live together with other poor people, and rich people with other rich people. Hence the data may over- or underestimate poverty.

Why Do Countries Become/Remain Democracies? Or Don’t? (7): Education and Prosperity

(This is a follow-up from a previous post).

There aren’t many questions in political science that are more important than this one: which are the factors that determine whether a country becomes or doesn’t become a democracy, and that determine the degree to which a country is democratic. There are two reasons why this question is important:

• Democracy is an important good. I gave some arguments for this statement here. Hence it’s important to know what facilitates or hinders the realization of this good.
• Countries act on this statement in their foreign policy. For example, part of the rationale for invading Iraq was the conviction held by the U.S. administration of the time that promoting democracy in Iraq was both an intrinsic good and in the interest of the U.S. (see here as well).

I gave a short and non-exhaustive list of possible factors promoting/undermining the development/survival of democracy here. In the current post I want to focus on two of them: education levels and income or prosperity levels.

1. Education

education and democracy correlation

(source)

This graph compares the Polity IV Democracy Index scores for the countries of the world (average scores during the 1960-2000 period), with the average years of schooling of the adult population in 1960. And there’s obviously a correlation, and the quote below gives an indication about the direction of correlation:

The chart above shows the 77 percent correlation between education levels in 1960 (measured by the average years of schooling in a country as estimated by Robert Barro and Jong-Wha Lee), and the subsequent 40-year average of the Polity IV democracy index. That democracy index runs from zero to 10, where countries with index values less than three don’t look remotely democratic and countries with index values of about seven are reasonably well-functioning democracies.

One way to read the graph is that there are basically no countries with very low levels of education that have managed to be democratic over the long term, and almost every country with a high level of education has remained a stable democracy.

Thomas Jefferson wrote that “if a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be.” In 1960, 36 nations had less than 1.74 years of schooling (which happens to be the level that Afghanistan has today). Of those 36 countries, only two — India and Botswana — managed to have average democracy scores above 4.2.

Out of the 19 countries in this sample with more than 5.3 years of schooling (the current level in Iran) in 1960, 17 have average democracy scores above 7.9. Fifteen of these have been perfectly democratic, at least by the standards of Polity IV. Only Poland and Hungary were dictatorships, and one can certainly argue that those places would have been democracies in 1960s if it were not for Soviet troops.

But in the middle ranges of education, between two and five years on average, almost anything goes. Some places, like Costa Rica and Italy, have been extremely democratic, while others, like Kuwait and Paraguay, have not. Iraq falls into this category today, which suggests a fair amount of uncertainty about that country’s political future.

Why do I think that the chain of causality runs from education to democracy rather than the reverse? Democracy in 1960 is essentially uncorrelated with subsequent growth in the levels of education. Education in 1960, on the other hand, does an extremely good job of predicting increases in democracy.

Why is there a connection between human capital and freedom? Giacomo Ponzetto, Andrei Shleifer and I have argued that the connection reflects the ability of educated people to organize and fight collaboratively. Dictators provide strong incentives for the ruling clique; democracies provide more modest benefits for everyone else. For democracy to beat dictatorship, the dispersed population needs to have the skills and motivation to work collaboratively to defeat dictatorial coups and executive aggrandizement.

Education teaches skills, like reading and writing, that enable people to work collaboratively. At younger grades, teachers spend a lot of time teaching children how to get along. In the United States, education is strongly linked to civic engagement and membership in social groups. The ability to work together enables the defense of democracy. Edward L. Glaeser (source)

2. Income

There’s an interesting paper here examining the causal relation between democracy and income. The authors find that

the level of national income provides the most important factor explaining inter-country variations in the degree of democracy with the consequence that low income is the most important barrier to democracy.

They first present the correlation between income and democracy, using not the Polity IV index but the Gastil/Freedom House index (see also here):

democracy and income correlation

(source)

The authors have two reasons to believe that the causal link goes from income to democracy rather than the other way around:

• Initial income in 1971 correlates with average democracy scores during the 1972-2005 period. This approach is similar to the one above in the case of education and democracy.
• And – simultaneously – there doesn’t seem to be a very strong causal link going from democracy to income. Barro has concluded that the degree of democracy is only a minor variable explaining income levels. So there is only a weak causal link going from democracy to income (see also here*). This means that the strong correlation shown in the graph above must be explained by a causal link going from income to democracy.

Why do higher levels of income promote the development of democracy? I gave an overview of the reasons here but some of the more important ones are:

• Higher education levels in a population means a higher probability of contestation. Following the Maslow hierarchy of needs it’s natural to expect the appearance of political needs once more basic needs have been secured.
• More income means more complex production. This in turn means that governments find it harder to impose central control over their economies.

Obviously, income is just one of many factors determining the development of democracy. It’s an important one, but clearly not sufficient. The graph above shows the Muslim countries separately. As you can see, all non-Muslim countries with high income levels are in the “high level of democracy” range. Affluent Muslim countries, however, aren’t. This indicates that affluence in itself promotes but doesn’t determine the development of democracy. Other factors are also in play. Culture and religion are perhaps some of them. It’s often argued that Islam is incompatible with democracy, or at least slows down the development of or transition to democracy. I’ll come back to this controversial topic another time.

* One can argue that the link would be stronger if democracies would be of better quality, see here.

Political Jokes & Funny Quotes (65): Santa Claus Discriminates

‘Tis the season again:

(forgot where I got this from; sorry)

More on poverty here, and on income inequality here, here, and here. More on Christmas and human rights (yes, why not?) here (specifically on the “war on Christmas”). More political jokes & funny quotes here.

Lies, Damned Lies, and Statistics (21): Misleading Averages

Did you hear the joke about the statistician who put her head in the oven and her feet in the refrigerator? She said, “On average, I feel just fine.” That’s the same message as in this more widely known joke about statisticians:

statistician drowning in a pond with an average depth of 3ft

(source)

And then there’s this one: did you know that the great majority of people have more than the average number of legs? It’s obvious, really: Among the 57 million people in Britain, there are probably 5,000 people who have only one leg. Therefore, the average number of legs is

And because most people have two legs, they have more legs than the average number of legs (1.9999123) (source). In this case, the median would be a better measure than the average or the mean.

But seriously now, averages can be very misleading, also in statistical work in the field of human rights. Take income data, for example. Income as such isn’t a human rights issue, but poverty is, as well as income inequality. When we look at income data, we may see that average income is rising. However, this may be due to extreme increases at the top 1% of income. If you then exclude the income increases of the top 1% of the population, the large majority of people may not experience rising income. Possible even the opposite. And rising average income – even excluding extremes at the top levels – is perfectly compatible with rising poverty for certain parts of the population.

Averages are often skewed by outliers. That is why it’s often necessary to remove outliers and calculate the averages without them. That will give you a better picture of the characteristics of the general population (the “real” average income evolution in my example). A simple way to neutralize outliers is to look at the median – the middle value of a series of values – rather than the average (or the mean).

An average (or a median for that matter) also doesn’t say anything about the extremes (or, in stat-speak, about the variability or dispersion of the population). A high average income level can hide extremely low and high income levels for certain parts of the population. So, for example, if you start to compare income levels across different countries, you’ll use the average income. Yet country A may have a lower average income than country B, but also lower levels of poverty than country B. That’s because the dispersion of income levels in country A is much smaller than in country B. The average in B is the result of adding together extremely low incomes (i.e. poverty) and extremely high incomes, whereas the average in A comes from the sum of incomes that are much more equal. From the point of view of poverty – which is a human rights issue – average income is misleading because it identifies country A as most poor, whereas in reality there are more poor people in country B. So when looking at averages, it’s always good to look at the standard deviation as well. SD is a measure of the dispersion around the mean.

More posts in this series.

Human Rights Nonsense (8): Heightism or Height Discrimination

(Quick reminder about this blog series, so as to avoid misunderstandings: I don’t want to imply that human rights are nonsense; regular readers know that the purpose of this blog is quite the opposite. What I want to do with the posts in this series is to point to the ways in which the language of human rights is used to push nonsense. Burdening the system of human rights with frivolous demands, exaggerated problems, wrong priorities and silly talk only turns human rights into a less nobel cause, easily disparaged by those who have an interest in rights violations).

It’s a fact that taller people make more money than short people, with an additional inch of height adding about 2 percent to income in the U.S. (source, source). Even among female identical twins (whose heights can differ more than you might expect), the taller sister earns, on average, substantially more than the shorter (source).

