Tuesday, January 4, 2011

Why do the poor remain with us?

Norman Geras raises a point that recurs in his commentary in his excellent blog:
but what a mark against the world's wealthiest countries that there remains in them such a category of people - the poor - who can be spoken about in this way. These are societies fat, bulging, overflowing, with stuff; oozing personal wealth, economic crisis notwithstanding; and they are yet to provide all their citizens with a standard of material well-being such that no one would any longer need to be referred to as the poor but might enjoy, even as unequals, the advantage both of a more comfortable state and a more dignified style of description.
An obvious response is that, by the standards of history and of much of the globe, the people referred to as ‘the poor’ in developed democracies are not poor. [This point is made very powerfully via a graph here.] They have life expectancies, security of food and shelter and rates of possession of consumer durables that mark them out as among the blessed of history. Indeed, as Michael Cox and Richard Alm point out in their Myths Of Rich And Poor: Why We're Better Off Than We Think, poor people in the US in the mid-90s had an average level of possession of consumer durables that would have marked them off as middle class in the early 1970s. [This point is expressed graphically here.]

But, by the standards of their own societies, they are poor, even if poor means “middle class two or so decades ago”. So, why do we have a persistent category of people who lag behind the general prosperity?

Well, for no single reason. As Norman Geras intimates, it is not a matter of how productive the society is, as used to be the case when poverty was the general human condition. There have been sharp drops in the general level of poverty in Western societies over time. Which is another way of saying that developed societies have been great engines of mass prosperity: that is what makes them “developed societies”. But these drops in poverty rates slowed and then stopped: for example, the proportion of people in poverty in the US dropped steadily, even dramatically, during the postwar boom until the mid 1960s and has been stubbornly persistent ever since. Rather discouragingly, the apparent ending of mass exit from poverty coincided with increased government effort against war on poverty: the US “war on poverty” has been about as successful as the “war on drugs”. But similar patterns can be discerned in other developed societies.

Indeed, one way to put the question is “why has poverty persisted despite massive expansions in the welfare state?” The question is not often put like this, but it is a very reasonable question to ask, on the evidence. After all, the welfare state is a century or more old: the failure of eliminate poverty is a reasonable criteria to evaluate it by, particularly given its massive expansion from the 1960s onwards. (It can hardly be the fault of “capitalism”, as its success in generating unprecedented and steadily increasing mass prosperity is what has made the elimination of poverty a remotely plausible goal in the first place. Indeed, the first post-classical public welfare measures – Venetian public health measures, English poor law provisions – grew up in the most commercial societies in part precisely because they were the richest societies.)

One answer to the persistence of poverty might be: because of the expansion of the welfare state. After all, the great mass exits from poverty clearly were not products of the welfare state: they were the result of massive expansion in productive capacities. The welfare state needs clients: if there are no poor people, then there are no poor people to be clients. Milton Friedman pointed out that, if one took the entire expenditure on anti-poverty programs and divided it by the number of poor Americans, there would be no poor Americans. Clearly, employing people in secure jobs with good pensions in welfare bureaucracies, and the transferring of funds to people who are not poor, take up a considerable amount of welfare resources and generate a considerable number of beneficiaries: beneficiaries who might be of some risk of losing said benefits if poverty was abolished.

So, waste and failure in welfare might be one reason for the persistence of poverty. Particularly if such retards economic growth – given why the mass exits from poverty have occurred – by, for example, reducing the level of productive investment.

Or it might be due to welfare subsidising unfortunate patterns of behaviour. The richer the society, the less absolute the penalties for destructive behaviour patterns tend to be, but they still exist. One of the effects of welfare can be to soften the effects of folly (or, to be less blunt, lessen the penalty for patterns of behaviour not conducive to increased income). People can get away more with clinging to leisure preferences, instant gratification preferences or familiar attitudes and patterns of behaviour which are not conducive to good incomes. (And the behaviour of parents may well have effects on the prospects of their children.) If there is a bell-curve of income-producing behaviour, then there will always be a tail end. The richer the society, the better off the tail-end will tend to be. But they will still be the tail-end.

