Approaching Family Economic Issues: Holistically or Pathologically?

Revised version of the prepared paper for the International Year of the Family, Family Rights and Responsibilities Symposium, 14-16 October, 1994 Wellington.

Keywords Distributional Economics; Social Policy

This is a paper about families with dependent children. (1) It ignores those which only adults, including independent children, and the broader issue of extended families, including whanau and hapu. The paper is further confined to only the economic aspects of the family with dependent children.

Nevertheless the general theme of the paper is of much wider applicability. There are two broad ways one can think about social issues and social policy. One is to look at problem issues: adoption, solo parent families, family violence, family disintegration, poverty, and so on. Such an approach involves the pathology of the family. These issues are important, need to be studied both in a research and policy context, while dealing with particular instances are often urgent. But they do not represent the entirety of family life.

For this we need a more comprehensive approach which looks at all family behaviour, and not just that which is problematic. It is an holistic approach. It sees a continuum of family behaviour with the problematic behaviour as a part of that continuum. Often it addresses the entirety of family life as a means of dealing with the outbreaks of social pathology – in policy terms it is preventive and proactive, rather than treatment and reactive.

Rather than talk about the pathology-holistic dichotomy at a theoretical level, I want to illustrate its application in the field of family incomes and family income maintenance.

In the early 1970s the issue of family incomes, insofar as it was discussed at all, was seen as one of pathology, in this case those on the social security benefit. One social worker wrote “if there are any poor in New Zealand then they are the social security beneficiaries” (see Easton 1981: 68). This statement was made without any reference to the possibility that those who were not beneficiaries could also be poor. A focus on pathology often leads to neglect of wider issues which are more important.

The statement that poverty was solely a benefit issue was eminently challengeable, and it proved simple to demonstrate the statement was wrong and misleading. It was true that among the New Zealand poor there were social security beneficiaries, but it turned out that by far the largest group in poverty were families (households) with which are children primarily dependent upon market incomes (Easton 1976). The conclusion was no surprise to any familiar with overseas research and debate, or even the social history of New Zealand, although it may well have come as a shock to those obsessively concerned with a particular pathology.

That included the received wisdom. One of the consequences of the pathological approach to families is that it assumes that all other families are unproblematic. Debating whether social security benefits were adequate meant that the bigger issue of the adequacy of the incomes of all families with dependents could be ignored.

Out of the holistic work on family incomes, and the degree of poverty, developed the targeted family income supplements, which began in 1976 and are currently in the form of family support. That the tax system responded quickly to the new findings did not mean society as a whole did. It was a long a slow process. As recently as 1988 the Royal Commission on Social Policy deigned to devote only one page (less than .03 percent of its report) on poverty, an extraordinary achievement given that for over a hundred years, here and overseas, social policy has been driven by concerns with social deprivation. Instead the Royal Commission pursued a few pathological obsessions, and produce a report which is as forgettable as it is bulky.

Defining the Poverty Level

This denial of the past is a form of revisionism which needs to be addressed because it undermines the holism of the past research. Consider recent attempts to redefine the poverty level.

In the 1970s there developed a poverty level out of the work of the 1972 Royal Commission on Social Security, a remarkably competent body in comparison to the 1988 Royal Commission on Social Policy. First it set down a principle for the social system.
The aims of the system should be
(i) First to enable everyone to sustain life and health;
(ii) Second, to ensure, within limitations which may be imposed by physical or other disabilities, that everyone is able to enjoy a standard of living much like that of the rest of the community, and thus is able to feel a sense of participation in and belonging to the community.
(iii) Third, where income maintenance alone is sufficient (for example, for a physically disabled person), to improve by other means, as far as possible, the quality of life available.” (1972:65, originals italics).

It then went about translating that principle into a practical minimum income level, which was in effect a poverty line. It was able to do this because in the course of its hearings the Commission received an enormous quantity of evidence about the living circumstances of New Zealanders. It used no quantitative techniques, but made a judgement as best it could, setting down what today is known as the BDL – the benefit datum line, the level of the married couple’s benefit the Commission recommended in 1972 adjusted for subsequent price changes.

The BDL need not of course be the actual benefit level, and for most of the period actual benefits diverged from the Royal Commission recommendation. Currently the sickness benefit for a couple is 7 percent below and the unemployment benefit 18 percent below the BDL. Benefits have always been less generous for couples with children, so they too are below the poverty level set by the Commission (Easton 1993).

Was the Royal Commission’s qualitative judgement about the minimum income level or poverty line correct? This was investigated in the 1970s by using a number of reasonably comprehensive surveys – Peter Cuttance’s studies of large families in the Waikato (1974), the Department of Social Welfare’s study of the elderly (1975), and the Christchurch Child Development Study of families with young children (Ferguson et al 1980a,b) – which were characterized by being comprehensive (or holistic) of the group they were investigating. In addition there were a number of not nearly as useful surveys which looked at groups of the poor – pathological surveys.(2) Collectively the surveys – with greatest weight from the holistic ones – supported the location of a poverty line somewhere near where the Royal Commission judged.

