Is "Relative Poverty" a valid analysis point?

The UN's Absurd Measure of US Poverty

• 

06/26/2018Ryan McMaken

The United Nations is at it again with yet another report on how bad poverty is in the United States — and how things would improve greatly if the US raised taxes. This time, the UN denunciation of the US has raised the ire of US ambassador Nikki Haley who has called the report "patently ridiculous."

Specifically, Haley was responding to a June 18 report by UN bureaucrat Philip Alston. Alston concluded that poverty rates in the US are among the worst in North America or Europe.
How did Alston come to this conclusion?

Well, first of all, it's important to note that he didn't collect any new information.
The report comes at the end of a two-week visit to the United States conducted back in December of 2017. At the time, Alston released a similar preliminary report.

The new report to the UN Human Rights Council is just an update of the old report.
Moreover, Alston could have easily authored the report had he just stayed home. The report is based simply on existing data already collected and published by agencies such as the US Census Bureau and the OECD. Any undergraduate could have written a similar report using data he found online.
One example of this method is found in Alston's reporting on poverty.

According to the report:

About 20 per cent of children live in relative income poverty [in the United States], compared to the OECD average of 13 per cent.

Here, Alston has essentially cut and pasted text from an existing OECD report. There's nothing wrong with this, per se, except for the fact that Alston has implied he has recently completed a thorough survey of poverty in the United States — even though he clearly hasn't.

This November 2017 report from the OECD reads:

[C]hild relative income poverty rates are very high – around 20% of children in the U.S. live in relative income poverty, compared to just over 13%, on average across OECD countries.

The report also includes this graph:

But there's a problem here with Alston's use of the data. The OECD report refers to "relative income poverty," which isn't what most people think it is. Most people would think a poverty rate should measure incomes against the cost of maintaining a certain basic living standard. But this "relative" poverty measure isn't that sort of measure. It's just a measure of how many people in a country make 50% or more of that country's median income level.

So, if you have country with a very low median income, and a very low standard of living, it's possible to have very low poverty rates — so long as most people make more than fifty percent of that country's lousy median income level.

This allows the OECD to claim — as it does in the graph — that the US has higher poverty rates than Mexico.

In order to understand this more fully, let's look at the OECD's own measure of disposable median income for each of its member countries (2015 data) in Graph A:

These numbers include both ordinary wage income and also cash assistance from welfare programs. It is also adjusted for local purchasing power and rendered in international dollars.

Now, note in the footnote of the OECD graph above that you're poor — regardless of where you are — if you make 50 percent of the local median income. So, 50 percent of the median income in Greece (with a median income of $13,000) or 50 percent of the median income in Norway (with a median income of $39,000) are both simply "poverty."

But let's look at just how huge these differences can be.  If we look at incomes at the 50 percent level for each country, we get in Graph B:

If you're going to be poor by this measure, you'll have a higher income in the US than in many other places. For example, the poor in the US at the median poverty level have incomes 34 percent higher than the median poor in Italy. When comparing the US and Spain, the US comes in at 40 percent higher.

Put yet another way, if you make $15,000 in the US, you're poor. But if you make $15,000 in France, Germany, the UK, or Italy, you're not poor. Why? Because the overall median incomes in those non-US countries are lower.

Basically, by this measure, poverty has little to do with what resources you have at your disposal. It's more or a measure of how much you're making compared to how much other people are making. It's a measure of income inequality, not poverty.

The problem with making comparisons this ways can also be illustrated by looking at the US poverty-level income compared to the median income from other countries. For example, the US poverty-level income is so high it's at 70 percent of the median income in Spain and 67 percent of the median income in Italy in Graph C:

If you have a median poverty-level income in the United States, your income is 95 percent the size of the median income of all households in Portugal. Stated broadly, we might say that poor households in the US have pretty much the same income as the overall population in Portugal. Or, one might say the median poverty income level in the US is nearly two-thirds as high as the overall median income of everybody in the United Kingdom.

