Children Of the Poor: How Poverty Could Destroy New Zealand’s Future

New Zealand Books March 1997, p.14-16.

Keywords: Distributional Economics; Social Policy;

In 1980 the National Government withdrew the government subsidy to CORSO, nominally because it had produced a film which said that there was poverty in New Zealand. Sixteen years later a National Prime Minister was arguing what kind of poverty and how extensive it is, while the Treasury Briefing to the Incoming Government 1996 even tried to measure the extent of poverty (they called it “hardship”) although, as we shall see, not very well.

Mike Moore’s latest book (his seventh), thus has to be seen in a context in which politicians are beginning to grapple with the issue of poverty in a way they have not for half a century. Given the timing of publication, one may wonder to what extent Moore’s book is intended to be an alternative election manifesto to the official one of his Labour Party, perhaps to push it more towards making a more explicit commitment to the poor.

The book is a polemic rather than a careful study of what we know, and dont know, about poverty in New Zealand. It uses some of the available research material to link loosely its theme that the nation is not concerned enough about the state of its children. Just how little material Moore has used to is hard to judge, for despite it being published by a university press the book has no references, no bibliography, and the index is erratic. Moore has an enormous heart, which generates both energy and compassion, but what he needs – what Labour needs – is a think tank to enable the use of the available research material to shape its policy thinking.

In government Labour manifestly failed to do this. Its 1988 Royal Commission on Social Policy (RCSP) turned its back on poverty, despite poverty providing historically and intellectually the foundation for social policy. Without this grounding the fragile structures the RCSP built have sunk into a swamp, and left Labour Party in opposition bereft of any basis to proceed.

Regrettably, Moore’s book is unlikely to offer much direction either. The discussion on child poverty drifts into chapters on political correctness and civil society, finishing with a chapter on policy which veers between some general principles (with which I usually agree) but little on their implications, platitudes, and a wish list (involving massive increases in government spending). For instance one may not have problems with “accept with confidence the reality of the global market place”, but it is not clear how this relates to “raise the minimum youth wage”, and “keep interest rates down”. Most readers would favour the injunction to “stop truancy”, but how? And what is one to make of advising the government to set up “an ethical and moral commission” to report on “slowing down and reversing the hijacking of our cultural values, our language and our institutions by those who are seeking to impose an extreme brand of political correctness on the rest of us”?

Modern poverty research begins in the early 1970s with the report of the 1972 Royal Commission on Social Security (RCSS) which, unlike the 1988 RCSP, devoted considerable space and thought to poverty issues. A number of studies followed, beginning with Peter Cuttance’s study of large families in Hamilton. This research program was characterized by quantitative studies with a strong theoretical perspective, rather than being dominated by ideology and prejudged policy conclusions.

Poverty writing before the 1970s, such that it was, was largely ethnographic, describing the individual situations of the poor. The best known is John A Lee’s novel, also called Children of the Poor. Moore acknowledges the borrowing “because it is appropriate, real and makes the point that for too many, the last 70 years have not seen much progress.” Lee’s partly autobiographical book has precipitated at least four other literary works. Erik Olsen has written a Lee biography, while Mervyn Thompson turned Lee’s novel into a play. The novel also provoked a response Not So Poor, from Lee’s mother, Isabella. Her editor, Annabel Cooper gives yet another account of the events in the preface. (Isabella’s memoirs were also turned into a play produced in Dunedin.)

While there are disagreements over the facts of Lee’s childhood, the fascination is the contextual interpretation of those facts. Isabella wrote in response to Lee’s portrayal of a children trapped into grinding poverty for which there was no escape. Her account is that the poor had a dignity and respectability. Ironically Lee was able to escape, whereas his mother never did, even if she maintained her dignity.

Such questions about the consequences of poverty has been largely unaddressed in more recent poverty writing. It has been more concerned with identify, measuring, and – to a lesser extent – describing the poor.

At an early stage the issue was how to define poverty. The 1972 RCSS had stated that the aims of the welfare 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.” (original’s italics).
In terms of the evolving international literature, the first aim was equivalent to absolute poverty and the second relative poverty. Individuals may have enough to sustain life and health, and thus be out of absolute poverty, but insufficient to be able to participate in and belong to their community, and hence be in relative poverty.