(source)

Moreover, taller people live better lives, at least on average. They evaluate their lives more favorably, and they are more likely to report a range of positive emotions, like enjoyment and happiness (source). They are also less likely to report a range of negative experiences, like sadness and physical pain (source, source, source). From 1904 to 1984, the taller candidate won the U.S. presidential elections 80% of the time, and only two presidents in the entire history of the United States have been shorter than the nation’s average height at the time of their presidencies (currently that’s 5.9ft) (source).

height of U.S. presidents

(source)

Hence:

There is no denying that we place a high premium on height, be it social, sexual, or economic, and our preference for height pervades almost every aspect of our lives. Isaac B. Rosenberg (source)

The bias towards tallness and against shortness is one of society’s most blatant and forgiven prejudices. John Kenneth Galbraith, 6.8ft.

The term heightism was coined to describe discrimination based on people’s height, and some propose to include it in antidiscrimination legislation. Others go even further: a special “height tax“.

As in the case of ageism, I don’t claim that there cannot be height discrimination. Very short people are often treated badly simply because they are short. There are still some who believe - often without being fully aware of it – that short stature is an inferior trait and therefore undesirable, and as a result they view short people as inferior human beings, or perhaps even not fully human. This is despicable. If this view leads to discrimination against people on the basis of their height (or rather lack of it) then something must be done about it. Nor do I deny that some people suffer psychologically from their (perceived) lack of height, and sometimes engage in self-mutilation in order to do something about it.

What I do claim here – as in the case of ageism – is that things tend to get blown out of proportion. Is the income differential between people of normal height and slightly taller people really an instance of discrimination? Do we really believe that employers make a conscious choice to pay taller people more? Of course, discrimination doesn’t have to be conscious discrimination. But before you get all worked up about discrimination and launch proposals for legislation and government action, it’s good to consider the possibility that we are dealing with another case of the “omitted variable bias” here. Taller people don’t get paid more because they are taller, but because they (seem to) possess other valuable characteristics, such as self-esteem and positive self-image.

Tall men who were short in high school earn like short men, while short men who were tall in high school earn like tall men. That pretty much rules out discrimination. It’s hard to imagine how or why employers could discriminate in favor of past height. … Tall high-school kids learn to think of themselves as leaders, and that habit of thought persists even when the kids stop growing. (source, source)

Adolescence is a formative period for self-esteem, and when you’re tall in adolescence, you build up self-esteem and a positive self-image, something which will be rewarded in your adult professional life.

For the most part American employers probably aren’t discriminating based on height. They’re “discriminating” based on qualities that tallness seems to encourage. (source)

So it’s not heightism, yet it is discrimination none the less. But perhaps I could ask to focus our attention on other types of rights violations, many of which are much more common and harmful. Our planet is plagued by extreme poverty, famine, war, genocide, terrorism, torture and dictatorship. We can turn to heightism when we’re finished with that. But of course, I’m biased. I’m 6.3 ft, and I would certainly suffer from pro-short affirmative action if such a policy would ever be proposed. So I would dismiss it as “nonsense”, wouldn’t I?

More posts in this series.

Human Rights Facts (47): Poverty and Obesity, Ctd.

Evolution of Obesity

(source)

In a previous post, I mentioned that poor people in the U.S. are more likely to be obese, and that they risk finding themselves in a poverty trap as a result: their poverty causes health problems, which in turn make them more poor (healthcare is obviously expensive, especially when you’re uninsured* and when your illness causes you to be absent from work or to lose your job altogether). Why does poverty cause health problems? For many reasons, but the one we’re focusing on here is obesity. It seems that poverty shifts

choices toward an energy-dense, highly palatable diet that provides maximum calories per the least volume and the least cost. The hypothesis [is] that healthier diets may indeed cost more. Adam Drewnowski and SE Specter (source)

A large body of epidemiologic data show that diet quality follows a socioeconomic gradient. Whereas higher-quality diets are associated with greater affluence, energy-dense diets that are nutrient-poor are preferentially consumed by persons of lower socioeconomic status (SES) and of more limited economic means. As this review demonstrates, whole grains, lean meats, fish, low-fat dairy products, and fresh vegetables and fruit are more likely to be consumed by groups of higher SES. In contrast, the consumption of refined grains and added fats has been associated with lower SES. … The observed associations between SES variables and diet-quality measures can be explained by a variety of potentially causal mechanisms. The disparity in energy costs ($/MJ) between energy-dense and nutrient-dense foods is one such mechanism; easy physical access to low-cost energy-dense foods is another. If higher SES is a causal determinant of diet quality, then the reported associations between diet quality and better health, found in so many epidemiologic studies, may have been confounded by unobserved indexes of social class. Conversely, if limited economic resources are causally linked to low-quality diets, some current strategies for health promotion, based on recommending high-cost foods to low-income people, may prove to be wholly ineffective. Nicole Darmon and Adam Drewnowski (source)

Poverty causes obesity, obesity causes ill health, and ill health causes poverty. And both ill health and poverty are human rights violations (see here and here respectively). So plenty of reasons to link obesity and human rights.

The reasons why poverty causes obesity and shifts diets towards low quality foods are diverse, and not limited to the relatively high cost of high quality food. There’s also something called

an “obesogenic” environment. Food options in poor neighborhoods are severely limited: It’s a lot easier to find quarter waters and pork rinds on the corner than fresh fruit and vegetables. Low-income workers may also have less time to cook their own meals, less money to join sports clubs, and less opportunity to exercise outdoors. (source)

poverty and obesity cartoon by David Fitzsimmons

(source)

So obesity is one thing which pushes people into a vicious circle of poverty and ill health (unhealthy work, inadequate sanitation, inadequate shelter etc. also contribute to this vicious circle).  But obesity and poverty can create a vicious circle of their own. If poverty leads to obesity, obesity can also be impoverishing:

Women who are two standard deviations overweight (that’s 64 pounds above normal) make 9 percent less money. … Obese women are also half as likely to attend college as their peers and 20 percent less likely to get married. (Marriage seems to help alleviate poverty.) (source)

More about the relationship between poverty and health here and here.

* Among the 46 million people in America who lack medical insurance, about two-thirds earn less than twice the poverty level (source, source).

Update:

Contrary to conventional wisdom, … the poor have never had a statistically significant higher prevalence of overweight status at any time in the last 35 years. Despite this empirical evidence, the view that the poor are less healthy in terms of excess accumulation of fat persists. (source)

Lies, Damned Lies, and Statistics (17): The Correlation-Causation Problem and Omitted Variable Bias, aka “Jumping to Conclusions”

correlation vs causation

(source)

Some more detailed information after my casual remark on the correlation-causation problem. Here’s a fictitious example of what is meant by “Omitted Variable Bias“, a type of statistical bias that illustrates this problem. Suppose we see from Department of Defense data that male U.S. soldiers are more likely to be killed in action than female soldiers. Or, more precisely and in order to avoid another statistical error, the percentage of male soldiers killed in action is larger than the percentage of female soldiers. So there is a correlation between the gender of soldiers and the likelihood of being killed in action.

One could – and one often does – conclude from such a finding that there is a causation of some kind: the gender of soldiers increases the chances of being killed in action. Again more precisely: one can conclude that some aspects of gender – e.g. a male propensity for risk taking – leads to higher mortality.

However, it’s here that the Omitted Variable Bias pops up. The real cause of the discrepancy between male and female combat mortality may not be gender or a gender related thing, but a third element, an “omitted variable” which doesn’t show in the correlation. In our fictional example, it may be the type of deployment: it may be that male soldiers are more commonly deployed in dangerous combat operations, whereas female soldiers may be more active in support operations away from the front-line.

correlation and causation

(source)

OK, time for a real example. It has to do with home-schooling. In the U.S., many parents decide to keep their children away from school and teach them at home. For different reasons: ideological ones, reasons that have to do with their children’s special needs etc. The reasons are not important here. What is important is that many people think that home-schooled children are somehow less well educated (parents, after all, aren’t trained teachers). However, proponents of home-schooling point to a study that found that these children score above average in tests. However, this is a correlation, not necessarily a causal link. It doesn’t prove that home-schooling is superior to traditional schooling. Parents who teach their children at home are, by definition, heavily involved in their children’s education. The children of such parents do above average in normal schooling as well. The omitted variable here is parents’ involvement. It’s not the fact that the children are schooled at home that explains their above average scores. It’s the type of parents. Instead of comparing home-schooled children to all other children, one should compare them to children from similar families in the traditional system.

