Poverty and Income Inequality

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 shelter and food and their basic medical needs taken care of, how could it hurt them that there are some people with millions or even billions of dollars? In fact, as any good economist will point out, it often the ability of some to make millions that creates an economy where virtually all can meet their basic needs. Many western nations are good 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 (as of 2010). 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. Early in life I was living on $8,000 per year, but I lived well, so I was not 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 be above average in income at some point (and my wife and I are now), I didn't like the idea of wealth redistribution. Income inequality just isn't a problem if all 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 problem here. The total amount of income and wealth is the issue that needs to be resolved. They need far more income in the country before their poverty can be addressed.

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 capitalist ideas and belief in the value of property rights, this kind of poverty justifies redistribution of wealth from rich to poor. If you think for a second 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: Life takes precedence over property rights. And what is true on a small scale is usually true (and certainly in this case) 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 walls that surround every middle class home, and the iron bars on almost every window. Somebody's daughter is always hungry there.

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 crates 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? Let's look at a couple simple examples. 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. 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 they are no longer poor 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). 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.

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