In the US, if one completes high school, get and stays married, get and stays employed (even starting at a minimum wage job) and avoids becoming involved in crime, one’s chances of staying poor are small.

We also get into some stubborn persistences here. Consider that, in the US, students of Asian ethnic backgrounds do far more homework, on average, than do black students. If lifetime income prospects are connected to educational achievement (as they are) and educational achievement is connected to student effort (as it is) then we can reasonably predict that poverty will be more common among black Americans than Asian-Americans on that one indicator alone (as it is).
So, what can we do about this? If doing less homework leads to higher rates of poverty, does poverty lead to doing less homework? No, but the patterns of behaviour and outlooks which lead to poverty (for example, by discouraging scholastic effort) may do so. A society where human capital is important, and increasingly important, has limited ability to get specific groups to value the acquisition of human capital. But, if they fail to do so, they will have higher rates of poverty. So poverty will persist due to a failure to take advantages of the opportunities available (with some depressive effect on the general productivity of the society, since the level of human capital will be lower than it otherwise would be).

Moreover, how good is the welfare system likely to be at putting itself out of business by encouraging patterns of behaviour that lead to exiting from poverty? Noting that, to the extent that a social system can be said to have “an interest”, poverty is not in the interest of “capitalism” – there is far more profit to be made from selling to rich consumers than poor ones. More precisely, the logic of capitalism has clearly been to generate mass prosperity, since capitalism is the best system ever developed for creating and using capital (the produced means of production) and the more capital, the more production, the more prosperity, the less poverty.

The welfare system can also create barriers to exit from it. Public housing can “trap” people in high unemployment areas, as to move is to lose one’s eligibility. The very high effective marginal tax rates that beneficiaries face (from their benefits reducing, and taxes increasing, as they earn more money) also constitute a barrier to exiting from poverty. But such are expensive to fix and tend to keep the level of clients for the welfare system higher, so there is little incentive from within the system to push for reform.

There are also some forms of poverty that simply are not much of a concern. That university students have low incomes in their 20s is not a concern if they end up being high-earning professionals in their 40s. Indeed, as Cox and Alm point out, the increased participation in higher education is a major reason for increased income inequality – we can tell this, because the slope of “life cycle” income changes (i.e. average income by age group) has become much steeper than it used to be.

So, given the increased participation in higher education, something that also took off in the 1960s, some of the persistence in poverty is a life-cycle effect.

Some of the persistence of poverty is a “recent entry” effect. New migrants, lacking skills and entre into various networks, will tend to start off with low incomes. Increased low-skill migration will also tend to lead to persistence in poverty rates, particularly if there is an increase in the importance of human capital in an economy. It is likely that the children and grandchildren of new migrants will not live in poverty, but if the flow-in is constantly replenished, then the poor are being replenished.

And, of course, if migration to a developed democracy becomes a guarantee that one will not be poor, the incentive to migrate will be greatly increased. Milton Friedman famously argued that the welfare state was incompatible with open borders: certainly the welfare state is likely to increase the resentment of migrants if people believe they are paying for people whose arrival they had no say in.

The low-skill migrant point interconnects with the educational point. It is clear that the Anglosphere is better at attracting productive migrants than much of Europe (and, apparently, my own country of Australia is the very best at cherry-picking its migrants).

But that second-generation male Muslim migrants in Europe are “going backwards” in their economic participation points to another difficulty – barriers to economic participation. Some of these can arise from the behaviour of those with lower levels of economic participation (e.g. the lower levels of homework among black American students). Others can flow from regulation or other institutional factors.

Regulation has a persistent tendency to protect the interest of incumbents: this is particularly true in land use regulation and labour regulation: unfair dismissal laws, for example, protect incumbents against new entrants to labour markets (since they raise the risk of employing new people, particularly for small businesses). Faced with increased risks in employing new staff created by such regulations which is not compensated for by increased productivity, businesses respond by cutting back on hiring, relying more on certification and on “vouching for” networks, became more reluctant to deal with differences that might get in the way of communication (i.e. the transaction costs of cultural differences) and so on. If migrant Muslim males put less effort into school and so are less certificated, are more likely to “have attitude” (or are believed to be so), are less plugged into networks, have less skills then they will be disproportionately excluded by such regulation. Though young people generally suffer from such “protect incumbent” laws.

