Myths, misunderstandings and mistakes in understanding poverty, social justice and income inequality

September 2, 2020. This is a set of my reflections based on my years of teaching students about the nature, presence, value and values of social entrepreneurship and its role in reducing poverty and achieving real social and economic justice.

Tangible wealth. List what you really value. 'Money in the bank' is not the best and certainly not the only measure of wealth. When asked, people find wealth or value in things like happiness, health, family relationships, safety or security. Money usually does not make the top of the list of things people value most.

Does money motivate? Pundits say no. Managers say yes. The learned know that it depends on what you mean by motivation and by money. Motivation to perform or to attend are quite different. Need for, absence, presence and prospect of money all have quite different effects.Money is a hygiene factor in that it can generally prevent poverty. So there is a motivation to secure money, and if doing a job well means more money than doing it poorly, people are more likely to at least try to perform well. Note the phrase, "at least try," and also realize that at some level of money this effect declines for most people. Not everyone is trying to maximize their income.

Rich get rich, the poor get poorer. It is patently untrue that for some people to prosper, others must suffer, that for a person to become wealthier, others -- usually many, many others -- must become poorer. People around the globe have all been growing their incomes in the past forty years, and the rate of growth is not that different across different income levels. But those with higher incomes at the start have grown their incomes faster in absolute terms. Generally across the board, world incomes have tripled in the past 40 years: “the average per-capita income of the average person on the planet, in real terms, adjusted for inflation, has tripled.” Poverty, social justice and income inequality Poverty is an absence of resources or opportunity; it is an absolute term. Some cultures and countries prefer to define poverty in relative terms, e.g., income less than half the national average income. As absolute poverty has declined worldwide – by almost 70% in the last thirty years – relative poverty and income inequality have become – for some – the ‘new’ measures of social justice. On Jan. 8, 1964, President Lyndon B. Johnson used his State of the Union address to announce an ambitious government undertaking. "This administration today, here and now," he thundered, "declares unconditional war on poverty in America."Further, he said, "to give our fellow citizens a fair chance to develop their own capacities." He sought to give poor Americans "opportunity not doles," planning to shrink welfare dependence not expand it. The collapse of marriage in low-income communities has played a substantial role in the declining capacity for self-support. In 1963, 6% of American children were born out of wedlock. Today the number stands at 41%.[1] Social justice is often mistakenly defined as relatively equal incomes – ‘fair’ income distribution or income equality -- within a country. The problem with this definition is that ‘fair’ is an vague, personal term and applying the measure to a single country is arbitrary and misleading, i.e., some countries will ‘do better’ than others, half of the countries will be ‘below average.’ Social justice is better understood as equal treatment before the law or within the culture or as the presence of opportunity. Social entrepreneurship – microfunding, teaching the village, providing products, services and opportunity for the poor – is sustainable social justice. Income inequality refers to a perceived ‘unfair’ distribution of national incomes. The popular measure of this construct is the Gini index.[2] The “Gini index measures the extent to which the distribution of income or consumption expenditure among individuals or households within an economy deviates from a perfectly equal distribution. A Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality.”[3]Surprising[4] (at least to some), income inequality increases as economic growth increases. There is an apparent trade-off between income growth and income equality; which better serves “the poor”?

Wealth inequality in America (2012; 6:23; edited transcript follows; source)

There is a chart I saw recently that I can’t get out of my head. A Harvard business professor and economist asked more than 5,000 Americans how they thought wealth was distributed in the United States. This is what they said they thought it was. Dividing the country into five rough groups of the top, bottom and middle three 20% groups, they asked people how they thought the wealth in this country was divided. Then he asked them, what they thought was the ideal distribution, and 92%, that’s at least nine out of 10 of them said it should be more like this.

In other words, more equitable than they think it is. Now, that fact is telling admittedly the notion that most Americans know that the system is already skewed unfairly, but what’s most interesting to me is the reality compared to our perception. The ideal is as far removed from our perception of reality as the actual distribution is from what we think exists in this country. So ignore the ideal for a moment. Here is what we think it is again. And here is the actual distribution, shockingly skewed, not only to the bottom 20% and the next 20%, the bottom 40% of Americans barely have any of the wealth.

The top 1% has more of the country’s wealth than nine out of ten Americans believe the entire top 20% should have, mind-blowing. I find this chart difficult to wrap my head around. Let’s reduce the 311 million Americans to just to a representative of 100 people, make it simple, here they are. Teachers, coaches, firefighters, construction workers, engineers, doctors, lawyers, some bankers, a CEO, maybe a celebrity. Line them up according to their wealth, poorest people on the left, wealthiest on the right, just a steady row of folks based on their net worth. We’ll color code them like we did before, based on which 20% quintile they fall into.

Now, let’s reduce the total wealth of the United States, which was roughly $54 trillion in 2009 to this symbolic pile of cash, and let’s distribute it among our 100 Americans. Well, here is socialism, all the wealth of the country distributed equally. We all know that won’t work, we need to encourage people to work, and work hard to achieve that good old American dream and keep our country moving forward.

So here is that ideal we asked everyone about, something like this curve, this isn’t too bad, we’ve got some incentive as the wealthiest folks are now about 10 to 20 times better off than the poorest Americans. But hey, even the poor folks aren’t actually poor, since the poverty line stayed almost entirely off the chart; we have a super healthy middle class with a smooth transition into wealth. And yes, Republicans and Democrats alike chose this curve. Nine out of ten people, 92% said this was a nice ideal distribution of America’s wealth. But let’s move on, this is what people think America’s wealth distribution actually looks like, not as equitable clearly.

