Wednesday, February 08, 2006

Poverty is Stupid 

More explicitly, "Poverty Statistics are Stupid." But "Poverty is Stupid" just makes a more compelling title, even if it is a little risky that people will wrongly accuse me of having said "Poor People are Stupid" instead.

So please, let me be clear on this point: I am not a heartless, poor-bashing SOB. I do NOT believe that poor people are stupid. Or at least no stupider than everyone else. On average. But I don't have any statistics to back that up, so unfortunately I have to admit the possibility that they actually might be, regardless of what my heart says. I just don't have the data.

You see? I'm not heartless.

My last post was critical of an otherwise economically savvy politician's well-meaning yet meaningless blandishments about "eliminating poverty," and I wanted to take a minute to explain what bothered me.

Here is why I think poverty statistics are stupid: because they don't actually measure poverty. Really. Let's test out a typical definition of a poverty statistic, for instance, something like "poverty is any income less than half the mean (average)." Seems straightforward, so take a guess which of the following three scenarios has the highest poverty rate:

a) 10 million people, all earning exactly the same income, 10 cents a year.
b) A two class system: 5 million "rich" earning 30 cents per year, 5 million "poor" earning 10 cents.
c) 9,999,999 people earning $10k per year, and Bill Gates earning $100 billion per year.

So which choice has the highest incidence of poverty?

None, they are all the same. They all have zero poverty. But does that really render them all equivalent? Would the purveyors of poverty pills really accept each of the three as a "just" economic system? I don't think so either. But every year, precisely this kind of economic index is rolled out with great fanfare and dire warnings of how it is growing -- which is, we are left to assume, a bad thing. And yet, if perversely twisted policies were constructed around the artificial task of bringing this peculiar index to zero, as in any of the above examples, it seems pretty unlikely that anyone -- except maybe Kim Jong-il -- would end up happier as a result.

But maybe a different commonly used definition of poverty would give a better measure. Let's try a "poverty line" that's half the median income instead of half the average. How well does this definition work? Let's check.

Say there are 100 filthy rich people, each making $1 trillion a year. Another 5 million people are making only $50 a year and 5 million more are making an even more paltry $24 a year. Finally, you and 100 other poor schmucks make an insulting $10 a year. In this system, the median income is $24 a year (the average is somewhere around $10 million). Since this sets the poverty line at $12 a year, you and your 100 poor schmuck friends earning only $10 a year live in poverty.

Now suppose one of those rich people has a heart of gold -- purchased fresh from the chest of a poor donor with a heart of gold, back when gold was $100/oz, with an order to sell waiting at $800/oz -- and this rich person decided to help you poor folks. Which of the following would you advise him is the best way he should go about reducing poverty:

a) pass a law to tax each rich person 100 dollars and divide that money amongst you and your 100 poor friends
b) pass a law to tax each of the 10 million middle class people 5 dollars each and split the resulting $50 million amongst the 100 richest people.

If you guessed b, you are correct. In option a, giving enough money to the poor so that they rise to upper middle class has the sad side effect of re-ranking everyone's income, and now the median income is 50 dollars a year. Sadly, this results in pushing 5 million previously middle class people into poverty, even though their wages didn't change at all, and despite the "socially-just" wealth transfer of rich people generously taxing themselves to push all of the previously poor out of poverty.

In option b, although the greedy rich took from the less fortunate to further needlessly enrich themselves, it did have the happy side effect of lowering the median so that in the end, while the rich got richer, the poor disappeared. Or at least they were relabeled, even if they didn't see any extra money.

While these examples are obviously chosen to most clearly illustrate some of the silliness of poverty statistics, the pathology doesn't reside only in extreme examples. Consider that if a government worked very hard and managed to increase everyone's income and purchase power -- say by a flat 10% across the board -- it would not affect these measures of poverty at all. Fixating on them causes policy makers to favor certain types of wealth distribution curves, without establishing that those curves actually optimize anything other than a statistic that happens to be easy to measure and to hype.

The usual justification for these "relative" measures of poverty is that, while they can't measure the rising tide that lifts all boats, they are instead designed to make sure that society doesn't suffer from too many boats resenting all the airplanes they see flying around above them. The war on poverty should really be called the war on resentment.

Unfortunately, these statistics don't even do a good job of measuring that resentment. They would measure resentment only if everyone actually had access to that perfect income information used in the statistics, and if every difference in income resulted in resentment proportional to that difference. But ask yourself, when you see a heart surgeon buying a set of golf clubs, do you resent his or her greater income? And when you are stewing about the unfairness of how much money Bill Gates makes, do you really know whether he makes $1 billion per year, or $10 billion per year?

Resentment is actually based on the perception of unfairness, not on unseen data in tables generated by tax collectors.

When corrections are announced to last year's data, does this retroactively change people's perceptions and resentments? If someone who actually earned a good living was nevertheless constantly told he wasn't getting enough, brainwashed day after day to believe others undeservedly received more than he -- even if it weren't true -- would traditional poverty indices measure the tensions of such resentment as they claim is their goal? No, their utility is limited to crafting policies that shape economic census data into certain arbitrarily favored distributions, disconnected from the underlying societal benefit they were invented to pursue.

Look at it this way, if scientists were to come up with a happy pill that could help supress resentment and allow everyone to be satisfied with what he or she had, so long as it was sufficient for their needs, could we then stop worrying about resentment indices and focus instead on making sure everyone had what they needed? Probably not, because the paradox is that what some people need most is a thriving poverty-management industry.

I'm waiting for a politician to say that. Famous last words, I guess.

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