The main gripe I have with the wave of complaint about inequality is that it seems to focus on just how rich the rich are, or are becoming. I’d argue that I don’t care as long as everyone is becoming better off at a very perceptible rate, and maybe they are. I’ve added some emphasis below:
I get criticism from liberals when I claim that the poor are doing much better than in 1973, despite figures showing flat medium incomes and rising inequality. Floccina directed me to a Timothy Taylor post that discusses a study by the Brookings Institute. Yes, the liberal Brookings Institute, I presume there is only one:
However, in a paper published in the Fall 2012 issue of the Brookings Papers on Economic Activity, Bruce D. Meyer and James X. Sullivan present some alternative interpretations and more cheerful conclusions in “Winning the War: Poverty from the Great Society to the Great Recession.” They conclude: “Despite repeated claims of a failed war on poverty, our results show that the combination of targeted economic policies and policies that support growth has had a significant impact on poverty. … Noticeable improvements have been made in the last decade; although not as big as the improvements in some earlier decades, they are comparable to or better than the progress made in the 1980s. We may not yet have won the war on poverty, but we are certainly winning.”
. . .
Here’s one of their illustrative calculations. The official poverty line is in blue. They then calculated income in a way that included taxes and the value of noncash benefits. They set up the calculation so that the two measures would have the same poverty rate in 1980, and then adjusted the poverty rate over time using the inflation rate. But when after-tax income is used in the calculation, the poverty rate falls more sharply over time, including during the last 30 years.
But perhaps their most striking result uses data on consumption, rather than data on income, to calculate the change in poverty rates over time. Consumption data comes from a different national survey than does income data (the Current Expenditure Survey rather than the Current Population Survey). Meyer and Sullivan point out that at the bottom of the income distribution, the answers about income on the Current Population Survey clearly understate the amount of income received. For example, only about half of welfare payments seem to be reported in the Current Population Survey. The proportion of economic activity that goes unreported to the tax authorities–and to the government survey–is probably higher at the bottom of the income distribution, too. In addition, when we talk about poverty what we are really worried about is more accurately captured by consumption rather than by income.
Meyer and Sullivan used consumption data, and again they set up the calculation so that the poverty rate for consumption data is the same as the poverty rate for income data as of 1980. Again, the blue line shows trhe official poverty rate. The red line shows the poverty rate with a broader definition of income, adjusted for after-tax income. The green line shows the change in the poverty rate if consumption is used to measure poverty. By this measure, the poverty rate almost reaches zero percent in 2007, before the Great Recession.
Thus, they write: “The results in this paper contradict the claim that poverty has shown little improvement over time and that antipoverty efforts have been ineffective. We show that moving from traditional income-based measures of poverty to a consumption-based measure, which is arguably superior on both theoretical and practical grounds—and, crucially, accounting for bias in the cost-of-living adjustment—leads to the conclusion that the poverty rate declined by 26.4 percentage points between 1960 and 2010, with 8.5 percentage points of that decline occurring since 1980.”
Just to be clear, the notion that the consumption-based poverty rate nearly reached zero percent does not mean that the war on poverty is won. After all, the poverty rate was originally set back in the early 1960s, and although the poverty line has been adjusted upward by the rate of inflation over time, it has not been adjusted for the amount of economic growth that has occurred. All poverty lines are set in the context of the society’s overall level of income: thus, a very low-income country the poverty rate per person might be set at $1.25/day or $2/day, while in the United States, the poverty rate for a family of 3 is around $16-$17 per person per day. One can argue that because the U.S. economy has grown dramatically in the half-century since the poverty level was set, the poverty line should be higher. But still, it’s worth knowing that the U.S. has made progress in terms of the existing poverty line–when using more appropriate standards of well-being like consumption or broader definitions of income
After-tax and transfer data is better than income, and consumption data is still better. Liberals are focusing on “inequality” when they should be focusing on poverty level consumption (as they were in 1973.) That’s the real problem.
PS. One of my earliest memories of college was when I took intermediate micro as a sophomore at Wisconsin. My professor once showed some data on what the US distribution of income would look like without transfer programs. He derived the estimates by looking at market income. I raised my hand and pointed out that if there were no transfer programs then surely the market income figures would be different. For instance, those on welfare might be forced to work in order to stay alive.
This Brookings study reminds me of another problem, the underground economy. Transfers to the poor don’t just discourage people from working, they also encourage people to work in the underground economy. Thus transfer programs have two effects. First, they make market income less equal than it would otherwise be. And second, they make reported market income less equal than actual market income. Both factors contribute to the much better performance of consumption than reported market income at the lower end of the spectrum. Which is obvious to anyone who travels around America and observes how the poor actually live.
PPS. I will be traveling the next few days–not much time for blogging.
The amazing decline in American poverty
Sat, 12 Oct 2013 17:52:43 GMT