nequality, poverty, and prospects for a better life
A Spirited Conversation: 28 May, 2014, Nelson
Keywords: Distributional Economics; Regulation & Taxation; Social Policy;
I want to begin by talking about Stacey who was a 14 year old Aucklander I met a couple of years ago when I was working on a standard of living case. She was living in a state house with only her beneficiary mother Meg. To protect her and her mother’s privacy I have simplified some detail and changed their names. I don’t think any changes I have made weaken what I am about to say; some things I have left out would strengthen it. Perhaps I should mention that the two are Pakeha – it is too common to think the poor are primarily Maori and Pasifika; there are actually more Pakeha who are poor (because there are more Pakeha). You might also need to know that Meg has a chronic health condition which rules out paid employment; she has tried though.
I was shown a financial statement prepared by a budget advisory service for Meg and Stacey. The budget recorded the family’s 2012 weekly income as $484 and set out a spending program for food, housing, household energy, medical and educational expenditure, transport and phone.
All up, the recommended spending on these items came to $465 which left just $19 a week for everything else including clothing and footwear, entertainment, recreation, OTC medicines and personal care, household cleaners and the like, dental care, consumer durables, insurance and a variety of things you probably think of as normal – haircuts, presents, school trips and pets. Certainly there was no provision for alcohol or tobacco, or even buying a lotto ticket.
How did Meg and Stacey cope with this limited existence? There were some small gifts from various sources but they were not enough. I got the impression that they skipped some of their medical needs, but the big saving was on food. Meg said she usually spent $40 to $80 a week – well below the recommended level of $130 a week the two would need for a simple but nutritious diet. It was recommended by the University of Otago Department of Human Nutrition.
Meg admitted they depended on chips, even though she knew they were not healthy. Chips are the cheapest way to fill one’s belly; they put off hunger, leaving some cash for other necessities. But Meg and Stacey knew they were not eating nutritiously. They had no option.
Their subsidised state house was not too healthy either. The house was not warm – the household energy budget was highish; it was badly located, adding to their transport costs; it was not in good shape – sewerage flowed outside when it rained.
That is the financials. What does it say about the prospects of 14-year-old Stacey? She was badly fed, lived in unhealthy housing, skipped some health care and was socially excluded by being unable to spend much time with her school friends. For example, they wanted to go a musical event together, but she could not find the $20 for the entrance fee. Poor nutrition, poor health and social exclusion compromised her education.
Let’s skip forward twenty years into the future. Stacey will probably still have poor health, which means she will not be as effective a member of the workforce. If she is in it, for she is more likely to be unemployed or a beneficiary. We shall not be surprised if she fails to be educated to her full capabilities, again reducing her workforce productivity. We can be reasonably sure, too, that Stacey is likely to be a bigger user of state assistance: higher public health costs, more use of benefits and – although I hope this does not happen to this young (and not unattractive) woman – more likely to be involved in criminal activities or to be incarcerated. We talk of New Zealand being a land of opportunity. Not for Stacey.
It is difficult to blame Stacey for her gloomy prospects. They are shaped by her impoverished family circumstances. I leave you to blame her parents or the state welfare system (or both); Stacey has little influence over them.
This is all in the future. Let’s ask about Stacey’s mother a couple of decades ago. Perhaps not exactly her, but twenty or so years ago the benefit income of a family in the same circumstances would be the same as today after allowing for inflation. We guess that the 14 year old then was similarly poorly fed, in poor quality housing, missing adequate health care, and socially excluded.
So all the things I said about the prospects of Stacey have already applied to many in her mother’s generation: undeveloped potential, poor workforce productivity, low employment, high demands on social services and the possibility of criminality (not Meg though).
So part of the problem with our poor economic performance is that we failed to spend enough on last generation’s children. Children are one of our most important – perhaps the most important – social investments.
There has been increasing research based on international comparisons suggesting that high inequality is related to poor economic growth,. This will surprise those who insist that the higher tax rates needed to reduce inequality reduce output. We can see in Stacey’s prospects how inequality can lead to lower economic growth; that effect probably overwhelms the impact of higher taxes.
If we under-invest in children we compromise future economic productivity and wider national prosperity while adding to the future costs of healthcare, welfare and justice. Depending on the choice of poverty line, there are about 200,000 children in poor New Zealand families. They – and Stacey – deserve better.
What do we mean by better? It is evident from what I have just said that Stacey needs more spent on her. I was commissioned to estimate how much extra. I wont go through how I calculated it – the data and explanation are in a paper on my website under ‘How much does a family need?’ (http://www.eastonbh.ac.nz/2012/08/4660/) I used a number of different methods, which gave much the same answer and averaged at about $75 a week more than the family was currently getting.
