Scott Sumner  

Poverty is a far bigger problem than inequality

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Back in the 1960s, progressives talked a lot about poverty. Now they talk a lot about inequality (which perhaps helps to explain the rise of Trump.) This post was triggered by a comment Tyler CowenAlex Tabarrok made, after his recent trip to India:

Inequality as measured by a standard Gini index is actually lower in India than in the United States. As measured by what you can see, however, inequality is very high. It's easy to step out of a Louis-Vuitton boutique and over a child sleeping in the street.
Screen Shot 2017-01-30 at 12.33.10 PM.png I'd like to discuss this by first referring back to a post I did comparing house prices in Oklahoma City and Manhattan:
I went to Zillow, and randomly pulled off an ad for a 2800 sq foot condo in Chelsea--this one priced at $11 million. And here's a random 2600 sq. foot condo in Oklahoma City, priced at $260,000. The NYC unit is more tastefully designed by NYC standards, but the OKC unit is more luxurious by OKC standards.
This is admittedly an extreme example, but I think it gets at an important difference between India and America. America has more inequality in a mathematical sense, but India probably has more in a quality of life sense.

The resident of the OKC condo has pretty much the same access to modern conveniences as the wealthy NYC resident. They both have modern appliances, cars, cell phones, etc. Access to health care and education. Perhaps the New York resident goes to expensive entertainment whereas the OKC resident goes to Friday night high school football games. (Stereotype alert!) Or the NYC restaurant scene may be more sophisticated, and expensive. But in a purely physical sense, life is not too different, despite the enormous gap in income.

Of course when you get to the bottom of American society, especially homeless people, then the gap in living standards becomes much larger. But that's exactly my point. In America, the 10-fold income gap between a comfortably middle class OKC resident and an affluent New Yorker is mostly just a state of mind. It's not even clear who's happier. That same income gap in India could be the difference between adequate food and chronic hunger pains. Or could lead to a lack of even the most basic medical care. Or a lack of housing that keeps the rain out. Or a lack of AC on very hot humid days. In low-income countries, inequality is much more consequential, which is why India looks like it's more unequal than the US, whereas in a mathematical (Gini) sense it is more equal.

All this is just a roundabout way of saying that what really matters is (absolute) poverty and unemployment and too many people in prison and too few kidney disease sufferers getting transplants, etc. etc. These are the issues that progressives need to focus on. They are also the issues that utilitarians should focus on.

If you don't believe me, I challenge readers to scroll down through all the pictures in this link, and then come back here and tell me what's wrong with my argument.

Sorry people, "Struggling middle class Americans" is a completely phony issue. By all means make the tax system more progressive. But let's not kid ourselves that middle income Americans are "suffering" on the basis of their income levels. If they are suffering, it's probably due to bad physical health, bad mental health, or an extremely stressful situation with a family member, friend, co-worker, or legal adversary.

PS. Speaking of OKC, Steve Winkler invited me down there to give a talk to a society of financial analysts. He put me up in a very interesting hotel last week, called Museum 21c, which is like a hotel within an art museum. Probably my favorite hotel in the United States. Who says OKC can't be as hip as Chelsea! Steve has an excellent blog, which is worth checking out.


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CATEGORIES: Income Distribution




COMMENTS (27 to date)
JayT writes:

I constantly try to make this argument, and people just can't seem to get it. It seems so obvious to me, but every time I bring it up it's as if the people I'm talking to never even gave it a thought.

One small correction, it was a post by Alex Tabarrok, not Tyler Cowen.

Dylan writes:

I wonder how sad it makes Alex Tabarrok every time someone attributes one of his posts to Tyler Cowen. It happens so, so often.

foosion writes:
But let's not kid ourselves that middle income Americans are "suffering" on the basis of their income levels. If they are suffering, it's probably due to bad physical health, bad mental health

There appears to be a link between income and health. Those with higher incomes have better health and live longer. For example, see https://www.nber.org/reporter/spring03/health.html

David Condon writes:

"I wonder how sad it makes Alex Tabarrok every time someone attributes one of his posts to Tyler Cowen. It happens so, so often."