The problem of persistence of attitudes not conducive to exit from poverty are not only a matter for the poor, they can be attitudes among the better connected as well. Labour market regulation penalising the more marginal in the labour market, land use regulation driving up rents and housing prices by restricting the supply of land for housing are not created or justified by the poor, and certainly do not benefit them, but do disproportionately penalise them.

The capacity for “progressives” (or, as former Labor Senator John Black puts it [pdf] the inner city rich, the code word for which is apparently, ‘progressive’) to romanticise green fields (which are every bit as much human creations as any suburb, and may well have less biodiversity), thereby driving up the value of their inner city properties by restricting the supply of land able to be used for housing, and to frame labour market regulation as “protecting workers” (as, indeed it does: it protects incumbent workers against competition from marginal workers) does its bit to increase barriers to economic participation and so to the persistence of poverty.

Add all these factors together and the elimination of poverty – that is, of a category of “middle class minus two or so decades” – becomes difficult, to say the least.

So, is it a “mark against the world’s wealthiest countries”? Well yes, though not as much as it may seem at first blush and those who are most likely to hold it so are often very much part of the problem.

Or, to put it another way, the sort of mushy, self-satisfied reasoning that Norman Geras likes to berate Guardianistas for in international affairs has its domestic equivalents. There is even some suggestive social science research (pdf) that implies that conservatives signal competence while progressives signal trust: hence the importance to the latter of policy positions which allow one to signal one’s good intentions (and conservative contempt for any disastrous consequences, which the liberals deride as being unfeeling or otherwise lacking in virtue).

Indeed, we observe people who not that many years ago would have been nodding along to descriptions of science as a “patriarchal Western discourse”, not worthy of any privileging, now holding the results of climate science as absolutely authoritative: attitudes to science clearly being subordinated to the commitment to signalling virtuous intentions. But embracing of such serial, or even concurrent, contradiction actually improves the capacity to signal that one’s priority is membership of the club of the ostentatiously virtuous.

If we allow actions to have income consequences (since that promotes productive behaviour) but not negative ones (since that can lead to poverty), stop low-skill migration, ensure that the welfare system promotes independence and not dependence (even at the risk of losing its client base) but otherwise pays those who cannot be independent enough not to be poor, only permit students in higher education who won’t be on low incomes while they are studying and eliminate regulations and other institutional factors that are barriers to economic participation (which will require neutering the “progressive” intelligentsia having any effective capacity to frame public debate so as to block such changes), we in developed countries can have “tail ends” which are not poor by the standards of our societies.

Good luck with that.

Still, the good news is that we could do better: the bad news is that we probably won’t (beyond general increases in productivity).


  1. otherwise pays those who cannot be independent enough not to be poor

    How do we know that the current level of poverty doesn't already reflect those who lack the capacity to be economically independent?

  2. Indeed, the first public welfare measures – Venetian public health measures, English poor law provisions – grew up in the most commercial societies in part precisely because they were the richest societies.

    This is not strictly true. The world's first [I think] and greatest welfare state was undoubtedly Imperial Rome from 58 BC onwards. In fact, it was the size of the Roman welfare State that eventually killed Imperial Rome. By the middle of the 2nd century AD, taxes of the wealthy had virtually obliterated the bourgeoisie. In the 3rd century AD, Rome had become an authoritarian - despotic - military socialist state.

    It would be very interesting to see how Venetian and English welfare state policies were influenced by ancient Rome. Ditto, Bismarck.

  3. Lorenzo, we just finished a debate over at Catallaxy. I argued - using data - there was no "underclass" in Austrlia. The Leftists - using no data - showed they NEED an underclass to justify their silly views.


  4. Despisis: by checking the statistics.

    Peter: correct, I forgot to put that caveat in, I have now.

    Venice's public health measures came from living on a group of small islands -- they were all in it together. It was also why the Serene Republic adopted the first quarantine measures.

    As to the Roman influence on the English poor laws, I doubt it. I suspect it was more a state take over of Church charity, a product of the Reformation, just as was the state take over of marriage laws.