Having conceptually defined poverty the next step was to identify some income level which would quantify it. The eventual answer was obvious enough, but some thought was given to alternatives. For instance in Britain at the time the commonly used poverty level was based on their social security benefit levels. This had the merit of reflecting the practical experiences of people living on low incomes, derived from the reports of social workers interacting with the poor. But it had the disadvantage that the supplementary assistance regime was administratively determined, so it can be changed by political fiat.

Instead the chosen poverty line was the income recommended by the RCSS as the basic benefit level, now known as the BDL or benefit datum level, noting that the government was not obliged to follow the Royal Commission (and in 1991 indeed slashed benefits far below its recommendations). From the above principles the RCSS would not have recommended a benefit level below that which they judged was required to enable the participation in and belonging to objective. However given their fiscal prudence, they were unlikely to set a benefit much above their assessment of the poverty line.

Had they chosen the right level? The RCSS had been deluged with evidence about community living standards. Their judgement was likely to be as good, if not better, as any panel of four wise men and one women. In subsequent years ethnographic surveys were used to test the validity of the conclusion, although they involve the converting of qualitative judgements into quantitative ones. There were only a few useful quantitative studies, most notably those by David Ferguson on the elderly in 1974, and his longitudinal Christchurch Child Development Study from 1976. In the end the BDL seemed to be about right. (Incidentally it is frequently stated there is no official poverty level in New Zealand. In fact various Department of Social Welfare reports in the late 1970s were tiptoeing around the notion, by implicitly using the BDL as though it were an official poverty line.)

But how to update the BDL for economic change after 1972? There has been little dispute that adjustments for inflation should use the Consumer Price Index. The theoretical conclusion in regard to real (i.e. inflation adjusted) changes in standards of living was that the BDL should be adjusted for long term changes in real incomes, but not for the stage in the business cycle. However the practical issue of how to do this proved irrelevant. There has been hardly any change in average real household incomes since the RCSS deliberates in the early 1970s.

The Household Economic Survey, available from the mid 1970s, gave a distribution of household incomes, although initially the data was not of good quality. But any conclusion could be checked against other data sources – specific surveys, income tax data, synthetic data, and census data. They supported its general conclusions – there were a lot of people below the poverty line. CORSO got into trouble partly because they used the figure of 18 percent of the population were below the BDL. What the politicians did not know is that while this was a “gee-whiz figure” to emphasize that the level of poverty was significant, the research had identified an important issue, which had already been imported into policy. In the early 1970s the conventional wisdom thought the majority of the poor were beneficiaries. By the middle of the 1970s it was known that the bulk of the poor were families with children, and the majority of these depended on wages. In 1976 a tax credit for parents with young children was introduced partly in response to the poverty research’s findings.

However the consequences of poverty was only weakly addressed. Do low family incomes damage children’s health, inhibit their learning, induce family violence, and/or cause family breakdown? If the answer to such questions is “yes” (to a significant degree), this raises major issues for social policy. It is not merely that poverty would be socially unjust, and lead to misery and early death (if, say, the elderly had insufficient to eat, keep warm, and obtain health services). Poverty among children would compromise the long term sustainability of a society, if it meant that as adults they were less healthy, less productive, and more prone to violence.

As his subtitle indicates, Moore thinks this. So would many people, and there are anecdotes to support their beliefs. But there is little research, for it involves an ethnographic approach combined with quantitative methods, typically with large enough samples to identify the pathology. Such studies hardly exist in New Zealand (and foreign ones do not readily translate because of difficulties with income comparisons and cultural differences). Sadly Ferguson’s Christchurch longitudinal study, and a similar one in Dunedin run by Phil Silva, found that collecting economic data on the family was considered unacceptably intrusive by the respondents.

Yet the end of the 1970s New Zealand could be well pleased with the progress. The basic quantitative paradigm had been developed, the data base was increasing, and there were an gaggle of ethnographic studies in support. About then both British and Australian academics commented to me that New Zealand was a world leader in poverty research. They would not say the same today. What went wrong?

