Would a relatively poor widow be better off if she were richer but still relatively poor?

A columnist in the New Zealand Herald on Monday last week argued, in response to this Policy Matters Blog, that health researchers are right to focus on inequality and relative poverty because the columnist’s widowed relative could not afford to send her 11-year old son to school camp.

However, the suggestion that it is inequality that precludes the widow’s son going to school camp is oxymoronic.  She can’t afford to send him because she doesn’t have the money, which is a matter of absolute, not relative, income.

The focus on inequality and relative poverty implies that the widow would be no better off if everyone’s incomes were quadrupled.

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Income Inequality: Have the US Poor Made the Biggest Gains?

Russ Roberts at Café Hayek has long argued that the proper way to examine income growth through time, when assessing inequality trends, is to trace the income growth of the same people through time.  In his latest article here he links to some evidence on this point and concludes that “people are getting richer across the income distribution (though the picture for blacks is mixed) and the biggest gains go to the poor (true of both whites and blacks)”.

In the same article he suggests that the much higher divorce rates in the US experienced by those in the lowest income quartiles may help explain why those focusing on the growth in the median incomes of the lowest income quartiles may come to more pessimistic conclusions.

A 2004 Business Roundtable publication here by UK sociologist, Patricia Morgan Family Matters:  Family Breakdown and its Consequences stressed the significance of the contribution of family policy changes – such as welfare policy, taxation and family law – to reduced family stability in New Zealand, although of course it is not the only factor.

Reducing Poverty or Inequality: Which Matters More?

Today the Herald published the third in a six-part series by Simon Collins titled Divided Auckland, asserting that poverty in Auckland is rising again and the income gap between rich and poor has widened dramatically.

There would be much to commend in a focus on poverty: why people at the bottom of the income scale are not doing well at school, not making a successful transition from school to work, are getting stuck in welfare poverty traps, or are struggling to raise kids, sometimes without intact families.

Since government is the dominant player in education, housing, health, welfare and the regulation of access to jobs, such a focus on poverty should consider carefully which existing policies are likely aggravating poverty and which ones are likely alleviating it.

But this is not, unfortunately, the focus of the articles to date.  Having identified the poverty concern, the series quickly switches the focus to income inequality.

The Business Roundtable has made many contributions to public debate on the issue of poverty versus inequality in recent decades.  In an article here on the topic, Roger Kerr wrote:

Other things being equal, I prefer less inequality in incomes and wealth rather than more. But I worry much more about poverty and hardship – in New Zealand and in poor countries.

It’s easy to explain why. Imagine if all incomes in New Zealand could somehow be quadrupled tomorrow. Most people would see this as a huge advance, especially for the least well off. But inequality would remain unchanged.

Or consider what would happen if Microsoft and all its millionaire employees were to relocate to New Zealand. Income inequality would ‘worsen’. But how many New Zealanders would regard that as a bad thing?

See also Roger’s article here, my blog The OECD Report on Inequality – A Quest for Equal Poverty for All? here, the Business Roundtable’s release on Richard Epstein’s case for a flat tax here, and Buchanan and Hartley’s book Equity as a Social Goal.

The last article in the Herald‘s series is to be published on Saturday and is about ‘what to do’.  Let’s hope the focus is on what to do about poverty.

Bryce Wilkinson
Acting Executive Director