That seems about right. I did the calculations – they are pretty mechanical – before I saw Meg and Stacey’s budget. The budget is telling us that they are cutting back on a nutritious food budget by about the amount I estimated they needed.
Mine is not a generous budget though. It is designed to be the absolute minimum for participation in society. There are some caveats for unusual circumstances which could mean additional income is required. For instance, Meg and Stacey had special health problems and their clothing and durables were run down by years of poverty so they actually needed more cash to rebuild them. Similarly they needed a bit extra to pay off debts incurred as a part of their poverty. I implicitly assumed good quality housing; I understand the house they were living in may have been condemned shortly after I visited them. So my figure is on the conservative side.
There is an uninformed view that all these people really need is financial advice. Meg got it from the budget advisory service. It told her that she did not need financial advice, she needed finance. Do-gooders frequently have a list of recommendations on how to reduce poverty but to be effective they require that the family starts off with sufficient income.
Similarly there is a lot of research tracing out the consequences of poverty and suggesting policy responses. But they are only bandages to poor families if the financial deficit is not addressed; ambulances at the bottom of a cliff which has a weak income fence at the top.
The conclusion from my budget studies is that poor families have insufficient income to lead a decent life. There are other things we may need to do, but unless we start off by ensuring families have decent incomes, all the other policies are not going to be effective. So how much should we increase their income by?
What my study suggests is that in the case of Meg and Stacey a very conservative estimate to give them the beginnings of a decent standard of living is they needed a boost to their income of about an eighth – for every eight dollars they currently spend they need to spend a ninth. (That’s in addition to any spending for their special circumstances.) Perhaps a more detailed study would suggest a different income boost – I am inclined to guess the figure may be higher. But let’s settle for an increased income of an eighth for this family, and for want of evidence, let’s assume that applies to all beneficiaries.
There is a problem of integrating benefits and other incomes – it’s a bit of a pig’s breakfast at the moment. In particular we should not increase benefits without thinking of the impact on families who depend on wages. I don’t have the data bases to do that with any sophistication.
So to give you a feel of what is possible, I am going to do a very simple redistributional exercise. First, I am going to give everyone – rich and poor – the same weekly boost to their incomes from what is called a ‘demogrant’. How to deliver it is a logistic problem which need not detain us. Beneficiaries might get higher benefits, children a universal family benefit, others a negative income tax. We can do all sorts of fine tuning – I support a universal family benefit but I think it should be income-taxed so it is more valuable in absolute terms to a poor family than a rich one.
How to pay for the demogrant? Again I am going to do a bit of hand-waving about the details, but, to simplify, I am going to assume that everyone pays additional tax in proportion to their income.
You might think that because I am proposing a proportional tax I am abandoning the notion of progressivity in the redistribution system. A demogrant which goes equally to everybody together with a proportional income tax hits the rich relatively harder than the poor. You can have a more progressive redistribution of course – you might also want tilt the tax against those with higher incomes, raising top tax rates – but this package is simple and easy to calculate.
How does the redistribution impact on Stacey and Meg? They would together receive a demogrant of $100 dollars a week, just like everyone else in their situation, but $25 of that would be clawed back in income tax, so theirs would be a net increase of $75 a week. They would not be aware of the clawback, simply getting an extra $75 a week net. That should get them off the chips.
Those with more income would not get as much. Consider a family of mother and daughter but spending $1000 a week, roughly twice what Meg and Stacey did. They would also get the demogrant of $100 a week, but their clawback would be $55 a week. So their net position would be an extra $45 a week, less that Meg and Stacey’s $75. Further up the scale the clawback would be greater; a family of two spending over $1700 a week would be paying more tax than the demogrant.
What about the household (disposable) income distribution as a whole? It is going to become more equal following this redistribution package, but by how much?
Those in the bottom household decile get a 12.5 percent boost and those in the top decile have a cut in their income of about 3.5 percent. It was not planned this way but about two out of three people would be better off under this demogrant and tax proposal – the poorer and middle ends of the distribution of course.
I compared the revised distribution with past ones. It turns out to be rather similar to the income distribution in 1990, before the Ruthanasia/Jennicide slashed benefit levels in early 1991. The 1990 level is more unequal than it was in the early 1980s before Rogernomics began cutting top tax rates and hiking them on middle incomes. But implementing the changes would leave a less unequal distribution than we have today.
Back in the early 1980s our household income distribution was definitely in the bottom half of the OECD – we were probably around about 20th out of 34 countries. Today we are more like 9th out of the 34 jumping up in income inequality past 11 other countries. I was astonished to learn that we are currently actually more unequal that Britain after adjusting for country size and level of incomes. Implementing the package I’ve just described would move us from the top half of inequality among rich countries into just below the middle. Not back to where we once were, but closer.