Partly it was the momentum from the RCSS had run its course, partly that the sharp rise in unemployment in the late 1970s redirected concerns to labour market pressures. But we have also seen that the RCSP failed to tackle the issue. (Nor did the Planning Council, another consultative body not noted for innovative thinking.)

There were however two further complications. The early research had, on the whole been cheap. The next stage involved greater resources, which could only come from the public purse. Second, the research required some access to the unit records of the household survey, which was only available to private researchers in a clumsy and expensive manner. (Our legislation is very protective of the security of personal statistical records, more so than most other OECD countries.)

There was one general exception. The government is well funded, even if it is unwilling to fund independent research. Moreover a quirk of the legislation means that public servants have access to the unit records, which private researchers do not. This gave the government monopoly control over the next stage of the poverty research program, a monopoly it chose to exercise by doing very little.

The research monopoly has some uneasy implications. When last year the impact of the government tax cuts were debated, the public and commentators had to rely upon calculations done by Treasury using their TAXMOD model (the basic model for poverty research). Since Treasury officials, like everyone else, can make mistakes or use critical assumptions which are not robust to reality, we are absolutely dependent upon the quality of the model. Yet there is no independent verification.

It was possible for private researchers to do some work via the government models, but they were severely constrained by the government monopoly (even were there adequate funding, which there has not been). For instance the above description on how to calculate a poverty level did not explain how to deal with the various household compositions (say a couple with two children). This involves using a “household equivalence scale”. The one which has dominated use is that set down by the Department of Social Welfare, which is based entirely on some a priori theorizing, and has no significant empirical content. Compared to the available empirically based ones it has very strong household economies of scale, making the unlikely assumption that it is very much cheaper (almost 40 percent) for four people to live together than separately. The advantage to fiscal policy of this assumption is that it downplays the cost of children in a household. Thus there is probably more children below the true poverty level than the estimates using this distorted scale conclude, with the consequence that there has been even less attention to addressing the needs of children. The government monopoly control on poverty research has saved the government billions of dollars in family assistance – at the expense of children and their parents.

I found an ingenious procedure (synthetic quasi-unit records) to get around the problem of limited access to unit records, without threatening their personal security. Last year I applied to the Foundation on Research Science and Technology (FRST) for a grant to process them. I did not really expect the government appointed funding committee to be enthusiastic about a project which undermined the government’s research monopoly, but I was astonished by their excuse. They approached six referees. Five – including the international ones – were enthusiastic.The sixth was less so, but his credibility and argument was undermined because he could not distinguish between the household survey and the population census. Neither, apparently, could the FRST committee, because they quoted the sixth’s spurious criticisms based on the wrong data base as the reason they could not fund the project. In the hands of such expertise is the destiny of social science research – and the poor.

Towards the end of the 1980s government agencies began to do some research. A couple of Treasury officials created their own poverty line, based upon a procedure which was considered outdated when the RCSS looked at it twenty years earlier. It involved valuing a minimum food requirement and then multiplying it by a number arbitrarily chosen by the officials (on salaries beyond the ken of the poor). The food allowance was less than with which prisoners are provided (leading to the comment: if you are poor steal food. If you get away with it you will be better fed, if you get caught and jailed you will also be better fed). The multiplier was over a fifth below the one implicitly used by the RCSS, so the Treasury poverty line was extremely low by the standards of any other studies. (The officials also misrepresented research which contradicted them.) This could be put down to a Treasury not being empirically skilled in the poverty research area. But alas such research, even though it was not externally refereed, appears to have been used for policy purposes, for in 1991 the unemployment benefit was cut to the exact level the research set as its poverty level.

Ignoring the research that has gone before is not confined to Treasury. An Overview of Recent Research on Poverty in New Zealand, by the New Zealand Poverty Measurement Research Group (PMRG – Paul Frater, Bob Stephens, and Charles Waldegrave) is nominally a review of New Zealand research. It cites only 69 local references in its bibliography. But the bibliography, provided for the New Zealand Statistical Association by professional statistician Stephen Haslett, on the somewhat narrower topic of The Statistical Adequacy of Current Monitoring of Social Welfare Benefit Levels cites double that number. There is a habit in New Zealand of ignoring past research, treating it as a pamplist in which the underlying text can be ignored and overwritten. Unfortunately such practical men and women use the previous work of defunct researchers, but without a thorough understanding, and end up in a methodological muddle. Newton remarked that he could see further because he stood on the shoulders of giants. Standing on their toes, all he would have seen was their shins.

