Once the current recession is finally over, poverty researchers might well find themselves confronted with a puzzle. For it is entirely possible that the downturn will actually help the government in achieving its goals to reduce child poverty and pensioner poverty. But, unfortunately, this effect is brought about by the ridiculous way in which ‘poverty’ is defined.
The Department for Work and Pensions defines a household as ‘poor’ when its (equivalised) annual income falls below a threshold of 60 per cent of the national median household income. Thus defined, the poverty rate falls if the incomes of the less well-off grow faster than the incomes of average households. Hence, the increases in means-tested benefits over the past decade, especially the ones targeted to lone parents and pensioners.
However, under this definition of poverty, there is another way how the poverty rates of specific subgroups can decrease. If the income of a target group largely consists of state transfers, which are often fixed in real terms, then a drop in median incomes will act to lower poverty.
In previous research, the Joseph Rowntree Foundation found that since ‘pensioner incomes are largely fixed… pensioner poverty tends to fall in times of recession, because pensioners get better off relative to the working-age population, and it tends to rise when the economy is growing strongly.’
It has long been noticed that in ‘extreme’ contexts, relative measures of poverty lose their meaning. In 1983, Amartya Sen wrote that ‘if there is starvation and hunger, then – no matter what the relative picture looks like – there clearly is poverty.’
But if mere cyclical fluctuations can already produce such nonsensical outcomes, then this is a strong hint that we should seriously reconsider the way we define and understand poverty.
This question is far more than just a technical one. We clearly judge different governments and policies by their impact on poverty – and the level and trend in recorded poverty varies enormously across different measures.
It is thus no exaggeration to say that the way we view poverty influences how we view economic and social policies as a whole. Between the late 1980s and the late 1990s, the two OECD-countries where relative poverty rates increased most (on a percentage basis) were the Netherlands and Ireland.
What happened? The Dutch policies of labour market deregulation and wage moderation boosted the employment rate by more than ten percentage points. All income strata benefited, but the well-off relatively more so. Ireland became the Celtic Tiger and recorded unprecedented levels of growth. The rising tides lifted all the boats but, for a while, it lifted the yachts more than the rowing boats.
If we care about whether the poor can afford a washing machine, a holiday or a computer, then we would clearly embrace such policies that boost growth and employment. In contrast, thinking too much in terms of ratios and relations leads us to be suspicious of dynamic changes, because they affect the income distribution in ways which can seldom be controlled or ‘fine-tuned’ by governments.
Ludwig Erhard once said that: ‘the solution lies not in the division, but in the multiplication of GNP’. One wonders what the father of the wirtschaftswunder would have made of a poverty indicator which can actually record improvements in times of a severe crisis merely because people on average earnings have lost their jobs.
First published on the Daily Telegraph’s Ways and Means blog.