Once we were proud that New Zealand was an egalitarian country in which we acknowledged differences but thought they were not great or did not matter that much in terms of wellbeing and life prospects. Admittedly we tended to overlook the fact that we treated neither women nor Maori well, but it was a world in which, broadly, everyone had some opportunity to prosper. We thought we lived in a land where you got a fair go.
Actually we did not know how we compared with the rest of the world, because we did not have the data. Our claim to exceptional egalitarianism was aspirational rather than factual. Now we have finally got the data, it turns out that we were once at the egalitarian end of the world in terms of the distribution of income, but we are no longer. I’m proud that it was once possible to grow up in a solo parent family in a state house and become prime minister. Have we abandoned that aspiration?
You may have found these figures I’ve been presenting a little stressful to follow. But they illustrate two fundamental things. First, we are not doing well in terms of any aspiration for economic equality.
And second, the objective of giving the poor an adequate standard of living is not an unreasonable goal, although it is relatively expensive especially compared to the ineffective nostrums that are often offered. The cost is the reason we flinch from properly addressing the problem, turning away from the income deficit issue and proposing marginal changes which do not attack the central problem of the poor’s lack of resources.
Stacey’s problem has been around for a quarter of a century. We have an adult generation who has suffered from deprivation in their childhood in the same way that Stacey suffers today. Not only do they suffer from their childhood deprivation; so do many of their children.
To only slightly misquote Exodus, the deprivation of mothers is passed onto to their children, and to their children’s children, unto the third and to the fourth generation. Yet it is not the children’s fault they are deprived, that they suffer personally. It is little consolation that because children are a social investment, everyone else suffers when they become adults.
That means we have two major tasks before us – one is expensive, the other is difficult and expensive. The expensive task is to remedy the existing deprivation. It is costly because if we are to boost the inadequate income of the deprived, those who are not deprived are going to have to make income sacrifices. [2]
The second, more difficult, task is how to ameliorate the consequences of deprivation which has already occurred. We know quite a bit about those consequences but it is harder to address them. For almost a quarter of a century we have been under-investing in our children – by a huge amount. The order of magnitude of the under-investment may be a bit like not having built any roads for thirty years, and having been a bit skimpy on the maintenance too. No wonder the social trip is bumpy.
This backlog – the size of the task before us – is so huge the nation may quail. Faced with it I am reminded of a story about President John Kennedy who walking through the White House grounds late one afternoon found that the gardeners had downed tools for the day, having dug a hole for a tree but not yet planted it. Querying, he was told that it would take years for the tree to grow. He replied, ‘That is why the tree should have been planted yesterday’.
So has Stacey a chance? I am told the family has moved to a healthier house, but it was probably still badly located. There has been no increase in their real income, so probably she is still undernourished and is still not getting necessary health care. It likely that her education and training will not make full use of her potential. I dont know about social exclusion, but the likelihood is that if she has a valued social network it is socially narrower than her school offered her. Many in it will be struggling with problems similar to her own.
Of course Stacey has a chance. But she has less chance than if she had grown up in a middle-income or upper-income family with adequate resources and a more favourable environment. And she has less chance than someone born fifty years ago who lived in similar family and housing circumstances to the ones she lives in today. Yes she has a chance, but I don’t think she will ever be prime minister.
Notes
[1] The decile figures are as follows.
Percent of Total Household Income*
| Decile |
Current (2011)** |
Proposed*** |
1990 |
1984 |
| Top |
24.6 |
23.7 |
23.1 |
19.9 |
| 2 |
15.3 |
15 |
15 |
15 |
| 3 |
12.4 |
12.2 |
12.4 |
12.8 |
| 4 |
10.4 |
10.4 |
10.4 |
11.1 |
| 5 |
9 |
9 |
9.2 |
9.8 |
| 6 |
7.7 |
7.9 |
7.9 |
8.5 |
| 7 |
6.9 |
7.1 |
6.9 |
7.4 |
| 8 |
5.8 |
6.1 |
6 |
6.4 |
| 9 |
4.8 |
5.1 |
5.2 |
5.5 |
| 10 |
3.2 |
3.6 |
3.8 |
3.4 |
| Gini coefficient |
0.311 |
0.293 |
0.286 |
0.26 |
* If the shown proportion is divided by 10, the result is the average income of the decile compared to overall average incomes.
* Adjusted for. http://www.eastonbh.ac.nz/2014/03/been-counters/ double counting
** With demogrant paid for by proportional rise income tax.
[2] I am not arguing that we should do exactly the redistributive package I used to illustrate possibilities. I’d like to see a proper team of experts given the task. Don’t expect quick effective answers – too often quick ones are quack ones. However quality experts could probably recommend a few introductory measures to reduce deprivation which could be put into practice quite quickly.