(source)

Greg Mankiw believes he has found another example of Omitted Variable Bias in this graph plotting test scores for U.S. students against their family income:

(source, the R-square for each test average/income range chart is about 0.95)

[T]he above graph … show[s] that kids from higher income families get higher average SAT scores. Of course! But so what? This fact tells us nothing about the causal impact of income on test scores. … This graph is a good example of omitted variable bias … The key omitted variable here is parents’ IQ. Smart parents make more money and pass those good genes on to their offspring. Suppose we were to graph average SAT scores by the number of bathrooms a student has in his or her family home. That curve would also likely slope upward. (After all, people with more money buy larger homes with more bathrooms.) But it would be a mistake to conclude that installing an extra toilet raises yours kids’ SAT scores. … It would be interesting to see the above graph reproduced for adopted children only. I bet that the curve would be a lot flatter. Greg Mankiw (source)

Meaning that adopted children, who usually don’t receive their genes from their new families, have equal test scores, no matter if they have been adopted by rich or poor families. Meaning in turn that the wealth of the family in which you are raised doesn’t influence your education level, test scores or intelligence.

However, in his typical hurry to discard all possible negative effects of poverty, Mankiw may have gone a bit too fast. While it’s not impossible that the correlation is fully explained by differences in parental IQ, other evidence points elsewhere. I’m always suspicious of theories that take one cause, exclude every other type of explanation and end up with a fully deterministic system, especially if the one cause that is selected is DNA. Life is more complex than that. Regarding this particular matter, take a look back at this post, which shows that education levels are to some extent determined by parental income (university enrollment is determined both by test scores and by parental income, even to the extent that people from high income families but with average test scores, are slightly more likely to enroll in university than people from poor families but with high test scores).

What Mankiw did, in trying to avoid the Omitted Variable Bias, was in fact another type of bias, one which we could call the Singular Variable Bias: assuming that a phenomenon has a singular cause. In honor of Professor Mankiw (who does some good work, see here for example), I propose that henceforth we call it the Mankiw Bias.

More posts in this series.

The Ethics of Human Rights (21): Social Mobility, Egalitarianism, Equality of Opportunity, and Meritocracy

equality of opportunity

(source, cartoon by Dario Castillejos)

In the best egalitarian society, people can change occupations, groups, associations etc. but their income, poverty level or social class will not change a lot as a result of this, since there’s not much difference between different income levels. This means that the society in question has decided that different occupations, talents and efforts should receive roughly the same financial reward. That may or may not be a good thing. Intuitively I would say that some occupations and some amounts of effort investment should receive higher financial rewards than others, in which case a somewhat inegalitarian society is what I want, notwithstanding my concerns about the problems created by inequality (see here for example). What I certainly don’t want is the worst egalitarian society, which combines the problem of equal rewards for morally diverse activities with the problem of fixed occupations and lack of social mobility, Soviet style.

In the worst inegalitarian society, there isn’t a lot of social mobility, social mobility in the sense of children ending up in adult life in a higher or lower level of income than the level of their parents.* There may be relatively many people changing occupations, but always within a limited class of occupations that yield roughly the same income levels. Such a lack of social mobility is an indication that income levels are not the result of merit, desert, reward, effort or talent, but rather the result of society’s choice not to equalize opportunities and to let people’s opportunities be determined by factors such as the family in which they happen to be born, unequal access to education etc. Genes do play a role in determining talent, and perhaps even willingness to invest effort, but only if genes were the sole force determining talent and effort could we claim that a lack of social mobility in an inegalitarian society is an inevitable characteristic of this society and not the consequence of a conscious choice of this society.

Since I don’t believe that genes have such a strong determining force, I have to conclude that the worst inegalitarian society chooses to limit social mobility and to accept (or even promote) unequal opportunities. Such a society in fact chooses to be a class society, a society that limits entry and exit into the various classes or income level groups and that forces parents and their adult children to share similar income levels (income levels are transmitted across generations).

The limited power of genes also allows me to conclude, positively now, that the best inegalitarian society can and should try to enact policies that promote social mobility. Such policies should remove obstacles that hinder people from using their talents and efforts in order to achieve a position in society that corresponds to a higher income level than the level their parents “enjoy”. These obstacles can be parental poverty, lack of access to quality education or to cultural resources, parental crime, peer pressure etc. In short, the best inegalitarian society should try to equalize opportunities. People with similar talents and willingness to develop and use these talents should have a roughly equal chance of ending up in a similar income level. If they don’t have such an equal chance, then it means that they don’t have the same opportunities and that certain obstacles hinder some of these people in the use and development of their talents. I can see no reason why the imposition of such obstacles on some people and not on others could ever be justified, but I’m open to suggestions.

Those who are at the same level of talent and ability, and have the same willingness to use them, should have the same prospects of success regardless of their initial place in the social system. In all sectors of society there should be roughly equal prospects of culture and achievement for everyone similarly motivated and endowed. The expectations of those with the same abilities and aspirations should not be affected by their social class. Chances to acquire cultural knowledge and skills should not depend upon one’s class position, and so the school system, whether public or private, should be designed to even out class barriers. John Rawls (source)

John Rawls

If we assume that genes have a limited role in distributing talent, that the distribution of talent among people is therefore to some extent random and not determined by who their parents are; and if we further assume that the willingness to invest effort isn’t completely determined by parental influence or by genetics – and if, on top of that, opportunities are equalized (to some extent), then we should find a lack of correlation between the economic status of parents and their children. We should, in other words, find high levels of social mobility. If not, the influence of genes on talent and the influence of parents on the willingness to invest effort are more powerful than we think; or – more likely – the society hasn’t been successful in creating equality of opportunity (hasn’t provided equal access to quality education for instance). The levels of mobility are therefore a good indicator of the equality of opportunity in a society.

If the best inegalitarian society tries to equalize opportunities and is reasonably successful, then this doesn’t mean that it will necessarily become an egalitarian society. Equalizing opportunities doesn’t imply equalizing rewards for different activities, and neither does it mean that everyone will make equally successful use of the equal opportunities. There will be a lot of social mobility and a lack of correlation between the social position of parents and children, but the mobility can go up for some people and down for others, depending on the talents people have, the efforts they are willing to invest, and the rewards that society gives to particular talents, activities and efforts. Because of these different rewards, and because equal opportunities will be used unequally, there is no reason to expect a convergence of income levels. The best inegalitarian society will become a meritocracy, which produces, by definition, unequal income levels because it differentiates between deserving and less deserving activities, and between deserving and less deserving efforts within an activity.

This kind of society differs fundamentally from the worst inegalitarian society which is a class society and which therefore locks people in positions whatever their merits (class society can mean different things – caste society, nepotistic society etc. – but the effect is always the same). It also differs from the best egalitarian society which allows people to move between occupations but rewards all occupations equally and can’t therefore be called a meritocracy.

I mentioned before that a society can choose to be the best or the worst inegalitarian society. But how does it do that? “Society” is a vague concept. Who are the people actually making those choices? Well, it can be the politicians for instance. It’s quite clear that different policies have different effects on the equality of opportunities and on social mobility. Estate taxes or inheritance taxes play a huge role. Redistribution policies and policies aimed at education as well. But the processes leading towards and away from equality of opportunity can also be more below the surface:

It turns out that there’s a bit of a paradoxical relationship between believing your country has a lot of economic mobility and your country actually having a lot of economic mobility. If you believe that your country is extremely mobile, you’re likely to believe the results of the economic competition are relatively fair. As such, you won’t want to slap the rich with particularly high tax rates and you won’t be terribly concerned about spreading economic opportunity. After all, anyone can make it!

On the other hand, if you don’t believe your country is terribly mobile, then you’re less likely to believe economic outcomes are fair. And if you don’t believe the outcomes are fair, you’re likely to tax the winners relatively heavily and plow those profits into things like universal health care and free college. Policies, in other words, that spread opportunity more widely and thus make your society more mobile. Put like that, it sort of makes sense. If you believe your society is already economically mobile, you don’t spend a lot of time trying to solve the problem of insufficient economic mobility. if you don’t believe that, then you implement policies meant to increase mobility. Ezra Klein (source)

Some data on social mobility are here, here, here, and here. And there’s something interesting about what’s called a Human Opportunity Index here. More posts in this series are here.

* “Basically social mobility refers to the likelihood that a child will grow up into adulthood and attain a higher level of economic and social wellbeing than his/her family of origin. Is there a correlation between the socioeconomic status (SES) of an adult and his/her family of origin? Do poor people tend to have poor parents? And do poor parents tend to have children who end up as poor adults later in life? Does low SES in the parents’ circumstances at a certain time in life – say, the age of 30 – serve to predict the SES of the child at the same age?” (source)

Measuring Poverty (1): Measuring Poverty in India

India is undoubtedly a poor country. Over the last decades, it has seen a decrease in the number of its citizens living in poverty (see an international comparison of poverty reduction here), but the extent of the decrease is disputed. There is a paper on this controversy here (or here). And this is one measurement from another paper:

(source, this graph uses the percentage of the population in poverty, or headcount poverty; the measure of poverty used is the one based on calorie intake described below; this information comes from the National Sample Survey (NSS), which tracks consumption by a representative sample of the population – survey data only available for the years in the graph)

The main causes of this progress (or whatever progress other statistics or papers show) are undoubtedly the “green revolution” and, in recent years, the steady economic growth (I argued here that there is, generally, a correspondence between faster per capita growth and faster poverty reduction).

