What is Poverty? (6): Absolute or Relative Deprivation?

Is poverty a lack of basic resources, or instead the unequal distribution of resources? Is it the absolute income or wealth of people that matters, or the fact that other people are richer and can afford more luxuries? Intuitively, one would go with the former of those options: people are poor when they are starving or homeless or when they lack some other basic necessity. People can have enough of all basic necessities and still be a lot worse of than some group of ultra-rich. One the other hand, what counts as a basic necessity is not always obvious, and people may form their ideas about necessities in light of the lifestyle of the average member of their society at the current moment in history.

This is another way of expressing the difference between absolute and relative poverty. In the US, it’s common to defend and use an absolute definition of poverty (as does the World Bank), whereas in Europe the focus is on relative poverty. The difference is an important one, because the use of one or the other definition of poverty determines who counts as poor or not. Hence, it also determines who gets government assistance.

Now, something strange is going on here. Intuitively most people favor an absolute definition of poverty – that’s what my own intuition and an unscientific sample of friends tells me –  and yet, if you ask people what one needs to get by in life, the amounts they give you are far above commonly used absolute poverty thresholds. In fact, these amounts are closer to median income. And as median income rises, the amounts supposedly necessary in order to get by also rise. This tells us that people actually use a relative notion of poverty. And this is true even for the country that is supposedly most naturally in favor of an absolute notion of poverty, namely the US.

I made a similar point here. More posts in this series are here.

The Causes of Wealth Inequality (21): The Feedback Loop Between Absolute and Relative Poverty

I’ve come across an interesting and novel argument (novel to me at least) in favor of measuring and doing something about relative poverty, and against an exclusive focus on absolute poverty. Absolute poverty – in other words, the absence of those resources necessary for the fulfillment of basic needs such as nutrition, shelter etc. – remains of course an important concern, but relative poverty is not hogwash: if you lack most of the things an average person in your society takes for granted, then you’ll feel deprived and excluded, ashamed like Adam Smith’s day-laborer who can’t appear in public without a linen shirt,

the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.

Linen shirts aren’t a basic need and one can be quite comfortable without it, but being without it in a certain society at a certain time in history can signal lack of desert. It can diminish the esteem others feel for you, as well as your self-esteem. As a result, you may be excluded from parts of society, and this exclusion may make it more difficult for you to acquire the resources necessary for your basic resources. Hence, your relative poverty leads you into absolute poverty, and your absolute poverty obviously makes your relative poverty worse. And when considering this vicious circle, we’re evidently not talking solely about linen shirts.

Anthropologists and economists have pointed out that festivals, celebrations and communal feasts are not just entertainment. They have an important social role in maintaining the networks that are crucial to coping with poverty and even escaping it. Household budget surveys have often revealed seemingly high expenditures on celebrations and festivals by very poor people. It is also known that clothing can serve an important social role. (source)

People therefore have very good reasons to claim that their well-being does not only depend on the avoidance of absolute deprivation but also on comparisons with others. Comparisons may even cause absolute deprivation.

More on this issue here and here.

The Causes of Poverty (50): The Structure of Income Inequality

It seems that one particular aspect of income inequality – namely the degree of inequality between middle income and lower income people – determines the degree of redistribution in a society, and hence the level of poverty of the poorest:

the key factor determining redistribution is the income gap between middle income voters and lower income voters. Where this gap is low, middle class people feel some degree of solidarity with the poor and exhibit what Lupu and Pontussen describe as “parochial altruism.” That is, they are more likely to support income redistribution because they feel that the poor are in some sense, “like them”. When the gap is high, middle class people will have a much weaker sense of solidarity with the poor, and hence be less supportive of redistribution.

Lupu and Pontussen suggest that the US is an outlier, with weaker solidarity than the structure of US inequality would suggest. They argue that the explanation for this is straightforward – “it is clearly attributable to the high-concentration of racial-ethnic minorities in the bottom of the income distribution.” More bluntly put – middle class Americans feel less solidarity with the very poor because the very poor are more likely to be black. (source, source, source)

Yet another reason to worry about income inequality. More posts in this series are here.

What is Poverty? (3): Vulnerability

Definitional discussions about poverty have convinced me that there are actually different types of poverty. I don’t think that all types are equally urgent policy problems, although they’re all worthy of attention (personally, I think poverty as absolute material deprivation is the one to focus most attention on, rather than relative poverty, poverty as a mental harm etc.).