But for me, even this still looks pretty great. Yes, the poorest 20% to 30% are starting to suffer quite a lot compared to the ideal, and the middle class is certainly struggling more than they were; while the rich and wealthy are making roughly 100 times that of the poorest Americans, and about 10 times that of the still healthy middle class. Sadly, this isn’t even close to the reality. Here is the actual distribution of wealth in America.

The poorest Americans don’t even register, they are down to pocket change, and the middle class is barely distinguishable from the poor. In fact, even the rich between the top 10 and 20 percentile are worse off, only the top 10 are better off, and how much better of, so much better off that the top 2% to 5% are actually off the chart at this scale, and the top 1%, this guy, well his stack of money stretches 10 times higher than we can show. Here is his stack of cash restacked all by itself, this is the top 1% we’ve been hearing so much about. So much green in his pockets that I have to give him a whole new column of his own, because he won’t fit on my chart.

1% of America has 40% of all the nation’s wealth, the bottom 80%, eight out of every ten people, or 80 out of these 100, only has 7% between them, and this has only gotten worse in the last 20 to 30 years, while the richest 1% take home almost a quarter of the national income today. In 1976, they took home only 9%, meaning their share of income has nearly tripled in the last 30 years. The top 1% own half the country’s, stocks, bonds and mutual funds. The bottom 50% of Americans own only half a percent of these investments, which means they aren’t investing, they are just scraping by.

I’m sure many of these wealthy people have worked very hard for their money, but do you really believe that the CEO is working 380 times harder than his average employee? Not as low as paid employee, not the janitor, but the average earner in his company. The average worker needs to work more than a month to earn what the CEO makes in one hour. We certainly don’t have to go all the way to socialism to find something that is fair for hardworking Americans. We don’t even have to achieve what most of us consider might be ideal, all we need to do is wake up and realize that the reality in this country is not at all what we think it is.

Questions

NOTE: It is impossible to discern if he is speaking of wealth and income as the same or as different concepts.

1. Does one person’s higher wealth or income come at the expense of another person’s ability to earn an income or to create wealth? No. Reject the zero-sum approach.

2. What constitutes a ‘fair’ distribution of wealth? Who gets to judge, enforce?

3. In 1980, 44% of the world’s people were poor and the United Nations wanted to reduce that number. Poverty was defined as the then-equivalent of $1.25 a day. In forty years, incomes have tripled. What has been the effect on those earning $1, $10, $100 or $1000 a day in 1980? What has been the effect on the percent of people living in poverty?

4. What if living choices created the differences? What if the horizontal axis had four quartiles: Single parent households (with children), followed by single adult households, then two-adult households and then two-parent, two-children households?

5. What is the global Gini coefficient? What is the horizontal axis represented five quintiles, starting with Chad, then Cuba, then Sweden, then New Zealand, then the United States?

6. Is a more useful goal to lift all economic segments or to shift, i.e., re-distribute?

7. What is better: Most poor and equal, or rich and unequal? How many poor people were there 200 years ago? are there today? Answer: About a billion. But world population grew from 1 billion to 7.5 billion.

Why Does 1% of History Have 99% of the Wealth? (2014; 3:18)

Moving from poverty to wealth, or why social entrepreneurship matters: Teach a village to raise fish.

1. The most effective antidote to poverty is a market-created job. For that job, an education is the best precursor.

2. The biggest barrier to an education and – as a consequence – a job, is poverty. But it is not an absolute barrier. The primary opportunity needed to grow out of poverty is primary and secondary education and basic health care; taxpayers spend more than two trillion dollars each year providing this opportunity to the poorest Americans.

3. Where do we create social capital? financial capital? This is the question for and the job of the social entrepreneur: Where do we intervene?

4. Where is the best place to intervene in this process?

5. Sustainability (of the natural environment) underlies each step; together they create sustainable development.

An education creates a marketable, productive skill, a sense of personal responsibility, and an ability and desire to continuously learn.

How do people climb out of poverty? By leveraging opportunity.

A stable family unit, usually two parents, at least one of them employed outside the home.

A productive, market-created job, creating wages, marketable output, and profit.

Further thoughts on poverty

1. How is poverty different in other countries?

a. In many countries, poverty most often measured in relative terms.

b. In poorer countries, the minimums are lower and cost much less in American dollar terms, e.g., defined as living on $1 or $1.50 a day.

2. Poverty in terms of income, wealth and consumption

a. commonly, lack of income or low share of national income used to define poverty

b. practically, consumption is best measure of poverty

c. poverty mitigated by wealth transfers, esp. tax-funded re-distributions, charity

3. Negative and positive rights

a. What government can’t do; what government must do for you

4. Negative and positive ethics

a. Avoid evil versus do something of value

Global cell phone subscriptions: 1990 v 2010[5]

1. World had 11m in 1990, 500m in 2000, 5.6 BILLION in 2010

2. USA almost of the world’s 11m cell 1990subscriptions, 279m in 2010

3. India, 0 in 1990, 752m in 2010.

4. China, 18,000 mobile subscribers in 1990; in 2010, they had 859 million.

5. Africa, there were 21,960 in 1990, 539 million in 2010

[1] http://online.wsj.com/news/articles/SB10001424052702303345104579282760272285556 [2] Google images: gini index 2012 [3] http://data.worldbank.org/indicator/SI.POV.GINI [4] http://planetsave.com/2012/01/29/rising-tide-sinking-boats-economic-growth-in-g20-nations-is-increasing-inequality-and-driving-climate-change/ [5] The great convergence, p. 75