It's blatant post countism.

JasonK writes:

@JayT I also believe "what really matters is (absolute) poverty" is obvious.

When I hear or read that inequality is the most important challenge of this generation, it's difficult for me to accept the premise. There are many ways to technically solve inequality that lead to worse absolute outcomes for everyone. The starting assumption seems to be rigidly zero-sum world where envy alleviation is the top concern.

Am I cynical to believe that the focus on inequality rather than poverty is a political strategy? The political power of those in poverty is far less than "Struggling middle class" in nearly every country.

Scott Sumner writes:

Everyone, Oops. I've done that mistake several times. Alex is one of the most underrated bloggers in the blogosphere. Unfortunately Tyler posts more often, and has a slightly more distinctive style. But in a way it's a compliment to Alex, as no way would my posts ever be viewed as good enough to be confused with Tyler's posts.

Foosion, I agree there is a link---and I'm convinced the causation goes from health to income. (Mostly mental health.)

Jason, I agree.

MikeP writes:

Alex is one of the most underrated bloggers in the blogosphere. Unfortunately Tyler posts more often, and has a slightly more distinctive style.

My form factor for reading Marginal Revolution is gReader on a phone, so I get little more than a subject line to decide whether to follow or not.

Nonetheless, the subject line is enough to call out Alex's posts correctly pretty close to 100% of the time. I read them because they're rare -- and good.

baconbacon writes:

The only disagreement I would have with this is that a ten fold difference in income not being particularly impactful is to strong, and think five fold is more appropriate (which is still a large gap). $250,000 a year in a big city is a far sight better than $25,000 in a small town/rust belt city, but about $50,000 + in cheaper areas starts giving a lot more individual freedom.

jc writes:

Seems to me that many people, consciously or subconsciously, think/feel two things (that may or may not be valid).

First, global poverty, while sad, is not our problem while American poverty is. And in America, absolute poverty is low enough to justify moving on to our previous "stretch" goal of relative poverty (i.e., inequality). Globally, we'll do a token amount to make ourselves feel good (e.g., take in a portion of vetted global refugees), and move on to the more pressing issue of how people in our own tribe are doing.

An interesting bit of emotional judo: characterize this as a Trumpian "America First in ALL areas" argument to your friends for whom inequality is a huge issue. "Trump is correct. It's working class, white Americans that we need to focus on. Doing this will reduce the Gini Coefficient the most. America First!"

I've gotten a few friends to, at least briefly, shift from viewing local inequality as the big issue versus global absolute poverty by invoking this as the argument to fight against, and mixing in a bit of anti-Muslim rhetoric to fight against just for good measure. Their desire to disassociate themselves w/ all things Trump, and to prove that they care about non-whites like foreign Muslims, rules the day.

Second, channeling Hanson, a fair amount who embrace within-U.S. inequality issues don't truly, intrinsically care about it all that much. It's simply a signal that you belong to the good tribe that's fighting for control of the country, that you embrace the good tribe's sacred norms.

How much do you actually, directly care about the stated issue? Perhaps not more than superficially or, at least, fleetingly. It's like our friends who hated Dubya for foreign aggression who are remarkably placid when Clinton, Obama, etc. kill people via sanctions, drones, bombs, etc. They were never really antiwar folks. They just hated Dubya and, as the human mind is trained to do, found reasons to justify this feeling.

If it wasn't invading Iraq, they'd have found another reason(s). We see this all the time in psychology: feelings or actions come first, logical justification comes second, and if confronted, our brain then magically switches the order in which it thinks these steps occurred.

Anyway, whether it's arguing against focusing too much on income equality or some other issue, you simply can't counteract irrational, visceral states of mind with logical argumentation. Especially when as every salesperson knows, you've got to uncover the true, hidden objection and overcome it (as opposed to unstated or false objections, whether prospects actually believe they are true or not).

And being smart and generally logical and rational compared to laymen, of course, does not make you immune to this general rule of the visceral as root cause. Remember that the original Prospect Theory experiments were conducted on professors whose jobs were to form conclusions based on the dispassionate analysis of evidence. And we all know that saying about science progressing one funeral at a time.

