Poverty and Inequality, Redux

Kevin Hardwick of James Madison University, one of the site’s thoughtful commenters, called my attention to an op-ed in Politico making the case for a causal link between inequality and poverty. Its author is John Podesta, founder of the Center for American Progress, which hosted President Obama’s recent address on inequality, and soon-to-be White House staffer.  Podesta argues, modestly, that “we don’t know nearly enough about what inequality means for economic growth and stability,” but the name of his new organization—the Washington Center for Equitable Growth—suggests some conclusions. The op-ed does not prove them. Instead, it offers the same conceptual confusion—not only unproductive but counter-productive—I discussed in a recent post on this topic.

The argument I made there, briefly, was that poverty and inequality are separate phenomena and that the solutions to the former—like education—are likely to exacerbate the latter. Poverty is an objective condition characterized by human need, inequality a relative one that tells us nothing about how the parties being compared actually live.  It turns out, for example, that the Bay Area in California has among the highest Gini coefficients in the country. What follows is a testable hypothesis and hence is proffered with requisite diffidence, but given the amount of high-tech wealth in that region, might the inequality have less to do with a gap between rich and poor (though one surely exists there) than with a chasm between the haves, the have-mores and the have-tons?

That makes a difference, of course, because a gap between millionaires and billionaires need not concern us. A gap between rich and poor ought to only because poverty stands on one side and resources that might address it stand on the other. (Joseph Raz: “The wrong is poverty and its attendant suffering and degradation, not the inequality. But the inequality is an indication that there may be resources which can be used to remedy the situation.”[1]) Inequality, in other words, is not intrinsically unjust; indeed, the most generous effort to redress poverty would still leave inequality intact if not, again, intensifying it.

The exception, of course, would be some evidence that the existence of wealth causes poverty, which would be deducible only from a zero-sum conception of economics that was conclusively debunked in 1776. Podesta demonstrates no causal link, instead simply shelving these phenomena alongside one another for display:

Ninety-five percent of income gains since 2009 have gone to the top 1 percent of earners. In 2012, the top 10 percent took home more than 50 percent of the nation’s income—a record high. After a brief period in the late 1990s during which incomes rose across the board, median wages stagnated during the 2000s, and have remained depressed during the economic recovery.

The first sentence reflects the distorted uses to which statistics can be put: The bulk of gains are always going to have gone to the top since one gets to be the top in the first place by getting a large amount of gains. The second is based on the zero-sum fallacy, the notion, as the Friedmans put it, of a fixed pie in which one person’s larger slice must mean a smaller portion for somebody else. It is only the third sentence that describes an objective problem.

Next Podesta makes his move: “These trends are aided and abetted by a dominant narrative defining how the economy grows. … Economic growth is driven by the wealthy few, who make investments, build businesses, and create jobs….”  Now, it is obviously true—one doubts Podesta denies it—that a good number of those to whom economic rewards accrue do create jobs and wealth that others reap. But he is also assailing a man of straw. The relevant claim is not that inequality causes growth (although other things that cause inequality might also cause growth) any more than that it causes poverty.  The issue is that inequality and poverty are separate phenomena. One supplies little information about the other.

The only information, again, that the degree of wealth supplies is the extent to which resources are available for relieving—alleviating, in Theodore J. Lowi’s formulation, not eliminating—poverty. Those who prefer that this relief be generous ought to be the first to line up behind policies that assure the financing for it. Society is morally bound to address poverty. How best to do so is open to robust dispute, but inequality, of itself, is simply an irrelevant datum in this debate.

[1] Raz, Morality of Freedom, (Oxford: Clarendon Press, 1986), 229.

Greg Weiner

Greg Weiner, who teaches political science at Assumption College, is the author of Madison’s Metronome: The Constitution, Majority Rule and the Tempo of American Politics. His book American Burke: The Uncommon Liberalism of Daniel Patrick Moynihan will be published by University Press of Kansas in early 2015.

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Comments

  1. R Richard Schweitzer says

    I propose to point out some correlations that may be clues to causes. I will do so in more than one post.

    First, here is one of the bits of data that has triggered some questions:

    Greg Mankiw is a professor of economics at Harvard he published the following information (07/14/2012) based on his research using the statistical information compiled by the Congressional Budget Office.

    The “transfer payments” referred to are ***actual beneficial payments*** made to taxpayers by the United States government; they are *not* deductions or exemptions from taxation nor are they tax credits.
    ~~~~~

    “Because transfer payments are, in effect, the opposite of taxes, it makes sense to look not just at taxes paid, but at taxes paid minus transfers received. For 2009, the most recent year available, here are taxes less transfers as a percentage of market income (income that households earned from their work and savings):

    Bottom quintile: -301 percent}
    Second quintile: -42 percent } effective tax rate is negative
    Middle quintile: -5 percent }
    Fourth quintile: 10 percent
    Highest quintile: 22 percent

    Top one percent: 28 percent

    The negative 301 percent means that a typical family in the bottom quintile receives about $3 in transfer payments for every dollar earned. When the tax rate is negative, that means that the taxpayer received more in payments from the government than the taxpayer sent to the government as taxes of any kind.