The government of India uses a method to measure poverty that I have mentioned briefly in one of my older posts on poverty measurement and that is different from the standard type of measurement (the “$1 a day” measurement, according to which 42% of India’s population is poor): given that an average adult male has to eat food representing approximately 2000-2500 calories per day in order to sustain the human body, how much would it cost to buy these calories? Those who don’t have an income that is lower than this cost, are poor.

Actually, the Indian government uses the thresholds of 2,400 calories a day in rural areas and 2,100 in urban areas. (City dwellers are thought to exert less energy, so they should need to consume less. See here).

Of course, this measure, like all measures, isn’t perfect. A person may be able to afford to buy food that contains 2,400 calories, but the quality or nutritional value of this food (in terms of vitamins etc.) may be so low that we can hardly exclude this person from the population of the poor. He or she may be able to buy 2,440 calories, but not enough nutritional value to lead a decent life.

However, if we take this measurement at face value we see that caloric intake does indeed mirror the poverty statistics in a satisfactory way. Compare this graph with the graph above:

(source)

However, I wonder whether India’s poverty measurements include only consumption of food. Poverty is more than just a nutritional issue. People may be able to buy enough food of sufficient nutritional quality, but may be left without resources for shelter, healthcare, education etc.

More on India here. More on the caste system here. And here is a sideshow of the pictures I took on my recent trip to India. More on poverty measurement in general. And if you’re wondering why I think this is a human rights issue, look here.

Income Inequality (17): Rising Poverty and Falling Income in the U.S.

poverty in the U.S.

(source, source)

Disappointing data from the U.S. Census Bureau: in 2008, poverty rose and median income declined (source), undoubtedly as a consequence of the recession.

Median household income declined 3.6 percent in 2008 after adjusting for inflation, the largest single-year decline on record, and reached its lowest point since 1997. The poverty rate rose to 13.2 percent, its highest level since 1997. The number of people in poverty hit 39.8 million, the highest level since 1960. (source)

poverty and income levels in the U.S.

(source, adjusted for inflation)

Since the recession only started mid-2008 and became much worse in 2009, the data for 2009 - and perhaps 2010 - will probably be even worse. Unemployment is one of the main causes for falling income and rising poverty, and unemployment is a “lagging indicator“, meaning that employment only starts to pick up long after a recession has officially ended.

Poverty levels have been on the rise since a number of years.

The rise in poverty in 2008 followed a disappointing performance during the economic expansion that started in late 2001 and ended in December 2007. Poverty, which rose during and after the 2001 recession, never dropped back down to its pre-recession level. This was one of the worst records for poverty reduction of any economic recovery in decades. … The disappointing performance of the last economic expansion reflects, in part, the fact that the fruits of the economic growth during that expansion were heavily skewed to people high on the income scale rather than being broadly shared. Economists Thomas Piketty and Emmanuel Saez have found the top 1 percent of households received two-thirds of the growth in national income that occurred during the recovery, a larger share than in any other economic expansion since the 1920s. (source)

Read more on income inequality in the U.S. here, here, and here. Child poverty increased as well:

The child poverty rate rose to 19.0 percent, leaving nearly 14.1 million children under 18 (nearly one in five) below the poverty line. The percentage of all children who live in families below half the poverty line also rose, to 8.1 percent. Both the percentage of children in poverty and the percentage in deep poverty* reached the highest point since 1997. (source)

child poverty rate in the U.S.

(source)

Compare this to other developed countries:

child poverty rates in different countries

(source)

I made some critical remarks on the “poverty line” as the poverty measurement system in the U.S. here. If those remarks are correct, the picture would be even bleaker.

One could claim that declines in household income result from declines in household size. While it’s true that households are somewhat smaller now than 10 years ago, this doesn’t explain the drop in income. See here.

* “Deep poverty” = cash incomes below half of the poverty line

The Causes of Poverty (24): Population Growth and Income Growth: Incompatible?

This single water tower amidst a sea of houses in Baguio, Luzon in the Philippines represents the population related demands on limited water sources

(source)

Some blame overpopulation for many of the world’s problems such as poverty, famine and war (which are obviously rights violations). There are supposed to be too many people for peaceful coexistence and sustainable food production. Those who worry about overpopulation are often called (neo-)Malthusians, and either predict a sharp fall in population levels because of the problems caused by overpopulation (a “Malthusian catastrophe”), or/and propose population control as a measure to solve these problems.

For pretty much all of human history, population growth constrained growth in real standards of living. That’s the “Malthusian Trap”: as standards of living improved, population increased, which put a strain on resources and drove down standards of living, which in turn drove down population growth, rinse & repeat. The industrial revolution broke this trap, although it’s worth pointing out the fairly obvious fact that this is not true for the entire world. Conor Clarke (source)

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What the figure above shows is that over a roughly 3000 year period, during which there was obviously quite a lot of technological progress — iron plows, horse collars, mastering the cultivation of rice, the importation of potatoes into Europe, etc. — living standards basically went nowhere. Why? Because population growth always ate up the gains, pushing living standards back to roughly subsistence.

The figure [below] helps suggest why: technological change was slow — so slow that by 1600 or so, when England had finally reclaimed its population losses from the Black Death, it found real wages back to more or less 1300 levels again.

And here’s the sense in which Malthus was right: he had a fundamentally valid model of the pre-Industrial Revolution economy, which was one in which technological progress translated into more people, not higher living standards. This homeostasis only broke down when very rapid technological change finally outstripped population pressure for an extended period. Paul Krugman (source)

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It’s apparent from this last graph that population growth can go hand in hand with income growth, and that it’s not correct to state that population growth necessarily leads to more poverty, which in turn leads to a reversal of population growth. But these compatible evolutions of population and income seem to require technological advances.

Note: my criticism of Malthusianism and other types of overpopulation hysteria (see here for some examples) is targeted only at deterministic theories which believe in overpopulation as the main if not only cause for the world’s problems, and which see overpopulation as a global problem. I accept that in certain specific areas of the world, population pressures can make things worse. But I don’t agree that these pressures are the sole or even the main cause of problems such as poverty, famine, war etc. And neither do I agree that population control is the main remedy for these problems. For example, we all know that water shortages – even very local ones – aren’t caused by overpopulation and won’t be solved by population control. More intelligent irrigation methods are the answer. And when we leave the local level and take the global point of view, the population problem is even less salient. On a world scale, income has grown systematically faster than the world’s population during the last centuries. Population pressures do not lead us to an inevitable “trap” as Malthus and his followers claim.

Income Inequality (16b): Its Moral Significance

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Will Wilkinson’s recent paper on income inequality argues that it’s an overrated problem (see also here). Before I deal with his arguments in detail, a quick reminder of my personal views on income inequality. From the point of view of human rights (which is my default starting point), the most urgent problem is not necessarily the unequal distribution of wealth or income, but the insufficient wealth and income of the poor in a given population. The urgent problem is absolute poverty, rather than relative poverty. Or, in other words, what we have to tackle first is some people’s inability to gather sufficient resources necessary to survive in a decent way, not the fact that some people have more resources than others. The human rights of people in a very poor but highly egalitarian society can be violated more extensively than the human rights of the relatively poor in a society that is very rich on average but highly inegalitarian. Eliminating or reducing income inequality – or “killing the rich” (metaphorically) as in the image above – doesn’t necessarily help the poor.

However, inequality can be a problem. The absence of poverty or the availability of sufficient resources for a decent human life is a human right, but it isn’t the only human right (some would even say that it isn’t a right at all, but I disagree, together with the drafters of the Universal Declaration). Human rights also include political human rights, and these political human rights usually mean the right to democratic participation in government and legislation. Income inequality makes these political rights highly problematic. Democracy is based on the equal influence of every citizen, but income inequality, by definition, gives the wealthier citizens more influence in politics.

In addition, income inequality may also lead to social fragmentation, with negative consequences for the cohesiveness of a society. We see that highly inegalitarian societies, such as the U.S., are also societies with relatively low levels of social mobility. One could argue that income inequality isn’t much of a problem when everyone has the same chance to be on the good side of the inequality. But when it is combined with social rigidity and stratification, it undermines meritocracy and equality of opportunity, which in turn enhances social fragmentation.

Finally, people in more egalitarian societies tend to be healthier, to live longer and to be happier (as Wilkinson should know). See here and here.