The problem is well illustrated by the PMRG’s attempt to set a new poverty level, by asking carefully selected “focus” groups what they think is an appropriate minimum standard of living. The research does not attempt to relate to earlier research, and like the Treasury has the oddity of calling the relative poverty line “absolute”. Its methodology is the use of an ethnographic approach to derive quantitative estimates, but its statistical methods, are crude. The work seems deeply methodologically flawed, in ways too numerous – and sometimes too technical – to detail here. A few illustrations will have to suffice.

The PMRG makes no attempt to calculate the accuracy of estimates. but eyeballs the data and tells us that the various estimates seem in agreement. Statistically they are not. Each group provides separate minimum standard of living estimates for a household of one adult and two children, and one of two adults and three children. It is not difficult (using fourth form algebra) to show that the proposed poverty lines are inconsistent.

Another flaw is the PMRG uses income after deducting housing expenditure. That it is a hybrid of income and expenditure is a warning that something is theoretically wrong. Having excluded housing expenditure the mixed measure is then adjusted by a Household Equivalence Scale which includes housing. The resulting estimate is not only a conceptual muddle, but it biases up the numbers of poor, enabling the PMRG to state that housing the major cause of poverty. It may be, but their analysis offers no support for the proposition.

In any case the conclusion probably detracts from the central point that by far the largest group of the poor are children. What we really need to know are answers to questions like “if one had an extra $100 million, how could it be best deployed to reduce poverty?” In principle we know how to answer such questions, but practically private researchers cannot answer them while the government maintains its stranglehold over funding and modelling access.

The PMRG’s analysis has been most challenged is because they define their poverty line in terms of a proportion (usually 60 percent) of median income. Any statistician knows that a statistical median (the middle income) is inelegant, clumsy to calculate, and its estimators are inferior to the statistical mean (the average). Aesthetics aside (although they are not a bad test of the integrity of a theory), using a proportion of the median has a very grave defect. Like the British benefit measure rejected in the 1970s, it can be affected by policy and administrative change. For instance suppose the government were to take income from those in the middle of the income distribution and give it to the rich. Then the median income would fall. Thus any poverty level which was a proportion of that median would fall, and so the numbers below the level would fall. Using a median based measure the government could appear to reduce poverty by making the rich better off and doing nothing for the poor.

This possibility is not a figment of a theoretical imagination. It has been actually happening since the early 1980s – as far back as we can go. (This incidentally, is one of the reasons why the rich have been so enamoured with the reforms of recent years, despite the economy stagnating. Reductions in their income taxes, funded by higher taxes on everyone else, has been making them better off.) The fall in the median income through time (especially relative to the mean) has been so great that the numbers below 60 percent of the median has been falling (despite poverty, by any sensible definition, rising). Thus a median based poverty level can be used to establish the claim that poverty has been falling over the last 15 years.

It may not surprise readers that Roger Kerr of the Business Roundtable seized on this result, making the absurd claim that poverty has been falling during the reforms. Treasury supports Kerr by presenting the nonsense in their Briefing to the Incoming Government: 1990, as though it were an intellectually coherent approach. (Treasury also published a measure based on constant price basis. This is the more conventional approach and is equivalent to a poverty line which is a proportion of the BDL. However its claim that poverty rose sharply in 1989/90 – to levels comparable to 1991/2 after the benefit cuts. Not only is this result out of line with other studies, but does not accord with any anecdote or other evidence. Given the Treasury record of poor empirical standards, their conclusion is probably an error, but given their monopoly there is no way private analysts can check.