While I am trying to keep this presentation simple, I must say there has been a serious technical problem in the extension of the Royal Commission’s BDL for a married couple to other family situations. This involves using a devise called a household equivalence scale. A number have been calculated for New Zealand, but the most widely used is that provided by the Department of Social Welfare (Jensen 1988, Easton 1994).

It is characterized by two features. First, unlike the others, it is not based on empirical evidence, but upon some a priori assumptions (an issue to which we shall return). Second, compared to the empirically based ones, the measure has a lower income adequacy level for larger households compared to small ones, which means that the equivalence scale assumes (for it is not empirically based) that children are cheaper to rear than the available empirical evidence suggests. The implication is that the child poverty is more widespread than estimates which use the DSW scale imply.(3) Both the revised poverty levels I am reporting use the unsatisfactory DSW scale.

The first attempted revision of a poverty line involved the New Zealand Treasury (Brashares and Aynsley 1991, Brashares 1993, Easton 1994). It is clear from the paper that the investigators knew little of the earlier research that had occurred in New Zealand. Instead she used a procedure which the 1972 Royal Commission had looked at and rejected as too primitive. It involves calculating the value of some basket of food and multiplying it up to get a poverty line. Among the technical difficulties is choosing an appropriate basket of food. The Treasury study chose one which was less than the food provides to a prisoner. No explanation was given for the assumption that the honest poor are to be fed less than a felon, although it may be wise to ensure that prisoners do not go hungry because they might riot. Nor is any justification for the multiplier given, even though it is substantially lower than that implicitly used by 1972 Royal Commission. I shall return to the issue of arbitrary assumptions shortly, but here I want to talk about a more serious conceptual problem.

At no stage did the study interact with the reality of family experiences and poverty. The Treasury approach involved sitting in an ivory tower, and making judgements without any knowledge of the actual situation which people face. It is a long way from the 1972 Royal Commission who day after day heard evidence as to what it was like to be on various income levels, and make a judgement based on these experiences.

This dependence on the ivory tower – a priori – approach is not confined to those who come down on more restrictive poverty lines. Another attempt to revise the Royal Commission poverty line is also technically flawed, at least if we are to believe what is reported in the newspapers, because there is still no technical report.(4) The papers say that the proposed poverty line is based on a proportion (60 percent) of the median equivalent household income. They may be reporting incorrectly since the approach is obviously technically flawed. Because this is a family gathering I will not go through the pyrotechnics – that belongs to a learned paper responding to the report when it is finally released. Here I make two points which illustrate general issues.

The first is that between the March 1988 and March 1992 year the median household income rose 6.5 percent, while consumer prices rose 20.0 percent.(5) Thus the real value of any poverty line based on the median income would have fallen 12.7 percent in four years. As it happens average (per capita) household (disposable) incomes rose 18.1 less than inflation, but a real fall of only 1.9 percent. Thus the proposed poverty level fell substantially more than average. If the level were to be used to set benefits, say, social security beneficiaries would find their incomes being cut by around about 3 percent in real terms each year.(6)

Second, suppose the Treasury were to agree to the new benchmark, knowing there could be a long term tendency for its real poverty level to fall because of the various technical deficiencies. Nevertheless the Treasury would then argue the appropriateness of the ratio, perhaps arguing for a 50 percent of median household income instead of 60 percent.

How are we to decide between these two essentially arbitrary ratios? Some would automatically go for the higher figure on ideological grounds, others for the lower ratio on opposite but equally ideological ones. The only resolution is to get the contestants out of their ivory towers and find out the implications of the various income levels on family life. In effect we would be back to the 1972 Royal Commission approach, 22 years later after much wasted effort and expenditure, and little progress.

This is not to defend the Royal commission BDL. After 22 years it needs recalibration. But such an exercise needs to be anchored in the actuality of family life.

According to the news reports, the second proposed poverty level work has been supplemented by “focus groups”, in which some of the poor have been asked how they feel. You will recall that this particular method was being used in the 1970s, but it was only supplementary to the central focus which was too look at the situation of all families, and not just a subset of them. The Treasury would rightly say that selective focus groups do not give a comprehensive overview. They are another example of the concentration on pathology instead of a holistic approach.

Effective Marginal Tax Rates

There appears to be a more serious problem with the second study , which nicely illustrates the dangers of pathology. Any resolution of poverty by income transfers involves an implicit effective marginal tax rate (EMTR), that is the amount of income left after any additional dollar earned, following the payment of income tax, surcharges, and losses through abatement.

At the moment the EMTR on high incomes is 33 percent. If the rich receive an extra dollar, they are left with 67 cents, after income tax is paid. When it was proposed to increase the top tax rate to 39 percent, there were anguished cries (admittedly from those who would be affected) that a higher rate would lead to tax avoidance and disincentives for effort.

In fact most of the poor face much higher EMTRs than 39 percent, as a result of their income tax being topped up by income surcharges, and abatements for benefits, family support, housing, tertiary education, and health charges. It can be a heady cocktail in which families face rates close to 100 percent. This means if they earn any extra income, most is pulled back by the state, and they have little left for themselves. Such rates are a severe disincentive to earn any extra income, and the family gets caught in an income level from which they cannot effectively break out. This is called “the poverty trap”. The trap has become more vicious in recent years, because despite the rhetoric of self-reliance the system, has been steadily modified in a direction which discourages the poor from being able to take any measures to help themselves, because most of the benefit goes to the state.