These are serious issues from the point of view of human rights. If reducing income inequality (for example through progressive taxation, public spending – on welfare, education, healthcare etc. –  and regulation of political funding and lobbying) can go some way towards a solution, we should consider it.

One last point: all these issues are based on the assumption that income inequality is the outcome of just processes. In other words, we assume that people’s incomes are the result of their own desert and effort. If, on the other hand, we assume – more correctly in my view – that income and wealth distributions are affected by unjust processes (such as colonialism, slavery, discrimination, inheritance and a lack of social mobility etc.) than we have additional reasons to do something about income inequality. And these reasons have nothing to do with the negative consequences of inequality. They are, instead, related to its origins.

(If you want to know more about my views on income inequality, before I tackle Wilkinson’s views, you can read this old post).

Wilkinson claims that

income inequality is a dangerous distraction from the real problems: poverty, lack of economic opportunity, and systemic injustice.

Those are real problems indeed, and even more urgent problems, as I’ve stated above. But income inequality is also a real problem, and I fail to see how one problem is necessarily a distraction from another problem. Human beings are perfectly capable of tackling several problems at the same time.

He also states that

there is little evidence that high levels of income inequality lead down a slippery slope to the destruction of democracy and rule by the rich.

That’s not true, as you can read here and here. Income inequality obviously doesn’t necessarily “destroy” democracy or replace it with “plutocracy”, but it significantly reduces its meaning, on both sides of the income gap: wealthy people use their wealth, their higher education, their networks etc. to gain influence, and poor people tend to participate less and thereby lose influence. While it’s true that wealthy people can use their political influence for the benefit of their poor fellow-citizens, it’s still a fact that many don’t. If we cherish democracy, we should implement policies that limit the risk of selfish interventions by disproportionately influential individuals or groups, as well as policies that encourage participation of relatively less influential individuals and groups. It’s not sufficient, as Wilkinson does, to point to the fact that many wealthy people voted for Obama, knowing that he would raise their taxes.

Wilkinson also believes that the level of American income inequality was not caused by exploitative, institutional mechanisms. Given the historical inheritance of slavery and discrimination, I think this opinion is false. This inheritance, combined with astonishingly high levels of correlation between parental income and the income of children, does suggest that there are institutional mechanisms which perpetuate income inequality. While it’s wrong to claim that the inheritance of racism and slavery is to blame for the poverty of African-Americans living today, it’s very likely that it has some effect.

Few people argue for a completely egalitarian society. I certainly don’t. Some inequalities are perfectly just, and probably necessary from the point of view of economic efficiency. But there are many who argue for the opposite: don’t do anything about inequality. While I don’t believe Wilkinson is one of them, his statement that “income inequality is a dangerous distraction” encourages those who believe that we shouldn’t care about inequality.

There’s a post here on the measurement of income inequality. There are some statistics here. Data on the U.S. are here and here. And there is a world map of income inequality here. More posts in this series are here.

Terrorism and Human Rights (9): Is Terrorism Caused by Poverty and Lack of Education?

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This paper says it is incorrect to state that poverty and a lack of education are the root causes driving people towards terrorism. It’s a highly interesting paper worth to be read in full. I’ll just try to summarize it here.

Terrorism is premeditated violence against citizens intended to cause fear and terror and to influence public opinion and government policies. Given that terrorism is obviously a crime, and given the well-established link causal link between poverty and lack of education on the one hand, and crime on the other, one could assume that there is also such a link between poverty/lack of education and terrorism. However, the link with crime in general, as the paper points out, is stronger in the case of property crime than in the case of violent crime.  And terrorism is a violent crime.

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The paper also presents more direct evidence of the absence of a causal link between poverty/lack of education and terrorism:

• Opinion polls measuring public support for terrorism among Palestinians do not show more support among the poor.
• Hezbollah members are not, on average, poorer than the rest of the population of Lebanon, on the contrary.
• The education and income levels of individual terrorists are higher than average:

An explanation for this is that people with higher levels of education and income often feel much stronger about political causes, have more passionate support for political groups etc., partly because such involvement requires knowledge and leisure time.

The most extreme type of terrorist, the suicide bomber, is obviously not motivated by economic gain. But he may be motivated, not by his own poverty and his struggle against it, but by the poverty of his family, people or country (many terrorist groups give money to the families of suicide bombers). The paper calls this “Robin Hood terrorism”. While it is true that the poorer countries produce relatively more terrorists, this correlation disappears when respect for human rights is taken into account.

At a given level of income, countries with greater respect for civil liberties are less likely to be a wellspring for international terrorists. A lack of civil liberties is associated with higher participation in terrorism.

The results of the paper are discouraging in a way, because they cut off one avenue in the fight against terrorism: provide better education and higher incomes. If terrorism isn’t the result of poverty and ignorance, then the struggle against it may prove to be very difficult. It’s easier to do away with poverty and ignorance than it is to remove other possible causes of terrorism, such as indignity, frustration, religion, culture etc. What is encouraging is the link between rights violations and terrorism. One more reason to promote human rights.

More on terrorism here, here and here.

Human Rights Facts (25): There’s No Reason For Anyone to Be Poor

The two graphs below, from Jeffrey Sachs’ “The End of Poverty”, show population growth and average per capita income growth over the centuries. Whereas both population and income stayed relatively stable during thousands of years, they took off during the last 2 or 3 centuries. (See this post for an explanation of the sudden an rapid rise of economic growth).

The interesting point is that per capita income grew much faster than the population. Population numbers in 2000 were about 6 times higher than in 1800; average per capita income was 9 times higher! Of course, the word to focus on is “average”. Income isn’t distributed equally, and there are huge and even “obscene” difference between income in the West and elsewhere. But if average incomes rise faster than the population numbers, everyone can – potentially – be richer than before, or less poor. Poverty is then no longer a problem of insufficient resources or scarcity, but a problem of distribution and justice.

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It would also be interesting to hear the reaction of Malthusians: if the world’s problems, such as poverty and war, are caused by overpopulation and the pressure of population growth on the economy, then how do they explain income growth rising faster than the population? I do admit that population pressures on a very local level can cause temporary problems of scarcity, but globally they don’t seem to matter much.

What is Poverty? (2): Different Definitions of Poverty and an Attempt to Make Some Order

(I’m sorry for this rather long post, but I couldn’t see a way to break it into pieces. For those courageous enough to give it a try: start in the middle, right after the definitions).

This is the World Bank‘s definition of poverty:

Poverty is an income level below some minimum level necessary to meet basic needs. This minimum level is usually called the “poverty line”. What is necessary to satisfy basic needs varies across time and societies. Therefore, poverty lines vary in time and place, and each country uses lines which are appropriate to its level of development, societal norms and values. But the content of the needs is more or less the same everywhere. Poverty is hunger. Poverty is lack of shelter. Poverty is being sick and not being able to see a doctor. Poverty is not having access to school and not knowing how to read. Poverty is not having a job, is fear for the future, living one day at a time. Poverty is losing a child to illness brought about by unclean water. Poverty is powerlessness, lack of representation and freedom.

And this is Wikipedia‘s definition:

Poverty is the deprivation of common necessities such as food, clothing, shelter and safe drinking water, all of which determine our quality of life. It may also include the lack of access to opportunities such as education and employment which aid the escape from poverty and/or allow one to enjoy the respect of fellow citizens. According to Mollie Orshansky who developed the poverty measurements used by the U.S. government, “to be poor is to be deprived of those goods and services and pleasures which others around us take for granted”.

The definition agreed by the World Summit on Social Development in Copenhagen in 1995:

Poverty is a condition characterized by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services. It includes a lack of income and productive resources to ensure sustainable livelihoods; hunger and malnutrition; ill health; limited or lack of access to education and other basic services; increased morbidity and mortality from illness; homelessness and inadequate housing; unsafe environments and social discrimination and exclusion. It is also characterized by lack of participation in decision making and in civil, social and cultural life. It occurs in all countries: as mass poverty in many developing countries, pockets of poverty amid wealth in developed countries, loss of livelihoods as a result of economic recession, sudden poverty as a result of disaster or conflict, the poverty of low-wage workers, and the utter destitution of people who fall outside family support systems, social institutions and safety nets.

The UN definition:

Fundamentally, poverty is a denial of choices and opportunities, a violation of human dignity. It means lack of basic capacity to participate effectively in society. It means not having enough to feed and cloth a family, not having a school or clinic to go to, not having the land on which to grow one’s food or a job to earn one’s living, not having access to credit. It means insecurity, powerlessness and exclusion of individuals, households and communities. It means susceptibility to violence, and it often implies living on marginal or fragile environments, without access to clean water or sanitation.

There’s also the very interesting definition by David Gordon in his paper, “Indicators of Poverty & Hunger“.