Clearly, if a poor household in the US has an income 40 percent higher than a poor household in Spain — then these two types of "poverty" are not the same.

Measuring Poverty by Actual Standards of Living

A more honest way to measure poverty would be to look at actual indicators of the standard of living. This would include household amenities, living space, labor-saving appliances, entertainment, and so on.

For example, living space in the US, even among the poor, is measurably more plentiful than elsewhere. As noted by Robert Rector at the Heritage Foundation:

Housing space can also be measured by the number of square feet per person. The Residential Energy Consumption survey conducted by the U.S. Department of Energy shows that Americans have an average of 721 square feet of living space per person. Poor Americans have 439 square feet. Reasonably comparable international square-footage data are provided by the Housing Indicator Program of the United Nations Center for Human Settlements, which surveyed Housing conditions in major cities in 54 different nations. This survey showed the United States to have, by far, the most spacious Housing units, with 50 percent to 100 percent more square footage per capita than city dwellers in other industrialized nations.

America's poor compare favorably with the general population of other nations in square footage of living space. The average poor American has more square footage of living space than does the average person living in London, Paris, Vienna, and Munich. Poor Americans have nearly three times the living space of average urban citizens in middle-income countries such as Mexico and Turkey. Poor American households have seven times more Housing space per person than the general urban population of very-low-income countries such as India and China.

As Rector notes, "There is a vast gap between poverty as understood by the American public and poverty as currently measured by the government." This is due to a wide variety of reasons. One reason is that income surveys don't count non-cash poverty relief programs. This means programs like Medicaid and food stamps aren't included in the incomes of low-income households in America. That makes those incomes looked significantly lower than they are.

Poverty measures also can't take into account heads of household who have low incomes, but also don't have a mortgage because they're paid off their houses already. This is not an insignificant factor in measuring poverty among the elderly.

All of this is important because in Alston's report to the UN, he relies on US government data using the traditional poverty-rate measures. He then combines these with the OECD's "relative" poverty measures to conclude that poverty is "shockingly" widespread in the United States.

A closer look at the data, though, suggests things are more complicated.

None of this is to say that poverty doesn't exist anywhere. Of course is exists, and issues like homelessness and true poverty are real for some people. Sweeping claims like those by Alston tell us very little, however, about the real state of poverty in the US. 

Ryan McMaken (@ryanmcmaken) is the editor of Mises Wire and The Austrian. Send him your article submissions, but read article guidelines first. Ryan has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.

Analysis of effects of UBI

From mises.org again; Universal Basic Income is an important topic for you, as it could be used as part of a micro or macro essay, but also because it seems it will feature largely in your futures. This is a strongly Austrian view, and will be disputed hotly by the likes of Joseph Stiglitz and Paul Krugman. However, it does highlight a key concept in Economics that you should be starting to feel comfortable with discussing in essays: Who is better at allocating resources, governments or individuals? If you can apply that idea to an essay question it will help you develop a strong understanding, and a better answer.

A "Universal Basic Income" Costs More Than You Think

• 

06/21/2018 José Niño

According to some media reports, the Universal Basic Income (UBI) party in Finland is coming to an end.

But Professor Olli Kangas, head of the research team at the Finnish social insurance agency, claims that the experiment “is proceeding according to plan and will continue until the end of 2018.” There are no concrete plans to expand the program after that, however.

Finland gained notoriety in 2017 when it launched a UBI program where the government handed out monthly stipends of 560 euros (roughly $670) to 2,000 randomly selected unemployed citizens with no strings attached.

Even though this program is slated to expire by the end of 2018, it’s only a matter of time before other countries replicate Finland’s model.

In the United States, the Californian city of Stockton, which filed bankruptcy in 2012 , is already launching its very own basic income test , fiscal risks notwithstanding.

While policy experimentation should be encouraged, UBI trials are not worth conducting, let alone expanding. Beyond fostering dependency and increasing fiscal burdens, UBIs ultimately reduce the private sector's ability to accumulate more capital and increase worker productivity — the most reliable ways of reducing poverty.