One type I haven’t discussed a lot is poverty as vulnerability. This isn’t actual poverty in the sense of existing destitution; it’s rather the presence of a high level of risk of poverty, a high level of insecurity or a high probability of becoming poor. Indeed, it’s fair to say that poverty isn’t merely current insufficiency of income or consumption, but also the absence of stable and predictable income or consumption.If you can eat today you’re not poor according to some measures (other measures would correctly include more than just food). But what if there’s a good chance you can’t eat tomorrow? Wouldn’t it be correct to call someone living with such a high risk a person suffering from poverty? People who have enough to eat and who have shelter, but who would starve if they faced unexpected costs or events, such as a health crisis, a flood, a drought, unemployment etc. should be considered poor.

Of course, you might think we’re all living under such risks. Even the wealthiest among us can’t be sure not be become poor tomorrow. Hence we’re all vulnerable, but some are more vulnerable than others. The issue is then how to measure vulnerability and risk. The risk is higher for some than for others, and the consequences when the risk events occur are tougher for some than for others, but how can we know and measure this? We can look at resources and savings for instance. Some people, and some people in some countries, are better armed to deal with risks. They can insure themselves, or their government insures them (unemployment insurance for instance). They may be able to smooth over these events: sell some assets, take a loan… Other people can’t insure themselves, or they live in a country that doesn’t provide public insurance, or they can’t smooth without jeopardizing their future wealth.

This vulnerability is not just a risk for the future; it creates problems here and now. When the risk is perceived – correctly or not – as being very high, then it produces fear, stress and feelings of insecurity. That’s not deprivation or poverty but it sure isn’t pleasant. Those feelings can also be self-fulfilling: people may take irrational precaution measures, counterproductive family planning decisions etc. So poverty as vulnerability is a real problem. Perhaps not as urgent as absolute destitution, but not without importance.

Measuring Poverty (9): Absolute and Relative Poverty Lines

There are many ways you can measure how many people in a country are poor. Quite common is the use of a so-called poverty line. First you decide what you mean by poverty – for instance an income that’s insufficient to buy life’s necessities, or an income that’s less than half the average income etc. Then you calculate your poverty line – for instance the amount of income someone needs in order to buy necessities, or the income that’s half the average income, or the income of the person who has the tenth lowest income if the population was one hundred etc. And then you just select the people who are under this poverty line.

I intentionally chose these examples to make a point about absolute and relative poverty. In the U.S., people mostly use an absolute poverty line, whereas in Europe relative poverty lines are used as well. As is clear from the examples above, an absolute poverty line is a threshold, usually expressed in terms of income that is sufficient for basic needs, that is fixed over time in real terms. In other words, it’s adjusted for inflation only and doesn’t move with economic growth, average income, changes in living standards or needs.

A relative poverty line, on the other hand, varies with income growth or economic growth, usually 1-to-1 since it’s commonly expressed as a fixed percentage of average or median income. (It obviously can have an elasticity of less than 1 since you may want to avoid a disproportionate impact on the poverty line of very high and very volatile incomes. I’ve never heard of an elasticity of more than 1).

Both absolute and relative poverty lines can be criticized. Does an absolute poverty line make sense when we know that expectations change, that basic needs change (in contemporary Western societies, not having a car, a phone or a bank account can lead to poverty), and that the things that you need to fully participate in society are a lot different now than they once were? We know that people’s well-being does not only depend on the avoidance of absolute deprivation but also on comparisons with others. The average standard of living defines people’s expectations and when they are unable to reach the average, they feel excluded, powerless and resentful. Can people who fail to realize their own expectations, who lose their self-esteem, and who feel excluded and marginalized be called “poor”? Probably yes. They are, in a sense, deprived. It all depends which definition of poverty we can agree on.

It seems that people do think about poverty in this relative sense. If you compare the (rarely used) relative poverty line of 50% of median income in the U.S. with the so-called subjective poverty lines that result from regular Gallup polls asking Americans “how much they would need to get along”, you’ll see that the lines correspond quite well.

So if relative poverty corresponds to common sense, it seems to be a good measure. On the other hand, a relative poverty line means moving the goal posts for all eternity. We’ll never vanquish relative poverty since this type of poverty just moves as incomes rise. It’s even the case that relative poverty can increase as absolute poverty decreases, namely when there’s strong economic growth (i.e. strong average income growth) combined with widening income inequality (something we’ve seen for example in the U.S. during the last decades). (Technically, if you use the median earner as the benchmark, relative poverty can disappear if all earners who are below the median earner move towards the median and earn just $1 or so less than the median. But in practice I don’t see that happening).