Poverty is the absence of any two or more of the following eight basic needs:

• Food: Body Mass Index must be above 16.
• Safe drinking water: Water must not come from solely rivers and ponds, and must be available nearby (less than 15 minutes’ walk each way).
• Sanitation facilities: Toilets or latrines must be accessible in or near the home.
• Health: Treatment must be received for serious illnesses and pregnancy.
• Shelter: Homes must have fewer than four people living in each room. Floors must not be made of dirt, mud, or clay.
• Education: Everyone must attend school or otherwise learn to read.
• Information: Everyone must have access to newspapers, radios, televisions, computers, or telephones at home.
• Access to services such as education, health, legal, social, and financial (credit) services.

And there’s the equally interesting but completely different definition by Peter Townsend:

Individuals, families and groups in the population can be said to be in poverty when they lack the resources to obtain the types of diet, participate in the activities and have the living conditions and amenities which are customary, or are at least widely encouraged or approved, in the societies to which they belong. Their resources are so seriously below those commanded by the average individual or family that they are, in effect, excluded from ordinary living patterns and activities.

There are, of course, many other definitions, but if we stick to these examples and summarize them, we can conclude that poverty is the impossibility to meet certain basic needs or the absence of certain necessities or resources:

• food *
• clothing *
• shelter *
• sanitation *
• clean water *
• health **
• education **
• work **
• power **
• representation **
• freedom **
• information **
• trust in the future (absence of fear) ***
• access to opportunities and choices ***
• respect ***
• self-esteem ***
• dignity ***
• inclusion, participation in social and cultural life ***
• independence ***.

All of these needs and resources are valuable and important in themselves, but I think we can distinguish them according to certain types. For example, you’re not necessarily poor if you’re uneducated. I can think of many uneducated rich people. And all poor people aren’t necessarily without an education. So I would propose the following distinction:

• Food, clothing, shelter, sanitation and clean water are needs that are directly linked to poverty. You are, by definition, poor if you lack one of these resources (and you may even die). I call these first-level-resources (marked with *).
• Health, education, work, representation, power, freedom and information, are resources, the lack of which can (but doesn’t have to) make you poor – poor in the sense of not having the first types of resources – and the presence of which is necessary to escape poverty. I call these second-level-resources or supporting resources (marked with **).
• Respect, self-esteem, dignity, inclusion, participation, trust in the future and the absence of fear, and opportunities, are resources which, like health, education etc., you may lose when you become poor, but which do not really help you to escape poverty. I call these third-level-resources or concomitant resources (marked with ***).

When looking at the different definitions cited above, we also see that poverty has many dimensions:

• A material dimension (food, clothing etc.)
• A psychological dimension (respect, self-esteem, trust, fear)
• A political dimension (power, representation) and
• A social dimension (education, health, work).

The latter 2 dimensions point to the fact that poverty, while often suffered alone and in solitude, requires social cooperation if it is to be eliminated.

The material, political and social dimensions can, to some extent, be measured, which is necessary if we want to have an idea of the importance of the problem, its evolution over time, and the effectiveness and success of policy measures aimed to combat poverty. One can measure nutrition, housing, income, access to certain services, standard of living, quality of life etc.

The psychological dimension is much more difficult to measure, but no less important. This dimension also shows us that poverty is not just a matter of the current state one is in, and the resources one has or doesn’t have. It is also about vulnerability, about the future, about trust and fear. And it also has a relative side (obvious from the Townsend definition given above), which attaches itself to the problem of our current level of resources (the absolute side): poverty means comparing yourself to others, feeling like a failure, humiliated, shameful etc.

Here’s a video about “what is poverty”:

More on poverty here, here and here.

Income Inequality (9): Absolute and Relative Poverty

The problem of poverty and related problems such as income inequality have received a lot of attention on this blog, because I consider poverty to be one of the most urgent human rights problems. Now and again, I’ve also mentioned the possibility of distinguishing between different types of poverty (here for example), and one such possibility in particular, namely the difference between absolute and relative poverty. Absolute poverty meaning the lack of basic resources, and relative poverty meaning income inequality.

I’ve taken the view that absolute poverty is a more urgent priority than relative poverty (see here), and that therefore measurements of income inequality – such as the Gini coefficient – are less relevant than measurements of absolute poverty – such as the $1 a day measure. It’s the absolute income of people that matters, not the fact that other people are richer than you are and can afford more luxuries, at least from a human rights point of view (the absence of a certain minimum amount of basic resources is a human rights violation in itself and renders many other human rights meaningless; see here).

Inequality of wealth is less urgent than the fight against absolute poverty, and opposition to income inequality can be easily categorized as the politics of envy. If inequality really matters it is the inequality of opportunity and other types of inequality not related to wealth (discrimination for example).

The one exception I was willing to make is the negative influence of high levels of income inequality on the adequate functioning of democracy (see here and here). And I also pointed out that there is a correlation between relative poverty and absolute poverty: countries with relatively unequal income distribution don’t score well on absolute poverty measures either (see here).

Richard Wilkinson

It now seems that I was wrong. Richard Wilkinson has pointed out, some time ago already, that relative poverty matters. Once economic growth has pushed up absolute (albeit average per capita) income levels and done away with penury, people tend to be more healthy and live longer if levels of income inequality are relatively low. Countries with lower per capita income levels but also lower income inequality, can do better in terms of public health than high income countries with higher levels of income inequality. Poorer countries with a more equal wealth distribution are healthier and happier than richer, more unequal ones. Here’s a graph (from another, unrelated study) linking inequality (measured not by Gini but by way of the concentration of wealth in the 10% richest people) to life expectancy and child mortality:

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Some of the reasons are the stress of living at the bottom of the pecking order, the stress of disrespect and the lack of esteem and respect (including self-respect).

This doesn’t mean than countries shouldn’t try to achieve economic growth. I’ve shown here that economic growth and poverty reduction go hand in hand.

Income Inequality (8): Income Inequality in the U.S. Under Democratic and Republican Presidents

Larry Bartels

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Partisan differences in macroeconomic priorities and performance have clearly had a very significant impact on the economic fortunes of American families over the past half century. Larry Bartels

In this post, I described the rise in income inequality in the U.S. during the past decades. Using Census Bureau data covering the period from 1948 to 2005, Larry Bartels’ book, Unequal Democracy, suggests that there is a much more egalitarian pattern of income growth under Democratic presidents than under Republican ones. So with Obama taking office, there is a possibility that the rise in income inequality will stop or even be reversed. At least his promised tax policies will, if implemented, be more egalitarian than McCain’s would have been (see here). Those who wonder why income inequality is a human rights issue can have a look here.

(As Mark Thoma points out here, this is more true for the first half of the period than for the second half).

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More on income inequality here, here, here and here.

Racism (4): Competition v Racial Bias

I’ve written a lot about discrimination, inequality and poverty, but I have to admit that much of it was descriptive, moralizing and philosophical. Especially regarding racial bias, I haven’t come up with many solutions, apart from better education and affirmative action.

Gary Becker

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I’ve now discovered the work of Gary Becker, a Nobel Prize winning economist who wrote about this some decades ago (I know, I’m late). He looked at the well-documented fact that African-Americans in the U.S. earn less than whites, partly because on average they are less well educated. But even if corrected for this, there remains an unexplainable difference in wages. Unexplainable apart from racial bias. There have been many studies that have proven the existence of bias. For example, firms are 1.5 times as likely to interview someone for a job if they think the person is white, even if all other characteristics such as education and experience are equal.

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The interesting thing about Becker is that he goes beyond education, positive discrimination or labor legislation in his search for solutions. He mentions increased competition between firms. A racially biased firm will only hire a white who is more expensive and perhaps even less qualified than a black, if this firm is not under pressure from competitors. If its market is opened to competition, then other firms can and will produce the same goods at cheaper prices by hiring the black guy/gal. The biased firm would then be forced to do the same. It may remain biased – opinions on such matters are notoriously hard to change – but it no longer has the luxury of acting on its bias.

So this sounds promising, and market freedom is beneficial for other reasons as well, so it’s worth to pursue it. But don’t expect too much of the free market. There’s no invisible hand, leading those motivated by selfish motives to destroy racism without really wanting to. Much more needs to be done.

Income Inequality (6): Social Mobility

Why is social mobility a human rights issue? There certainly isn’t a right to social mobility – nor should there be – but the degree to which a society is socially mobile determines the degree of equality of opportunity. And equality of opportunity is a human rights issue. Human rights are designed to give people equal access to education, health care, professions, elected positions etc. so that they can have the same opportunities as others to do with their life what they desire. Of course, “same” not in an absolute sense. Talents, luck, effort and persistance cannot be equalized.