A Not-so-Revolutionary Idea with Questionable Results

UBIs are not exactly a novel idea, having garnered broad support from intellectuals of all stripes over the years. Even free-market economists such as Milton Friedman argued in favor of UBIs, claiming they would be less costly to implement and maintain than a traditional welfare bureaucracy.

In the late 1960s up until the 1970s, similar programs were implemented in the United States. They were called negative income tax experiments, where workers who earned below a certain threshold received payments from the government instead of paying taxes to the government. Although different from their UBI cousins, they still yielded interesting findings on the effects of basic income models.

In the study The Work Response to a Guaranteed Income: A Survey of Experimental Evidence, economist Gary Burtless found that “the negative income tax plans tested in the experiments were expected to reduce work effort among participants, and they did so.” Additionally, A Comparison of the Labor Supply Findings from the Four Negative Income Tax Experiments demonstrated a consistent trend of workers reducing labor supply when they received negative income tax benefits.
While these employment trends look troubling, there’s something much larger at stake when dealing with UBIs. Any serious discussion about economic growth starts and ends with increasing worker productivity. UBIs are completely detrimental in this regard.

Under normal circumstances in an unhampered market, firms are constantly seeking to increase worker productivity, which benefits individuals who actually show up to work. However, the costs behind a UBI require depriving employers of the resources needed to increase capital accumulation, and thus increase worker productivity. As a result, potential workers receiving government aid are benefiting at the expense of other actual workers who lose opportunities to become more productive. Those workers then receive lower wages than they would have in the absence of the UBI. This siphoning of wealth makes society poorer on net.

Despite the revolutionary branding, negative income taxes and other basic income tax proposals appear to function just like traditional welfare measures that stifle capital accumulation and divert wealth away from productive sectors of the economy.

Another Permanent Government Program

Given the broad scope of UBIs, they will only shift incentives away from productive work to make a living toward politics to sustain a living. Even if they start off with meager stipends, what’s to stop beneficiaries from asking for more generous sums? Politicians would have to raise punitive taxes even further.

Ironically, Milton Friedman understood that there is nothing so permanent as a temporary government program. A UBI would function no differently from the current means testing welfare paradigm and would just add more to ballooning deficits, diverting resources from society's productive sectors.

The Seen and Unseen

No economic analysis of welfare transfer policies is complete without the farsighted insights of French economist Frédéric Bastiat. Often overlooked in policy discussions, the concept of the “seen and unseen” demonstrates how policies like the UBI can’t solely be judged by their immediate and apparent effects.

When a transfer policy like the UBI is implemented, what is seen is the transfer of money from one sector of the economy to humbler sectors. However, what is not seen is the money that productive sectors of the economy lose out on. Under normal circumstances, this same money would otherwise be allocated towards business expansion and other ventures that increase worker output and worker incomes.

Private Initiative is Still the Best Anti-Poverty Program

If Finland wishes to tackle poverty, it should gravitate towards policies that enhance economic freedom.

A country like Finland is already ranked as one of the freest in the world, placing 26th and 17th in the Heritage Foundation’s Index of Economic Freedom and the Fraser Institute’s Economic Freedom of the World rankings, respectively.

Policymakers in Finland and across the globe should work tirelessly to raise their country’s economic freedom rankings in order to fully reap the benefits of markets. Lowering taxes, reducing barriers to business creation, and facilitating labor freedom all play an integral role in spurring economic growth.

Jose Nino is a Venezuelan-American political activist based in Fort Collins, Colorado. Contact: twitter or email him here.