    On underclass, these definitional fights tend to be tail-chasers where people argue past each other.

  5. In the US, if one completes high school, gets and stays married, gets and stays employed (even starting at a minimum wage job) and avoids becoming involved in crime, one’s chances of staying poor are small.

    You do realise how big an ‘if’ that really is, right? And how much of it is dependant on circumstances utterly outside the control of any given individual?

    And remember, also, that that is an ‘and’ statement. If any one of those conditions fail (and they can fail for any number of reasons: the death of a spouse, implication in or unwitting connection to someone else's crime, outright injustice, the almost axiomatic insecurity of those same minimum wage jobs, ill health on the part of anyone in the family, &c, &c, &c), then the chances of breaking even drop to vanishingly small, let alone of getting ahead.

  6. Well yes, "Good luck with that." but I don't think the situation is entirely hopeless. As a voter in both Australia and the US I think both electorates have become quite skillful at blocking the 'progressive' agenda. In America Obama and Pelosi pushed the 'progressive' agenda and it created a massive pushback - even the partial creation of a new political party. In Australia I think it fair to say that fashionable 'progressivism' is shared by the Greens and the left of the Labor party. The handcuffing that the Australian electorate recently handed the pols was breathtaking - coming close to a hopelessly hung parliament. In the end it forced a Labor left PM to form government with not just the lone Green but with some disaffected members of Australia's most conservative major party. In my view, this was a subtle and virtuoso performance by the Australian electorate. It may not have accomplished much positive, but it sure poked some sticks into the spokes of big government (for those of you who like a horse drawn metaphor). Kidding aside I think the spectacle of 'progressives' actually getting in power and being harshly rejected by the US electorate is a sign that ordinary people are wise to the 'progressive' intelligentsia who are essentially trying to flog the threadbare remnants of the 20th century's well intentioned but failed ideas. Finding the way forward will be the part that requires the most luck. It will take nothing less than a new politics - a new way of balancing the interests of the individual and the group. And in such a way that it works both economically and socially. Not laissez faire capitalism, not socialism - even the half baked variety. Put another way many electorates understand the problem, the difficulty will be in winding back the bureaucratic sector (and their allies in both academia and in establishments like Wall St.)These are cartels which the electorates will either drive from their privileged position or rising societies like India or China will put them out of business. Although I don't think it goes far enough the Roadmap for America put forward by Representative Paul Ryan of Wisconsin is a mainstream Republican alternative gaining traction against the 'progressives' in the US. The Tea Party will require that the Republican party go further or it has a real chance of replacing it. Again I agree with the idea it will require plenty of luck, but as an American I know that the people are angry enough to actually do something. I see the Tea Party as largely made up 'small government' Republicans who are as disgusted with Bush's spending as they are with Obama's. They could be the core of a new majority that will indeed do things like eliminate entire government departments. For example, there are plenty of voters who have that attitude but who will never vote Republican - those who cling to Guns and God and voted for Hillary, not Obama, in the primaries. But the Jacksonians are an historical remnant. The Hispanics are a more hopeful group for building a new majority. In the swing state of Florida 49% of the electorate voted for Cuban American Marco Rubio running as as a Tea Party Republican who defeated the mainstream Republican governor running as an independent (30%) and a former Clinton Democratic Congressman running on the Democratic side (20%). (The governor had been the favorite for the Republican nomination but jumped ship and ran as an independent when it became clear that Rubio was going to beat him in the Republican primary) Hispanics have traditionally voted Democratic - 60% to 70%m but I think that could change too. Like almost all immigrants they do not come to America to lose. The Hispanics have strong family values and are incredibly hard workers. As the welfare state (think California) runs out of resources they may well be the decisive element in a new electoral majority.

  7. Catsidhe: some of those factors are out of an individual's control and some are not. See the rest of the post. And failing any of them does not guarantee poverty, it just makes it much more likely.

    Lgude: we will see how much is actually delivered. But I agree, progressive politics are losing their edge, particularly in the US where people can, for example, compare California to Texas and see what works and what does not. The looming unravelling (or, at least, serious "adjustment") of the European welfare state will have its effects too.