A low level of social mobility means that few people have a better position in society (e.g. a financially or profesionally better position) than their parents. With real equality of opportunity, you would expect people to be in very different social classes than their parents.

One measure of social mobility is the link between fathers’ and sons’ earnings:

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Interestingly, this graph also indicates that a lack of social mobility correlates with income inequality. There’s no reason to assume that equality of opportunity would lead to more income equality, but it is disquieting to note that a more unequal a society also offers less mobility and hence less chances to escape from inequality. This seems to be the case for the U.S, Italy the U.K. and other countries not represented in the graph. In the U.S. – the “Land of Opportunity” remember – you will earn a lot if your parents earn a lot, on average of course. That’s disappointing and casts a shadow of doubt on the American Dream. Moreover, the U.S. is a very unequal society. And without much social mobility, it will stay like this. One can of course encourage social mobility, through redistribution (“spreading the wealth”), through an inheritance tax etc.

Income Inequality (5): Increasing Income Inequality in OECD Countries

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In the wake of the controversy over Obama’s remark about ”spreading the wealth around”, comes an OECD study on rising income inequality in its member states, and notably in the U.S. This backs up what I’ve written recently. Here’s an excerpt of the study:

The gap between rich and poor has grown in more than three-quarters of OECD countries over the past two decades. … In some countries, such as Canada, Finland, Germany, Italy, Norway and the United States, the gap also increased between the rich and the middle-class. … Also, social mobility is lower in countries with high inequality. … A key driver of income inequality has been the number of low-skilled and poorly educated who are out of work. More people living alone or in single-parent households has also contributed.

A higher Gini coefficient means more inequality (source). (More on the Gini measure here).

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What to do about it?

In developed countries, governments have been taxing more and spending more on social benefits to offset the trend towards more inequality. Without this spending, the report says, the rise in inequality would have been even more rapid. … Although the role of the tax and benefit system in redistributing incomes and in curbing poverty remains important in many OECD countries, our data confirms that its effectiveness has gone down in the past ten years. Trying to patch the gaps in income distribution solely through more social spending is like treating the symptoms instead of the disease. … Increasing employment is the best way of reducing poverty. … Countries have to do better at getting people into work and giving them in-work benefits to provide working families with a boost in income, rather than relying on unemployment, disability and early retirement benefits.

According to me, it’s not so much relative poverty (i.e. income or resource inequality) which is important but absolute poverty (more on the types of poverty here). People need an absolute number and quantity of basic resources and capabilities in order to have a life which is fulfilling, which allows them to develop themselves and to enjoy all things that make human life worthwhile. The fact that my neighbor has a luxury car and I have just a basic model is not a morally important one.

Income inequality can of course mean that the people on the wrong end of the unequal scale suffer from absolute poverty, but not necessarily. If they do, it’s their absolute poverty and not their unequal position that’s the problem. (In fact, there is a correlation between wide distributions of income and high levels of absolute poverty, see here).

One field in which income inequality can cause a problem is democracy. The rich can use their financial means to pervert the democratic procedures and to distort the equal influence on which democracy is based. Another way in which income inequality may pervert democracy is its divisiveness. It polarizes societies and it can divide regions within countries. None of this is helpful for the adequate functioning of democracy.

But perhaps there’s also another case to be made for reducing relative poverty or income inequality. People who are on the wrong end of income inequality and who happen to live in a wealthy country may not lack basic resources such as education, healthcare, income, work etc., but they may lack self-esteem because they compare themselves to more successful fellow citizens.

This description of the relative importance of income inequality has no implications for other types of inequality. Other types are probably more of a moral problem. I’ll come back to this in future posts.

More on income inequality here.

Human Rights Maps (23): Income Inequality

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A more recent map with data for 2011:

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More on income inequality and how it is measured.

Income Inequality (4): Income Inequality and Fairness

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More on income inequality here, here and here. I’ve stated my personal views on income inequality here and here.

Income Inequality (3): The U.S.

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Income inequality within a country is usually measured using the so-called Gini-index (see also here). When we look at the Gini indices for the U.S. at various times, we see an increase in inequality (a higher value means more inequality):

• 1967: 39.7 (first year reported)
• 1968: 38.6 (lowest index reported)
• 1970: 39.4
• 1980: 40.3
• 1990: 42.8
• 2000: 46.2
• 2005: 46.9
• 2006: 47.0 (highest index reported)
• 2007: 46.3

These data show an increasing gap between rich and poor over the period between 1970 and 2000 (no significant evolution since 2000). As a result, inequality in the U.S. is now higher than in other developed countries:

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Before the 1960s, the U.S. became progressively more egalitarian. From the 1970s onward, average income continued to increase, but mainly thanks to large increases in the top incomes, which caused a change in the trend and an increase in inequality.

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This trend of rising inequality since the 1970s in the U.S. and some other advanced industrial societies (especially the U.K.) goes against traditional wisdom.

Simon Kuznets argued that levels of economic inequality are in large part the result of stages of development. Kuznets saw a curve-like relationship between level of income and inequality, now known as Kuznets curve. According to Kuznets, countries with low levels of development have relatively equal distributions of wealth. As a country develops, it acquires more capital, which leads to the owners of this capital having more wealth and income and introducing inequality. Eventually, through various possible redistribution mechanisms such as social welfare programs, more developed countries move back to lower levels of inequality. Kuznets demonstrated this relationship using cross-sectional data. However, more recent testing of this theory with superior panel data has shown it to be very weak. (source)

The trend of rising inequality has been called “The Great U-Turn“, a phrase coined by Harrison and Bluestone. When we focus on the U.S., we can identify the following causes of this u-turn:

• Globalization and trade liberalization depressing the wages of the less skilled or threatening their jobs.
• Rising number of single parent families.
• Influx of women and immigrants in the low-end job-market has also depressed wages.
• Lower taxes for high incomes by the Reagan administration.
• The weakness of the labor movement in the U.S.
• A relatively large wage premium for a college education in the U.S.
• The work ethic in the U.S. typically favors large rewards for success.
• Increasing reliance on technology causing increased demand (and higher returns) for education and cognitive skills.
• Etc.

What can be done about it?

• Offer better education.
• Renewed public support for the right of unorganized workers to be represented by unions.
• Strengthen the social safety net, including universal coverage for health care.
• Vote for Obama. A study by the independent Tax Policy Centre found that the tax policies proposed McCain would widen the gap in after-tax income of rich and poor even more, and that the policies proposed by Obama would reverse the trend:

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More on income inequality.

Gender Discrimination (6): Earnings and Convictions on Gender Roles

Men who have very traditional convictions on the role of women in society, and believe a woman’s place is in the home rather than in the workplace, are likely to earn substantially more than more modern men.

The opposite is true for women. Women who believe in gender equality earn more than more traditional women. For those who might say: “that’s all very well, but this is because traditional women don’t work outside the home and don’t earn anything”: this still holds when we restrict the calculations to those working outside the home.

This is from an interesting new study.

The guys at Freakonomics blog aptly called it a “self-fulfilling stereotype”.

So, it pays to be a chauvinist male. But don’t consider this as advice! What could be the reasons for this correlation between earnings and beliefs? Traditional males probably tend to chose high paying jobs. And being in a high paying job, and witnessing the scarcity of women in the same job (male executives still outnumber female executives eight to one in the U.S.), may solidify or promote traditional beliefs. High paying jobs tend to monopolize a lot of people’s time and effort, and the wives probably are forced to take care of the family, which again solidifies traditional beliefs about the role of women.

More on gender equality.

The Causes of Poverty (14): Education

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The poverty of the family has consequences for the education of the children in this family. This is intuitively the case, because we know that poorer families often live in poorer neighborhoods with sometimes substandard schools. Poor parents also find it difficult to give educational support within the family, either because they don’t have the time or are under-educated themselves.

But this statement is also based on facts.

Simple comparisons between children in poor families and children in non-poor families using national datasets indicate that poor children are more likely to do worse on indices of school achievement than non-poor children are. Poor children are twice as likely as non-poor children to have repeated a grade, to have been expelled or suspended from school, or to have dropped out of high school. They are also 1.4 times as likely to be identified as having a learning disability in elementary or high school than their non-poor counterparts. (source)

The study called “The Impact of Family Income on Child Achievement” (by Gordon Dahl and Lance Lochner), measured the consequences of growing up poor for a child’s math and reading achievement: a $1,000 increase in income raises math test scores by 2.1 percent and reading test scores by 3.6 percent (source).