A smart look at the European banking system

This article from mises.org looks closely at issues in the EU banking arena. It contains some key concepts, and is highly relevant to policy, particularly monetary policy. There is a new emphasis on finance, and this looks at ways banking affects economies, and references the work we have done on credit cycles. Note that Europe is quite different to the UK and the US, as firms rely heavily on banks for loans in the EU, whereas the UK & US use bond markets far more. This means EU banks are huge, but suffer exponentially in downturns. Mises.org is an academic institute named for Ludwig von Mises, a leading Austrian economist. "Austrian" is a school of economics, as is Keynesian economics. Friedrich von Hayek is the best known Austrian economist, and is recognised as a major free-market thinker. Remind me to bring this up when we do monetary policy.

Deutsche Bank's Troubles Raise Worries About the Future of the Euro Zone

• 

06/19/2018 Thorsten Polleit

The euro banking sector is huge: In April 2018, its total balance sheet amounted to 30.9 trillion euro, accounting for 268 per cent of gross domestic product (GDP) in the euro area. Unfortunately, however, many euro banks are in lousy shape. They suffer from low profitability and carry an estimated total bad loan exposure of around 759 billion euro, which accounts for roughly 30 per cent of their equity capital.

Share price developments suggest that investors have lost quite some confidence in the viability of euro banks’ businesses: While US bank stocks are up 24 per cent since the beginning of 2006, the index for euro-area bank stocks is still down by around 70 per cent. Perhaps most notably, ’Germany’s two largest banks, Deutsche Bank and Commerzbank, have lost 85 and 94 per cent, respectively, of their market capitalization.

With a balance sheet of close to 1.5 trillion euro in March 2018, Deutsche Bank accounted for around 45 per cent of German GDP. In international comparison, this an enormous, downright frightening dimension. It is mostly the result of the bank still having an extensive (though not profitable) footprint in the international investment banking business. The bank has already started reducing its balance sheet, though.

Beware of big banks — this is what we could learn from the latest financial and economic crises 2008/2009. Big banks have the potential to take an entire economy hostage: When they get into trouble, they can drag everything down with them, especially the innocent bystanders – taxpayers and, if and when the central banks decide to bail them out, those holding fiat money and fixed income securities denominated in fiat money.

Banking Risks

For this reason, it makes sense to remind ourselves of the fundamental risks of banking – namely liquidity risk and solvency risk –, for if and when these risks materialise, monetary policy-makers can be expected to resort to inflationary actions. In fact, to fend off these risks from materialising, central banks have committed themselves to pursuing chronically inflationary policies.

Liquidity risk describes the risk that a bank might fail to meet its credit obligations in full. This is an inherent risk as most banks extend long-term loans and refinance themselves with short-term funds. As a result, they have to succeed in rolling-over maturing debt. In a situation in which investors are no longer willing to lend their money, the banks may not be able to obtain new funds and become illiquid.

However, in today’s fiat money system, central banks are in a position to print up any amount of base money at any given time, and they can lend this newly created money to ailing banks at their discretion. As a result, the liquidity risk can be, and actually is taken care of by central banks. A single bank may go under due to a lack of liquidity. But not the banking system as a whole, as in a liquidity crisis, central banks can, and do, decide to prop up the system.

Solvency risk means the risk that banks’ assets are not worth enough to service banks’ debts. It can strike if and when losses on loans make a bank’s incoming cash flow drop below its cash outflows. A bank may well continue to operate for quite a while despite being insolvent: It meets its daily payment requirements because cash outflows remain below the total that will become due at some point in time.

Keep the Fiat Money System Going

If and when insolvency makes liabilities exceed its assets, however, a bank’s equity capital is wiped out, and the bank may even default on its debt, and savers and investors lose their funds. While it is relatively easy for a central bank to prevent a liquidity crisis in the banking sector, it is quite another matter when it comes to an insolvency crisis: Once asset values start falling and losses are getting realized, problems reach a new dimension.

If banks in such a situation fail to raise new equity capital, the government – fearing a collapse of the banking system – typically steps in. It either uses taxpayers’ money to provide banks with new equity capital, or it can issue new debt, which is bought by the central bank against issuing newly created base money, with the latter being paid in as new bank equity capital – and the affected banks being taken over by the government.