  8. >> "In the US, if one completes high school, gets and stays married, gets and stays employed (even starting at a minimum wage job) and avoids becoming involved in crime, one’s chances of staying poor are small."

    And yet even such people become poor, often through no fault of their own. Sickness might strike down a family member and treatment may eat away at the family's financial reserves. The breadwinner might get lucky and stay with a firm, only to see that firm go bankrupt when the market changes unexpectedly. Even a blessed event such as an unexpected pregnancy can still ruin a carefully-planned lifestyle, and sometimes, people just get unlucky and find themselves on the wrong side of a traffic accident, or caught in a crossfire (staying away from crime is no guarantee that crime won't come after you) and you end up with a family short its major breadwinner.

    The welfare state was invented because soldiers were coming back from two World Wars and, later, Vietnam with no chance of having a steady income in civilian life. When 99% of the wealth is concentrated in the top 1% of society and so much of the resource that "makes the world go round" has wound up in the hands of a handful of people who really have no need of much more cash beyond the first ten million, you end up in a situation where the economies of the world are getting stalled through a lack of those funds - the money is just not where it should be to keep the wheels of the free market greased and running.

    The poor are there because there are now too many around for the rich to just ignore them any more.

  9. People are poor because they choose to be, or rather, they've found a comfort zone within poverty. As long as you have a source of income, it is possible to save and work towards becoming wealthy, no matter what amount you get paid. Becoming wealthy is not about getting paid more or passing laws to improve economic conditions. It requires that a person spends less than he earns. Plan ahead and the unexpected bills won't hurt so badly. All it takes is 5%-10% per paycheck.

    But of course, media does not tell us this. It tells us to spend and spend and spend some more, because the way you are right now isn't okay. For example, do you NEED a smartphone? It makes your life easier, but it is so standard now that you rarely find people without cellphones. And it's just a convenience, not a necessity!

    People are poor because they don't know how to become wealthy and with Gov't agencies to help them out, they don't have to do the thinking. They can always go to the backup plan and take advantage of someone doing the work for them. Yay!

  10. capitalism doesn't need the unequality between rich and poor? if this would be true, where would be the motivation for the tail to get up to the head? also many wouldn't feel like being poor, if they wouldn't be raped with advertisements of goods they cannot afford at every single moment in their life, you only have to get outside (beside ads in online media) to be manipulated to feel like somethings missing in your life. 90% (just a guess) of goods human mankind is able to use at the moment would be obsolete without the existence of advertising companies or advanced psychological based manipulation called marketing

  11. fiat-knox; you managed to get the history of the welfare state quite wrong: forms of it started before WWI. You seem to have no grasp of economic history: as poverty became less common it became more a public policy issue while both World Wars were, after a brief hiatus, followed by economic booms (the 1920s and the 1950s, 1960s). Your analysis of current economic problems also makes little sense: lots of very wealthy people are patently very happy to continue to invest away.

    Kay: there is something to what you say, but some people also are in genuinely difficult circumstances -- for example, the chronically ill or disabled.

    Anon: the inequality which motivates need not between rich and poor. Plenty of millionaires work away trying to become billionaires. As for the apparently omnipotent advertising companies, first many ad campaigns fail. Second, give your fellows more credit, cynicism about ads is the modern condition. People get lots of genuine enjoyment out of their gadgets and things. Also, people are living longer, doing more, etc. Things are hardly so drear as all that.

  12. Lorenzo. This is off topic, but thanks very much for your excellent comments on my blog. You really raised the standard of discussion.

    Cheers Leith

  13. My pleasure, thank you :)

    As you may have gathered, it is an area of interest and your highly intelligent empiricism is something I very much appreciate.

  14. Somehow I missed this post at the time. My grandparents come from genuinely poor backgrounds. So, for example, my maternal grandmother recalls that they used to have one egg for the whole household as a treat. Her father used to get it because he was the worker. The children used to fight over who got the top off the egg. My maternal grandfather lived in a shack with a dirt floor. They used to supplement their food by fishing, prawning and looking for oysters (he still has a life-long love of seafood, which I have inherited). If one looks at how their families got into that condition, it also has a lot to do with capitalism and the Great Depression. For no fault of their own, their families were devastated by the stock market crash. So capitalism can create prosperity, but it can also take it away.