There is an important implication for social policy of these high EMTRs and the resulting poverty trap. The danger is that the society will be split into two. The well-off who will face low tax rates, and will be able to better themselves, and the poor who will face high tax rates and real disincentives to better themselves. Thus society will bifurcate into those who are affluent and progressing, and those who are deprived and stagnant. Addressing the high EMTRs is one of the urgent task which faces income maintenance today.

Now, sadly, the quoted figure of $900 million (a year) odd to remove poverty from New Zealand involves an EMTR of 100 percent, for the implicit policy means that the family would have no incentive to earn, and every incentive to reduce its effort, since any reduction in market income would be offset by an increase in the supplementing benefit. It is misleading to say that we could eliminate poverty by spending a mere $900 million a year. For any plausible poverty line it will cost a lot more. There is a danger that some unscrupulous politician will pick up the figure, use it, promise a package of $900m, and claim to have eliminated poverty as a result. It is not, I’m afraid, that easy.

Why make such an obvious mistake? One can but conjecture, but I suspect it will be that the analysis was of a pathological bent, and considered only those who were below the poverty line, ignoring those above. Thus when it calculated the cost of increasing the incomes of the poor it failed to consider the implications of the change for those above the poverty line.

Holism vs Pathologism

This returns us to the basic theme. Studies of the pathology of the family are a useful component of social policy, but they are not comprehensive. Without a holistic analysis underpinning them they are likely to be misleading, because they ignore that family behaviour is much more integrated and coherent than the implicit pathological model. The latter assumes somehow some families or family issues can be split off and dealt with ignoring that there are others just on the other side of the cut experiencing similar pressures.

The attempt to create a holistic account of family life was the most important achievement of the household studies analysis of the 1970s. The fact it identified that families with children are the largest source of poverty was a serendipitous spin off, which has become the conventional wisdom and usefully influenced family policy.

Indeed the model’s general analysis on poverty remains one of its strongest conclusions to social policy to this today. It continues to suggest that priority needs to be given to:
– increasing the level of family support, although perhaps delivering it in a more efficient manner (St John 1994);
– reducing the effective marginal tax rates, and poverty traps;
– reducing the private costs of education and health services.

So the model has stood up remarkably well to the revisionist attacks on them.(7) That those conclusions are now a part of the wisdom does not excuse those who wish to challenge them, ignoring the analysis on which they are based. Moreover it is remains a powerful tool of analysis. It estimated that the numbers in poverty rose between the 1989/90 and 1991/2 year by around 40 percent is independent of the exact poverty level: a tribute to the robustness of the holistic approach (Easton 1993).

However much of the analysis involved primitive assumptions, or ones which while true for the 1970s are not true in the 1990s. Of particular worry is the new conditions in the labour market (especially the high levels of unemployment), and the changing balance between the incomes of men and women. It has not been possible to develop the model, which was probably as well tuned for the 1970s as the available data would allow, but is in need of refurbishment to develop new insights for the 1990s.

The great cost to the nation of the unwillingness to fund properly the holistic analysis of family behaviour has been not just the relapse into revisionism on poverty, but also a return social investigation and social policy to a focus on specific pathological situations. As a result social perceptions and social policies become imbalanced. Those outside the obsessions of the current pathological focus get ignored, even when their needs are greater.

The holistic approach starts with the whole of the population – in this case families with dependent children. It sets up principles and provides analysis for the whole of the population. It then addresses the needs of particular groups in the context of the whole, ensuring a continuity between the policies for specific issues, and those for entire population. It is an inclusive approach, not one which exclusive, neither excluding the majority, nor other minorities.

I have sketched here how the approach has been applied to family economic behaviour. Equally it can be applied to general legal rights and responsibilities, where it asks what is the appropriate set for families as a whole, and then applies the principles to those in special circumstances, extending the rules to meet their particular needs.

What we need then, is a return to an holistic approach to the family, based on sound theoretical assumptions, solid empirical investigation, and independent competent analysis. This needs to be at the centre of research and policy development, rather than at the periphery, as pathological concerns grip the concern.

It would be too much to expect such a revolution to happen in this year of the family, but perhaps we can start down a path which will lead to such an outcome. Until we do that, there is little hope that we can reduce the unnecessary stress on the family which current economic and social policies seem to be generating.

1. More precisely “households”, as is true for most quantitative studies.
2. Easton (1986) reports on most of those done up to that time.
3. See Easton (1994) for greater detail.
4. Evening Post, October 13, 1994.
5. Here I use the median income which is not adjusted for household composition (i.e does not use an equivalence scale). The principle I am illustrating is reasonably independent of this adjustment, and it avoids using the invalid scale as discussed above.
6. This is the sort of outcome which the technical critique of the use of a median income poverty benchmark would predict.
7. For a detailed description of the model see Easton (1991).

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