In reality, central banks and governments have put a ‘safety net’ under the banking industry. Smaller banks may well go under, but a scenario in which the entire banking system goes belly up will be prevented for a simple reason: Politically speaking, the costs of a fiat money system collapse is simply too high and has to be prevented; no price is viewed as too costly to keep the fiat money system going.

A Vicious Circle

This is what sets a truly vicious circle into motion. For today’s fiat money causes booms which sooner or later must turn into a bust. The liquidity risk and especially the insolvency risk can be expected to hit the banking industry at some point. To prevent it from materializing, the central bank must keep expanding the quantity of (base) money and keep interest rates at artificially low levels, keeping the inflationary scheme going.

Central banks sow the seeds of crisis, and once the crisis unfolds, especially when it affects banks negatively, central banks run bailouts by injecting new money provided at artificially low interest rates, and the vicious cycle starts all over again. Needless to say that such a cycle causes economic and social problems on a grand scale. It makes the purchasing power of money drop. Only a few benefit, while the majority of the people is taken advantage of.

Given the problems of the euro area banking industry, we should indeed wonder what might happen next. The scenario that the euro area economies might grow out of their banking problems would undoubtedly be a rather convenient one, but it is fairly unlikely. Bailing out ailing banks with taxpayers’ money and an inflation-financed recapitalization of banks’ equity capital might be a much less pleasant scenario, but it appears to be more likely.

For one thing is indisputable: If an oversized banking apparatus starts to shrink, the outstanding stock of credit and money will decline. And as the quantity of money goes down, prices across the board trend downwards causing deflation. Needless to say that deflation is a nightmare for highly indebted economies: Falling prices increase the real debt burden, sending the financial and economic system into a cataclysmic downward spiral.

Inflation Is a Policy that Cannot Last

The current president of the European Central Bank (ECB), Mario Draghi, said in July 2012: “[T]he ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Taken at face value, these words suggest what the ECB is ready to do: to print up ever greater quantities of euro balances to prevent the euro currency from falling apart. Ironically, however, this is precisely what the ECB’s money printing scheme will bring about.

Ludwig von Mises (1881 – 1973) noted in this context wisely: “All governments are firmly committed to the policy of low interest rates, credit expansion, and inflation. When the unavoidable aftermath of these short-term policies comes to pass, they know only of one remedy — to continue their inflationary ventures.”1 These words capture pretty well what has been going on in the euro area.

Without the ECB’s overly generous issuing of fresh fiat money, the euro banking apparatus could not have reached its current size, its bloated dimension. And with its attempt to rectify its inflationary policies of the past – namely preventing the euro banking sector from collapsing, the ECB is about to pursue even more extensive inflationary policies. This doesn’t bode well for the euro’s purchasing power going forward.

The euro area provides a textbook example of a rather unholy alliance between the central bank and commercial banks: It has not only caused an inflationary boom and bust cycle that has resulted in a severe financial and economic crisis. The unholy alliance has also made possible an oversized (and poorly performing) banking industry, and the policy to keep it going will result in a rip off of the majority of the people on a truly grand scale.

• 1. Mises, L. v. (1998), Human Action, Scholar’s Edition, p. 794.

Dr. Thorsten Polleit, Chief Economist of Degussa and macro-economic advisor to the P&R REAL VALUE fund. He is Honorary Professor at the University of Bayreuth.

Ever wondered why the UK is the 5th largest economy even with low investment?

The Bank of England’s new man offers a truly intangible attraction

david smith

When pictures appeared on front pages of the actor Aidan Turner, who plays Ross Poldark in the BBC series, it was followed by mild controversy. People, it was said, were taking notice only of the man, and his bare chest, rather than the actor and the part he was playing

Bear with me. Also a few days ago it was announced that Jonathan Haskel, of Imperial College London, had been appointed to the Bank of England’s monetary policy committee. Even without baring his chest, all the attention focused on the fact that he was a man and had been chosen from a shortlist of five; and that the other four were women. Little attention was devoted to him as an economist.

