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Poverty is the Problem - Not Income Inequality

October 2013 - By

The idea of poverty is often linked to income inequality, but this is misleading. By itself, it isn't necessarily a bad thing for some to be richer than others. If, for example, everyone in a country has decent shelter and food and their basic medical needs taken care of, how could it hurt us that there are some people with millions or even billions of dollars? In fact, as economists will point out, the ability of some to make millions can help create an economy where virtually all people can meet their basic needs. Many western nations provide at least partial examples of this.

We should keep in mind that poverty is a relative term. In some countries the rising of income past $2 per day is considered the end of poverty. The poverty level in the United States, by contrast, is about $22,000 annually for a family of four, the way the government figures it. This works out to about $15 per day per person. It is hard to live on that amount here, but this poverty is nothing like that of sub-Saharan Africa.

It seems likely that whatever level of wealth a nation reaches, those with the least income will still be called poor. True poverty should have a more functional definition, rather than an income level definition. Not so long ago (around 1998 to 2001) I was living on about $8,000 per year, but I lived well, so I wasn't poor. I had a home, food, and medical care when I needed it. I even traveled quite often. Having all the basics of life, I certainly didn't care that there some who had millions of dollars. It didn't hurt me in any way. In fact, since I hoped to have an above-average income at some point (as my wife and I did for several years after that), I didn't much like the idea of wealth redistribution. Income inequality just isn't a problem if people are well and envy isn't running rampant.

Income Inequality

In any case, income equality can be less of a solution to real poverty than people might think. Consider a country like Haiti, where if all the income was divided equally everyone would still be making less than two dollars daily. Clearly the distribution of income is not the primary problem there. The total amount of income and wealth in the country is the issue that needs to be resolved. They need far more income before their poverty can be reduced much.

On the other hand, if there is a large gap between the rich and poor and the poor are really poor, this is a problem on several levels.

First, extreme poverty is a life threatening condition. In my mind, despite my tendency towards free-market ideas and belief in the value of (conditional) property rights, this kind of poverty justifies redistribution of wealth from rich to poor. If you think for a second about what you would do if your daughter was starving and the rich people next door were partying and enjoying a banquet -- and you had the opportunity to take a bit of that food -- well, then you understand the principle, which might be stated as plainly as this: Life takes precedence over property rights. And what is true on a small scale is usually true on a larger scale.

Second, as you imagine stealing your rich neighbors food to save the life of your daughter, you can see another problem inherent in income inequality when the poor are really poor: It is bad for the rich as well. In fact, when my wife and I travel to some parts of South America, I often ponder the costs of all the glass-and-metal-spike-topped walls that surround every middle class home, and the iron bars on almost every window. Somebody's daughter is always hungry in some countries, and because of that the people have to pay for walls and other security measures.

But the costs to the middle class and rich of having extreme poverty a few steps away is more than just financial. It is common to roll up car windows when traveling in the poorest areas, for example. It is dangerous to take a walk in many areas, especially if your clothing shows that you are not poor. Wealth in the midst of that kind of poverty doesn't buy you the easy-going lifestyle we can enjoy in many western societies.

Finally, in addition to the suffering of those who are in extreme poverty and the costs and inconvenience that this creates for the middle class and wealthy, there is a more general economic argument for alleviating poverty. It is that we may all be better off when none are extremely poor. We gain not just safer, more stable societies when we eliminate poverty, but we gain wealth as well.

How can being taxed to help the poor help the rest of us? A look at some simple examples will help explain. Consider an isolated community in the Appalachian Mountains four generations ago, or one in the Andes Mountains today. The people living there may be poor in large part because of a lack of basics we take for granted, like electricity, running water and decent roads and bridges.

If the government taxes us to provide those things for the poor there, the local economies may grow dramatically. Farm produce and other products can now be brought to market. Industries can be started because of the electricity. Under-employed people have work and can be far more productive. It is easy to imagine that in some such cases this one-time investment can yield not only great benefits for the people helped, but also future tax revenues (based on the increasing incomes) that more than repay the expenditures.

The bottom line is that there is a great benefit to all of us when all do well. The poor are a poor market for most goods and services, but when their incomes rise things can be sold to them and they can sell things, starting with their labor. All you have to do to see the logic of this is to imagine a store in a town where most are unemployed or underemployed, and a dollar-per-day is the average income. It would be hard to make a profit. Let that store represent the rest of us in the economy (in the form of businesses and their employees) and you can see why we would like those people to be making ten times as much money.

We are all wealthier in the long run when everyone can participate fully in the economy and meet their basic needs. In some parts of the world unemployment is higher than 50%. Just think how much better off the country -- and all its citizens -- would be if all those potential artists, store-owners, business women, and laborers were part of the economy.

Governments have a poor record of doing the right things when it comes to helping people help themselves. Unfortunately, much of what is done to alleviate poverty can also help perpetuate it (grain donations in poor countries have been known to destroy local grain farms, for example, by lowering the price below the cost of production). But this doesn't mean that nothing good has ever been done by governments, nor does it mean that we can't push for those policies that actually help both in the short and long term.

Income inequality does matter in countries with extreme poverty. A bit of redistribution can alleviate it not by making the rich poor, but by raising the incomes at the bottom and improving the economy as a whole. It just has to be done wisely.

A Few More Notes About Income Inequality and Redistribution

I like to remind my liberal friends that all tax revenue and law in general is accomplished by force. I do not pay taxes voluntarily, but pay because men with guns will come if I don't (I would not support the many wars and other nonsense my money is spent on if I had the choice). With this in mind we should be very careful about what programs we advocate and about law making in general.

I like to remind my conservative friends that they too believe in "sharing the wealth," just in different ways and degrees. None of them advocate ending public schooling or Social Security, both of which are redistribution schemes (the latter because the money paid out is taken from current taxpayers, not prior investments, which were never made). And they never seem to complain about the vast welfare programs for the wealthy and large corporations (you can read more about that here: Redistribution to the Rich.)

Finally, income inequality, while not necessarily a problem in itself, is worth looking into when it is growing more pronounced, as it currently is in the United States. You have to wonder why the economy is producing more than ever, with productivity per employee more than doubling in forty years, while those employees make less now (adjusted for inflation) than they did forty years ago, and the richest few percent are five times as rich. Much of that is tax policy, which has directly and indirectly shifted more and more of the cost of government onto the shoulders of the poor and middle class and has made it more difficult for people to increase their income through small businesses.

But that is a topic for another time. For now I will repeat my proposition that income inequality is not the same as poverty, and that the latter can be alleviated is wise ways that benefit all of us, and even reduce that inequality at the same time.

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