    The most surprising fact to me was that the effective tax rate is negative for the middle quintile. According to the CBO data, this number was +14 percent in 1979 (when the data begin) and remained positive through 2007. It was negative 0.5 percent in 2008, and negative 5 percent in 2009. That is, the middle class, having long been a net contributor to the funding of government, is now a net recipient of government largess”

  2. R Richard Schweitzer says

    Now the possible thesis that occurs to me is that those factors, for which I have not been able to find updating stats, indicate a major disruption in what had once been the normal system of distributions (work, related income , exchange of services for services and goods as the source of participation in the “economy”).

    The “normal system” has been disrupted by a politically determined intrusion whereby a significant (and distorting) amount of distributions are transactions through the mechanism of the federal government (plus state and local level involvements). There has been a constant and accelerating increase in the volume and diversity of those transactions. They carry transaction costs, which reduce the available end distribution.

    By way of example: Dividing the federal expenditures on those in the statistical “poverty” levels, by the number of participants, the amounts equate to about $80,000 per **person** annually. We know it does not get through this non-normal system.

    So, what I posit is an enquiry into the possibility (and likelihood) that the “cause” of growing inequalities is due (at least in some major part) to those disruptions in the **normal** system of distribution and the substitution of functions of distribution through the mechanisms of governments.

    • Kevin R. Hardwick says

      Richard–

      I am not buying your math. If you divide the us population below the poverty line (about 45 million people) by the amount of the federal budget allocated to reduce poverty (about 460 billion dollars), you get about $10,000/person. But this is misleading, since the actual numbers who benefit from these programs is about 28% of the US population, or about 88 million people. That amounts to about $5200/person.

      So for the 45 million Americans at or below the poverty line to receive $80,000 each in Federal benefits, they need to be getting the remaining $74,800 from other programs.

      Some of that would accrue from CHIP and Medicaid–which between them amounted to 260 billion in 2012. But these benefits went to 60 million Americans, not the 45 million below the poverty line. That is about $4,333 per recipient–so when we include these programs, we are still short by $70,000 per person.

      So just eye-balling the numbers, I don’t see how you get to $80,000.

      What am I missing here?

      All best,
      Kevin

    • Kevin R. Hardwick says

      Put another way–total Fed. Govt. expenditures in 2012 was about 3.5 trillion. Were the Federal Govt. to provide $80,000 per person benefits to the 45 million people in the US at or below the poverty line, that would amount to 3.6 trillion. So the $80,000 figure would in essence mean expenditures 100 billion greater than the entire 2012 outlay. That can’t be right. I am willing to believe that we spend a great deal on transfer payments to the very poor, but it can’t be $80,000 each. It has to be less than that.

  3. gabe says

    Richard:

    So, it is like a charity that keeps 80% of all donations made to it in order to meet overhead?
    Sounds about right for government, don’t you think?

    it has less to do with inefficiency in government than with enabling / building a rather large government class!!

    • R Richard Schweitzer says

      You are quite correct, I erred in my calculation which was based on federal **and ** state spending; which is only $1.03T for 2012 (per Senate staff research report) which I extrapolated wrongly from a 3 year figure, and stated wrongly as annual. My example was wrong in calculation.

    • R Richard Schweitzer says

      Dr. Hardwick:

      I acknowledge my error below (came out as reply to Gabe).
      You sent me back to federalsafetynet.com for more carefully complied data.

      they list about $13K per person or $52K for a family of 4 for 2012, from federal programs. But, you are correct, it does not focus on Exactly the “poverty line” people.

  4. R Richard Schweitzer says

    Gabe:

    The example was not the point, just a demo of transaction costs. And hey! It ain’t charity; it’s politics.

    The real issue is what David McCord Wright labeled “The Economics of D1sturbance” – I think!

  5. Kevin R. Hardwick says

    Richard–

    I am not sure that it matters all that much–it is still a great sum of money, either way. So I think in the broader sense, your point stands. I also don’t think that the sums I quote account for tax credits, either–which I think we have to consider as well, given the original purpose of your example.

    Well wishes,
    Kevin

  6. R Richard Schweitzer says

    Dr. Hardwick,

    As I have confessed to you elsewhere, I can be obtuse; better make that: *am* obtuse.

    What I was trying to lay out was the need to examine the many “welfare” programs (supposedly aimed at the “poor”) whose correlations, as they have increased in scopes and dispersed administration, indicate they can be (I think probably are) the cause of the incremental disparities (“inequalities”) of incomes, of accumulations of durable transferable assets (wealth), and perhaps most important – in motivations- which shape cultures.

    The point of the example , on which I stumbled, was simply to observe a source of transaction costs, which have to be extracted from somewhere in the production/distribution system.

    From your studies, you are likely more learned in the effects of the original “Poor Laws” of England. But, I sense that our own equivalents in these times may be where we should be looking for “effects.”

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