The fact that Professor Haskel was chosen in preference to other candidates was all about his potential ability to reshape the Bank’s thinking on key challenges for the economy, including low investment and weak productivity. In welcoming his appointment, both Philip Hammond and Mark Carney singled out his work on productivity and innovation.

He was the author, with Stian Westlake, of Capitalism Without Capital, named as one of the books of 2017 by both The Economist and America’s National Review. I reviewed it at the end of last year. It highlighted the importance of “intangible” investment in the economy, as distinct from “tangible” investment.

Tangible investment includes what we usually think of as investment — plant and machinery, buildings, IT and vehicles. Intangible investment, which overtook tangible investment in magnitude in Britain in about 2000, includes software, databases, research and development, the creation of original works of entertainment, literature and music, design, branding, training, market research and the re-engineering of business processes.

That there is both tangible and intangible investment is not new, but the implications are far-reaching. Official statisticians are trying to catch up with the importance of intangibles but have yet to do so. And while Britain’s record on conventional, tangible investment is awful — the lowest as a proportion of gross domestic product of more than 30 OECD countries in 1997-2017 — the performance on intangibles is better. According to Professor Haskel’s figures, Britain’s intangible investment is notably higher relative to GDP than most big EU countries, including Germany, France, Italy and Spain, and only a little lower than the leaders, Finland, the United States and Sweden.

His other finding is that intangible investment drives productivity growth. Tangible-intensive industries tend to achieve steady returns. Those that are intangible-intensive expand, get more productive and achieve increasing returns. Those companies that are at the productivity frontier — that are significantly more productive than the average for their sectors — are those with the highest levels of intangible investment. We need more tangible investment, including in infrastructure, and the debate is now joined about whether Heathrow’s third runway is the right kind of such investment. But we also need intangible investment.

This has implications for public policy, so, if the aim is to improve productivity across the economy, as much effort should be put into encouraging intangible investment as has been put into boosting investment in machinery, vehicles and commercial property. Some of that is done already, such as through the R&D tax credit. More could be.

The second implication is for spare capacity in the economy. The rise of intangible investment means that estimating spare capacity by reference only to traditional investment looks so last century. It is plainly more complicated than that and, as David Owen, an economist with Jeffries International, puts it, Professor Haskel’s expertise “may prove invaluable in helping the MPC better assess spare capacity in the UK economy and the rate of trend growth, both key when looking at monetary policy”.

They are indeed. The Office for Budget Responsibility, in setting the parameters for the government’s fiscal policy — tax and spending — and the MPC in deciding on interest rates and the other aspects of monetary policy have taken a gloomy view of the economy’s “speed limit”. Both think there is little spare capacity and that the economy’s trend rate of growth, its speed limit, is only about 1.5 per cent a year; little more than half what it was before the financial crisis.

These things can never be set in stone. In a services-based economy, it may be that output can be increased quite quickly with barely any increase in tangible investment. As long as people have the expertise, a mobile phone and a laptop may be all they need. They may not even need an office. Despite weak investment, the capital constraint on raising economic growth is less than it appears to be.

That leaves people; the labour constraint. Pretty well every business survey shows recruitment difficulties and skill shortages, which may partly explain the strength of the job figures; employers are recruiting when they can. The Bank tends to focus on the unemployment rate, presently a low 4.2 per cent, as the best measure of spare capacity in the economy.

There was a time when this seemed like an unnecessarily limited approach. Employers had access to a labour market that encompassed the EU, a key ingredient of Britain’s flexible labour market. But that is changing. The number of EU workers has dropped over the past year. Even before we leave the EU, the flow of workers has slowed significantly to half its pre-referendum peak.

To grow, Britain needs tangible and intangible investment and the latter suggests that there may be more slack in the economy than thought. Yet we also need a flexible labour market and a free flow of migrant workers. There, things are more difficult.

David Smith is Economics Editor of The Sunday Times
david.smith@sunday-times.co.uk