    There is still genuine poverty in Australia today (in the sense of not having enough to eat, suffering poverty induced illness, not having anywhere to live). One group in particular who suffer from this are indigenous people. Another group is the mentally ill who end up living on the streets. In the case of the former, welfare really hasn't done much to help indigenous people; arguably, despite best intentions, it has made things worse. To be honest, I really don't know what the solution is, but it has to come from within the indigenous community itself. In the case of the latter, I think there needs to be better intervention to help people with mental illness (the vast majority of those who live on the streets have a mental illness).

    With the mentally ill, I'd say that they are poor through no fault of their own - they have a condition which makes it impossible to succeed. With respect indigenous people, again, I think the poverty and cultural disconnect is a function of being colonised and having one's culture trashed in part by a vastly different culture. Perhaps the way in which many indigenous people live today would be "rich" if compared to a hunter gatherer society, but it's pretty shocking in a modern industrial society.

    I dunno, I'm just thinking out aloud about the difficulties in making generalisations. Capitalism can make people poor when it has a downswing. Welfare can entrench people in positions of dependency (indigenous people). But in other circumstances, I think it can help (eg, better provision of care for the mentally ill)

  15. Creating unnecessary poverty is a major reason why major economic downturns matter, and it is important to know what causes them. Even so, the striking thing about post Industrial Revolution economic growth in the Anglosphere is its long-term reliability (particularly, but not only, in the US). The 1930s Depression was not "capitalism" taking away prosperity but bad public policy.

    The disabled was a group I did overlook, mainly because I took them rather for granted as a genuine problem case (hence the comment about "otherwise pays those who cannot be independent enough not to be poor"). Those who are not competent to look after themselves are even more so.

    On indigenous Australians, I have already posted at length on them, but indigenous minorities are not a general feature of Western countries (only settler societies Japan, Australia, New Zealand, Canada, the US plus the Lapps as an odd case).

    Except where it comes from mental incapacity, homelessness is a creation of public policy. Otherwise, the genuine poverty you are pointing to is generally from wildly dysfunctional family dynamics (which indigenous communities are particularly prone to). The problem is, such dysfunction can be contagious. And yes, a difficult policy and social issue.

  16. Here's something by Noel Pearson which resonates with this post: http://www.theaustralian.com.au/news/opinion/proof-of-welfares-multiple-failings/story-e6frg6zo-1226016136858

  17. LE: Yes, a fine piece thank you for referring me to it.

  18. I think you missed something we live in an age when the distribution of wealth is unequal and getting more so. Attached is a graph of USA income distribution. Greed and corporatism is rampant - even more rampant than prior to the 1930s crash.
    This all assumes wealth is measured by paper money. Issuance of paper is now under almost total control of a paper aristocracy that also includes Governments that benefit from money creation.
    On the idea that failure is guaranteed by success - the more complete the success the more likely failure is guaranteed - expect even more mayhem soon!!!
    Sorry I cannot find how to attach the graph - you will have to take my word for it.

  19. Rising inequality from a surge in incomes at the top end is not particularly germane to the issue of the persistence of poverty.

  20. An interesting aspect of Star Trek is a 150 years in the future, there is no concept of money.

    People do their jobs because they take pride in their work, satisfaction in their accomplishments, and work hard because they do not want to let down their peers or society but they receive no monetary compensation. Mises would not be a trekker.

    Nonetheless, the officers do seem to have larger quarters.

    If a crew member (few of whom ever survive a trip to the surface of planet with Kirk) has quarters that are less than 60% of the size of their officers, if that poverty by the normal definition! is that inequality, albeit at warp speed?

    1. There are some economic calculation issues there methinks :)

  21. I guess Denmark doesn't exist in this world-view?

    The USA is 'off the scale' compared to the likes of Denmark with regard to any number of social pathologies. The Gini index is not fixed by some 'iron law' of economics but is to a great extent the result of the precise outcome of political antagonisms with societies.

    It is no accident that the share of wealth of the top 1% in the USA has exploded over the period in which neo-liberalism has dominated public policy.