The PMRG have denied their median calibrated poverty line is intended for such uses, but they themselves published a table which does exactly the same thing as the Treasury. Why they bothered to use a median, and get in such a muddle, is a mystery. Anyone familiar with the basic paradigm would have checked their original estimate and observed that, within its margins of error, their focus groups were recommending a poverty line equal to the BDL – the benefit level for a couple recommended by the RCSS in 1972. The PMRG could have made the modest but justified claim that their exercise has been another ethnographic contribution to the improved calibration of the BDL and supports the view it is a good estimate of a poverty line (and our respect for the wisdom and competence of the RCSS). Instead, when they (rarely) refer to the earlier work they misrepresent it.

Using data based on the work of Mary Mowbray of the Social Policy Agency (more reliable than most because she does not have a policy axe to grind), we can trace numbers below the BDL over the last 15 years. The proportion of households rose slowly through the 1980s from 10.2 in 1981/82 to 11.5 percent in 1988/89. In the early 1990s poverty levels jumped to nearer 15 percent of all households. (Proportions of people will be higher, because large households tend to be poorer.)

This pattern (which also broadly applies if some other constant price poverty level is used) tells the following not implausible story. In the 1980s the constant real value of the benefit, together with the introduction of family support, moderated the effects of the deteriorating market incomes (including rising unemployment), so that poverty numbers only rose modestly. However when benefit levels and entitlements were savaged in 1991, poverty numbers rose abruptly, with a widespread increase in hardship, evidenced by enormous pressures on social welfare agencies, food banks, and a host of anecdotes. Poverty levels do seem to have since come back a little since 1992/93 although they remain markedly higher than they were in the 1980s. The Treasury attributes this small reduction to the economic recovery, although their data series is behaving oddly.

I can report here some preliminary research which suggests that the fall in unemployment in the mid 1990s did lead to distributional benefits, but mainly to those just above the BDL. My tentative judgement is that the fall at lower incomes is due to an easing up of the stringency of benefit entitlement and the special needs benefit. What is undisputable, is that the benefit cuts and other general measures have lifted poverty to a higher level in the 1990s compared to the 1980s. (There is a direct way of assessing these issues, but the government agencies with their monopoly on funding and modelling access have ben unwilling to investigate, and no one else can.)

Note the new potentially powerful development heralded in the previous few paragraphs. It is now possible to trace changes in poverty on a year by year basis, and we so we are able to improve out understanding of the dynamics of poverty. Treasury official George Barker has gone further to proclaim a “new view of the income distribution”. Unfortunately his argument is long on rhetoric but short on results. The data base is simply not there. Indeed his so-called new insights, insofar as they are valid, were well known to past researchers, who knew they were limited by the data shortages in the way Barker is. Where they could they explored the issues: for instance the RCSS report discusses the income pattern over a family life cycle (written by Angela Seers, a researcher whose early contribution is often overlooked).

Barker makes considerable emphasis on some results using the income tax data base. They purport to demonstrate there is considerable mobility within the income distribution, quoting, that over a quarter of the those in the bottom quintile (fifth) of tax filers are in a higher quintile a year later. (No information is provided as to what the proportion in higher quintiles who drop into lower ones.) A tax data base is a administrative one, and therefore subject to a number of serious problems (such as what happens to people who file in some years but not others). Incredibly Barker does not discuss these issues, so it is difficult to make any sense of his results at all. The work is written up in a booklet Income Distribution in New Zealand (which has nothing to do with a book I wrote with the same title). It does not meet even the most elementary academic criteria of defining its data bases or discussing data problems, despite the publisher being the Victoria University of Wellington based Institute of Policy Studies. One result is mentioned in the Treasury 1996 briefing, as though it would be helpful to an incoming minister, but it even manages to misquote the statistic. (One despairs over Treasury empirical standards.)

More professional work by Harry Smith and Robert Templeton of Statistics New Zealand is more enlightening. It is evident that the lowest quintiles represent low quality income – part time earnings, benefits, low wage earning and the like. The conclusion is there is considerable “churning” in the lowest incomes of tax filers, as people move through different income states such as low wages, out of work, on benefit, part-time work, self employed and so on. At the top of the distribution there is considerable stability.

What is being argued over is the nature of the experience of individuals. Are people in poverty trapped in poverty through most of their life? Or is it a temporary transitional phase? Barker appears to favour the second option. There is not a lot of data to go on.