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We also see that grown-ups receive salaries in proportion to their education level:

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If we combine these two facts – poor chilren do less well at school, and under-educated adults have lower salaries - then we can conclude that there’s a vicious circle between poverty and low education. A child in a low income family on average gets lower grades and education levels. When this child is an adult, it will get paid less. When it starts a family, this will be a low income family. When it has children of its own, these children will be under-educated etc.

This is a kind of poverty trap. Here’s a graph showing the correlation between poverty and lack of education in the 50 states of the U.S.:

But rather than a trap or a vicious circle, education can be the best means to escape poverty. Hence the enormous importance of investments in education. But we shouldn’t forget the many other causes of poverty, and the many other means to fight it. And we shouldn’t reduce education to an anti-poverty tool.

In the discussion on poverty and education, one should also remember the importance of adult training, especially for the unemployed, and not focus exclusively on child education.

One study found that a year of schooling raised the earnings of welfare recipients by 7 percent. (source)

Income Inequality (2): Inequality Between Rich and Poor Countries

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The following graph, from the Special Studies series of the World Trade Organization, shows the differences in annual per capita GDP growth between rich and poor countries. The vertical axis shows the average annual per capita growth between 1960 and 1990, and the horizontal axis the per capita GDP in 1960.

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Had the per capita incomes of the poorer countries (left side of the graph) been converging with that of the richer ones (right side), or had, in other words, the income inequality between poor and rich countries been decreasing, then the countries would have lined up from left to right along a downward-sloping line with the poorest country growing the fastest. This is not the case.

If anything, richer countries have been growing faster on average than poorer countries, thereby increasing global income disparity. (source)

Some poor countries – or countries that were poor in 1960 – have done much better than others. These are the ones in the upper left side of the graph. The ones in the left bottom half have seen low annual growth figures. Some countries, mainly in East Asia, have done well, and continue to do so.

More on inequality. And more on poverty.

Why Do Countries Become/Remain Democracies? Or Don’t? (3): The Resource Curse

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Why do countries with lots of natural resources tend to do worse than countries with less resource wealth, both in terms of economic growth and in political, social and human rights terms? We see that countries which own lots of natural resources such as diamonds, oil or other valuables that are found in the ground, are often relatively poor, badly governed, violent and suffering from gross violations of human rights.

This figure shows the correlation between resource exports as a share of GDP for a number of countries and their GDP growth:

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Causes of the resource curse

There are many possible causes of this curse (also called “the paradox of plenty”):

1. Lack of economic diversification

Other economic sectors tend to get neglected by the government because there is a guaranteed income from the natural resources. These sectors therefore cannot develop and cannot become an alternative when the resources are taking hits. The fluctuations of the international prices of the resources can cause extreme highs and lows in national economic growth. This is bad in itself, but also makes it difficult for the government to do long term planning, since the level of revenues cannot be predicted. Dependence on one economic sector means vulnerability.

Another disadvantage of concentrating the economy on one resource sector, is that these sector often provide few jobs, especially for local people. The oil industry for example needs highly specialized workers, who are mostly foreigners. On top of that, these sectors do not require many forward or backward connections in the economy (such as suppliers, local customers, refiners etc.), which again doesn’t help the local job creation.

Even if the government tries to diversify the economy, it may fail to do so because the resource sector is more profitable for local individual economic agents.

Resource dependent countries also see their best talents going to the resource industry which pays better wages than the rest of the economy or the government sector. As a result, the latter are unable to perform adequately. See point 4 below.

2. Corruption

Corruption tends to flourish when governments own almost the entire economy and have their hands on the natural resources. More on corruption in a future post.

3. Social division

Abundance of natural resources can produce or prolong violent conflicts within societies as different groups try to control (parts of) the resources. Separatist groups may emerge, trying to control the part of the territory most rich in resources. This is often aggrevated by existing social or cultural division. Division may also appear between parts of the government (e.g. local government vs central government, or between different parts of the central administration).

The resources therefore may cause divisions and conflict, and thereby cause deficiencies in government, economic turmoil, and social unrest. But the resources may also prolong conflicts because groups which manage to take control of (parts of) the resources may use these to arm themselves or otherwise gain influence and power.

4. Government’s unaccoutability and inefficiency

Countries which do not depend on natural resources are often more efficient in taxing their citizens, because they do not have funds which are quasi-automatically generated by resources. As a result, they are forced to develop the government machinery in an efficient way, hence a reduced risk of government break-down. The citizens in return, as they are taxed, will demand accountability, efficient spending etc.

Conversely, the political leaders in resource-dependent countries don’t have to care about their citizens. They create support by allocating money, generated by the resources, to favored interest parties, and thereby increasing the level of corruption. And if citizens object, they have the material means to suppress protest. They don’t appreciate an effective government administration as this carries the risk of control, oversight and other anti-corruption measures (see point 2). So they have an interest in bad government.

It is obvious that bad government, rights violations and economic stagnation have many causes. The resource curse is only one. There are countries which are blessed with resources and which do well at the same time. And there are mismanaged countries that don’t have any resources. As in all correlations, the causation may go in the other way: bad government can create dependence on exports of natural resources.

“When a country’s chaos and economic policies scare off foreign investors and send local entrepreneurs abroad to look for better opportunities, the economy becomes skewed. Factories may close and businesses may flee, but petroleum and precious metals remain for the taking. Resource extraction becomes ‘the default sector’ that still functions after other industries have come to a halt.” (source)

What to do about it?

Leif Wenar has argued that a strict application of property rights could help reduce or correct the resource curse. When dictators or insurgents sell off a country’s resources to foreigners or multi-national companies, while terrorizing the people into submission, they are in fact selling goods that they stole from those people. They have no right to sell what they don’t own. The natural resources of a country belong equally to all the people of that country. Article 1 of the International Covenant on Civil and Political Rights states:

All peoples may, for their own ends, freely dispose of their natural wealth and resources.

And

“the people, whose resources are being sold off, become not the beneficiaries of this wealth but the victim of those who use their own wealth to repress them”. Leif Wenar (source)

One could take legal action in western jurisdictions to try to enforce the property rights of the citizens of resource cursed countries and to charge multinational corporations with the crime of receiving stolen goods.

Western countries, investors and consumers could also boycott companies that invest in resource-cursed countries, or try to pressure campaign them to get out of these countries, or they could stop to invest in these companies.

When people finally get a grip on their resources, they open the path to better government, a better economy and better protection for human rights. Perhaps then they will not have to die trying to recapture a tiny part of the resources that are their lawful property, as happened in many cases in Nigeria, for example, where people often try to tap some oil from the pipelines channeling their property to the west. In doing so, they risk their lives. As a consequence of their actions, the pipelines can explode:

Income Inequality (1): Gini

Corrado Gini

The inequality of wealth or income in a particular country is traditionally measured by the Gini coefficient (named after Corrado Gini). This coefficient is the result of a comparison of the percentage of the population and the percentage of the total income of the population. E.g. 80% of the population earns 50% of the total income, and the remaining 20% earns the other half.

You can see this on the graph below. The diagonal 45° line represents the fictional state of equal income: 5% of the population earns 5% of the income, 10 earns 10, 20 earns 20 etc. In reality, income distribution is of course unequal and is somewhere along the curved line, the Lorenz curve, with the majority of the population earning the minority share of the national income, and a minority earning the majority.

The more curved this line, the more unequal the income. The Gini coefficient is the surface between the diagonal and the curved line, divided by the whole surface under the diagonal.

This is then expressed as a value between 0 and 1 (following a complicated mathematical formula which I will not inflict on you). 0 corresponds to perfect equality: everyone having exactly the same income, = diagonal. And 1 corresponds to perfect inequality where one person has all the income, while everyone else has zero income. There will be no curve in this case as the curve comprises the horizontal axis and the right-hand vertical axis. Both extremes obviously being impossible. In real life, the lowest is 0.23 in Sweden; the highest is 0.7 in Namibia (most recent data).

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A complete list of countries’ performances is here. (Sometimes you’ll also find the Gini index, when the coefficient is multiplied by 100 and hence expressed as a percentage).

Of course, the Gini coefficient is a measure of relative poverty: the people on the wrong side of inequality in a rich country with a relatively high Gini can be better of then the people on the wrong side of inequality in a poor country with a relatively low Gini. The coefficient remains useful because the way individuals or households perceive their position in a given society, compared to the other people of their society, is an important aspect of their welfare.

In any case, there seems to be a correlation between relative poverty and absolute poverty: countries with relatively unequal income distribution don’t score well on absolute poverty measures either:

Now, human rights do not require perfect income equality. Such a kind of equality would even be damaging since if would destroy all incentives for economic productivity. It would lead to economic ruin and hence gross violations of human rights. However, extreme inequality of income also leads to violations of human rights: it creates hunger and poverty, unequal education and unequal participation in political and cultural life etc. More about equality here.