Wealth, poverty and inequality

Straight from my management class notes:

Ayn Rand said, “If you ask me to name the proudest distinction of Americans… they were the people who created the phrase ‘to make money’. Men had always thought of wealth as a static quantity -- to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were the first to understand that wealth has to be created.”

In Capitalism, Socialism, and Democracy (1942), economist Joseph Schumpeter wrote:

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. (p. 83)

To understand the importance and nature of wealth and its creation, we need to understand poverty, its definition, nature, causes and effects.

1. Creating – not re-distributing -- wealth reduces poverty.

2. Wealth creation requires economic growth.

3. Economic growth increases relative poverty.

4. Relative poverty is one form of inequality.

5. Not all inequality constitutes unfairness or injustice. “Life is unfair.”

6. Social justice is an issue of opportunity, process and outcomes.

7. Poverty and social injustice today are most often the result of a lack of opportunity.

Poverty is at the root of many of our social, cultural problems, including race, health, education, and perhaps most of all – opportunity. We can create wealth without reducing poverty, history shows that as more wealth is created, more people move out of poverty.

Bono: “In the United States,you look at the guy that lives in the mansion on the hill, and you think, you know, one day, if I work really hard, I could live in that mansion. In Ireland, people look up at the guy in the mansion on the hill and go, one day, I’m going to get that bastard.”

Thomas Aquinas: "Envy according to the aspect of its object is contrary to charity, whence the soul derives its spiritual life... Charity rejoices in our neighbor's good, while envy grieves over it."

Defining and understanding poverty

Measures of poverty have long focused on an absence of wealth, income or the basic necessities for survival – food, clothing, shelter. To understand and address poverty, it is critical to understand absolute poverty, relative poverty and consumption.

1. Absolute poverty is a condition that occurs when a person’s or a household’s income falls a specific threshold level of income, i.e., below the ‘poverty level’. As explained by an NAS panel, "Absolute thresholds are fixed at a point in time and updated solely for price changes.... In contrast, relative thresholds, as commonly defined, are developed by reference to the actual expenditures (or income) of the population." In 2013, the American government-established absolute poverty threshold for a single person under the age of 65 was $12,119.

2. Relative poverty serves as the basis for political arguments in favor of income re-distribution, intended to eradicate inequality. Most western economies outside the United States, household poverty is defined as income below 60% of the median household income. Note this World Bank discussion of measuring poverty.

3. Consumption is a better outcome indicator than income, is easier to measure than income, and better reflects a household’s ability to meet basic needs.

Where is poverty?

• Almost half the world — over 3 billion people — live on less than $2.50 a day.

• The GDP (Gross Domestic Product) of the 41 Heavily Indebted Poor Countries (567 million people) is less than the wealth of the world’s 7 richest people combined.

• Nearly a billion people entered the 21st century unable to read a book or sign their names.

• 1 billion children live in poverty (1 in 2 children in the world). 640 million live without adequate shelter, 400 million have no access to safe water, 270 million have no access to health services. 10.6 million died in 2003 before they reached the age of 5 (or roughly 29,000 children per day).

“We don’t actually count benefits in kind or aid through the tax system in our definition of poverty, although we do count just giving poor people cash money. The upshot of this is that in the old days what the poverty line was really measuring is the number of people who were poor after the things we did to reduce poverty. Today that same poverty line is measuring the number of people who are poor before all the things we do to reduce poverty. We don’t care whether people have jobs or not, we don’t even care whether people have incomes or not: we only care that people have the opportunity to consume. It’s not income poverty that is the real concern, it’s consumption poverty that ought to be. Figure 2 shows us this is around and about zero now in the US.”

“But more important than this is the fact that this measurement of relative poverty is not in fact a measurement of poverty at all. It’s a measure of inequality. We can all argue about whether inequality is bad, how much is too much and so on but it’s a very different concept from poverty.” “What this tells us is that the very poorest of the poor in the US, the bottom 5% (and thus very definitely below that poverty line) are in fact richer than 95% of all Indians. And 85% of all Chinese and 55% of all Brazilians.”

Robert Rector of the Heritage Foundation (link) noted these conditions of Americans defined as poor by the Census Bureau.

• 46% of all poor households own their own homes.

• 76% of poor households have A/C (30 years ago, 36% of U.S. had A/C).

• The average poor American has more living space than the average person in Paris, London, Vienna, or Athens.

• Nearly three-quarters of poor households own a car; 30 % own 2 or more.

• Ninety-seven percent of poor households have a color television.

• 78% percent have a VCR or DVD; 62 percent have cable or satellite TV.

Contrast the American assertion from our Declaration of Independence – life, liberty and the pursuit of happiness – with the comparable French motto – liberte, egalite, fraternite – both from the late eighteenth century and the time of their respective revolutions. These simple phrases demonstrate a marked difference in the two cultures and the political system and rights that emerged from this thinking. The American motto emphasizes more individual pursuits, not equal outcomes; the French motto is more collective, socialist.

Equal opportunity and treatment do not lead to equal outcomes

Equality can be expressed in terms of inputs, process and outcomes, or (1) equal opportunity, (2) equal treatment in process, and (3) equal outcomes, respectively. You could give every person admission and free tuition to Harvard, and each person would likely differ in his or her academic performance, subsequent life, income and career. Equal opportunity does not produce equal effort or equal outcomes in wealth or income. As long as people make choices with the same opportunities and procedural justice, there are going to be differences in the outcomes. Economic growth can be facilitated by equality in opportunity, e.g., property rights, and equality in process, e.g., rule of law. Growth can also improve equality in both opportunity and process. As either a cause or result of equal opportunity and equality before the law, economic growth is still most likely to increase income variation. And the starting line of equal opportunity will never be perfectly equal. People come to the starting line with personal, social, financial and cultural differences, some of them advantageous and some of them problematic. The original United Nations’ Millennium goals focused on the eradication of absolute poverty. The resultant success in reducing global poverty was due, in part, to increasing inequality, as all income quintiles worldwide increased. Now the United Nations has shifted its attention to relative poverty, failing to recognize that strong economic growth helped all income quintiles.

There are those who advocate communism (not socialism) as the solution, starting with New York Mayor Bill Di Blasio. The following was asked about his campaign and his results.

In 2013, you ran on reducing income inequality. Where has it been hardest to make progress? Wages, housing, schools?

DiBlasio: What’s been hardest is the way our legal system is structured to favor private property. I think people all over this city, of every background, would like to have the city government be able to determine which building goes where, how high it will be, who gets to live in it, what the rent will be. I think there’s a socialistic impulse, which I hear every day, in every kind of community, that they would like things to be planned in accordance to their needs. And I would, too. Unfortunately, what stands in the way of that is hundreds of years of history that have elevated property rights and wealth to the point that that’s the reality that calls the tune on a lot of development.

I’ll give you an example. I was down one day on Varick Street, somewhere close to Canal, and there was a big sign out front of a new condo saying, “Units start at $2 million.” And that just drives people stark raving mad in this city, because that kind of development is clearly not for everyday people. It’s almost like it’s being flaunted. Look, if I had my druthers, the city government would determine every single plot of land, how development would proceed. And there would be very stringent requirements around income levels and rents. That’s a world I’d love to see, and I think what we have, in this city at least, are people who would love to have the New Deal back, on one level. They’d love to have a very, very powerful government, including a federal government, involved in directly addressing their day-to-day reality.