Consider the following hypothetical situation. Suppose we knew the location of a family, consisting of a number of generations at all stages of the life cycle, and that it was near the bottom (on average) of the income distribution, in 1951. Forty years (or two generations) on we might look at the same family (that is its descendants of the 1951 people). Would it still be near the bottom, or would it now be evenly scattered through the distribution (or somewhere between)? If the former, the family would be trapped into a cycle of poverty, hardship, and deprivation, churning through the lower income levels, but never really escaping. If the latter the experience would have been a temporary one, which many go through, perhaps once a generation.

This is not just a thought experiment. There exists sufficiently detailed income records of one family group which we can trace over the postwar era. It was near the bottom of the income distribution in 1951, and it was still near the bottom of the distribution in 1991, two generations on. This seems to support the hypothesis of households being trapped into cycles of poverty and hardship, unto the third generation.

The “family” for whom I have these good records are those who report themselves as Maori in the population census. They were poor in 1951, they were still largely poor in 1991. Admittedly this is a family with a particular genetic and cultural heritage, but all families have their own such heritages. The Maori historical experience is basically very damning to the Barker thesis. He could fall back that under the new economic regime they will soon be evenly scattered through the income distribution. We shall see. (The numbers of Maori households which appear in the household survey are small, so a statistician has to be careful to draw conclusions. The evidence points however, that Maori real and relative incomes deteriorated between 1981/82 and 1994/95.)

Income dynamics are important but typically we do not have the data to explore them. The data that we have may be boringly static, but we have far from fully exploited its use. Haring off after a new untestable fashion, and ignoring past solid research, means that golden research opportunities have been lost, and all that is seen is hairy shins.

What do we know about poverty that we did not know a decade ago? There is not much new I am afraid. We have one or two tentative research hypotheses, and some broad confirmation of earlier research, but generally we have not made a lot of progress, except we are no able to track poverty better through time. The access to quasi-unit records remains the most promising approach for new insights, although the lack of resources to use them means new understandings will be delayed. One might also hope that in the future the ethnographic work will integrate better with the quantitative work, and begin to explore issues of the causes and consequences of poverty, which are beyond the power of the existing data base.

Nor have we made much progress with new policy implications, although we can absolutely confirm that if the government cuts benefit levels and entitlements (as it did in 1991) poverty will increase. I confess amusement to a response of Roger Kerr. He had published an article using Barker’s work in The Evening Post, but the editor had rejected further serious comment, so the venue of the debate had moved to The City Voice, a lively give-away Wellington paper. There I pointed out various defects in Barker’s data. Kerr’s reply largely accepted my analysis, but asked plaintively what did I think about the policy conclusions he drew. The attitude is not untypical of much policy debate: never mind about the facts, never mind about the theory, never mind about the research – what matters is the policy.

Sure we need to be passionate and polemical about poverty in New Zealand, but no doubt Kerr and Barker would claim to be just as concerned about the interests of children as Mike Moore. But all of us need to be more informed. And if we are not, almost inevitably we will pursue policies detrimental to the interests of the poor and of children (as has happened over the faulty household equivalence scale, and may happen if the PMRG work on housing is adopted as casually as it has been constructed). The outbreak of interest in poverty in recent years reflects the consequences of ignoring poverty in the 1980s. Ignorant of, and insensitive to, the poor we introduced policies which exacerbated their hardship.

Unlike the 1970s, poverty research over the last decade has not been one of New Zealand social science’s great achievements. If it made any claim, albeit a modest one, it has clumsily responded to the rise in poverty on the early 1990s, precipitated by policies which were only possible by the research neglect of the 1980s. Although they may be unaware of it, Bolger, Shipley, and Moore in this book interpret the rise through the framework largely developed by poverty research.

At a seminar on health and inequality in December 1996 Peter Saunders, an Australian – indeed world – expert on poverty and income distribution research, commented that there has been a “failure of the social policy community to be sufficiently professional in much of its work.” His point is that if analysts are unprofessional (even though they may be passionate), they leave policy open to other unprofessional mavericks. The resulting social policy will be dominated by the ideology and objectives of the rich (as indeed has happened in New Zealand in recent years). The interests of the poor, and our children, will be – and, as Moore points out, are being – neglected.