Part of what Orwell, for instance, may be alluding to when he claimed there are some ideas so wrong that only a very smart person could believe them, is the fact that intelligence is a tool; smarter people are better at finding convincing reasons to support whatever belief they've got, and also better at then convincing themselves that these reasons are the true reasons for their belief.

To convert them, or at least induce a fair amount cognitive dissonance, you've got to counteract the visceral driver of their beliefs first. And then supply the logical analysis of evidence as a sealant to prevent their new state of mind from slipping back.

BC writes:

"...what really matters is (absolute) poverty and unemployment and too many people in prison and too few kidney disease sufferers getting transplants, etc. etc. These are the issues that progressives need to focus on."

I know it sounds uncharitable, but I wonder how much of progressives' obsession with inequality stems from searching for a problem to match their solution(s). If the solution is welfare programs, regulation, and elevation of the status of minorities and women, then the only problem in your list that can really be addressed is too many people in prison. That one dovetails with elevating the status of minorities due to disproportionately minority prison population. We already have welfare programs for the absolutely poor (and maybe private charities are better than government anyways?). Too few kidney donors calls for deregulation, especially around compensating donors. (I suppose smart progressives could call for welfare programs to help the poor pay for kidneys.) Beyond Fed policy, unemployment calls for labor deregulation, including dropping the minimum wage. There just don't seem to be many problems for Big Government to solve.

mbka writes:

Scott,

Sorry people, "Struggling middle class Americans" is a completely phony issue.

I couldn't agree more, but I'm afraid the link to pictures of real poverty won't address the root problem. Americans, or any Westerner for that matter, do know these pictures well. But many don't travel. And if they do, they see these images in a detached way, from the inside of their air conditioned minivans. It never occurs to them that these are people exactly like them, except born in a terrible country where the average person can't make ends meet.

In the US, in the EU, an average person with average competence can live quite well. In India or Somalia, they can't. It doesn't dawn on Westerners that it's not our individual brilliance that makes us rich, but a spectacularly successful system we luckily were born into. It doesn't dawn on the average Westerner that the person dying in the street in India could be you and me, had we been born into that country, equipped with all our same qualities. It doesn't dawn on the average Westerner that these others are the same as us. Hence the lack of real empathy.

BTW same with do-good liberals, here the empathy is professed but is often abstract. I am not sure the average liberal understands that the average poor Somali is really just a person ina bad country, not an intrinsically poor and thus perpetually-to-be-helped nitwit.

I get have the same sense of absurd alienation I am talking about right in the West BTW, when I hear (white) people say things such as "did you see these Chinese cross the road" when all I saw was ... people.

Thaomas writes:

While it is important to distinguish "poverty" from "inequality," especially in the US, I wonder about deciding that one is "more important" that the other if the policy under consideration does not involve a trade off.

AntiSchiff writes:

Dr. Sumner,

This is a very good point. I assume poverty doesn't get more attention, because it's more politically popular to provide rewards for middle class votes.

Maurizio writes:

It could be even simpler than that. Why is inequality per se a problem at all? I mean, inequality among rich people does not seem to be a cause of concern.

Brian Donohue writes:

Very good post, Scott. Bears repeating on a regular basis.

Don Boudreaux writes:

In today's rich countries, such as the United States, inequality "measured by what you can see" (to quote Alex) is very low and getting lower. Middle-class and poor Americans might know that Bill Gates has a private jet, a few huge homes, and closets full of custom-tailored suits and maybe even custom-made socks. But such luxuries - other than, perhaps, the huge homes - are largely out of sight. I doubt, for example, that anyone who isn't a professional tailor can look at Bill Gates's clothes as he wears them and, say, Scott Sumner's clothes as he wears them and see that that Gates is dressed better than Scott. And certainly, no one can look at Gates and see that he has access to more and more-nutritious food than does Scott - because Gates in fact doesn't.

Evan Smiley writes:

Pre-monogamy the rich could hog all the breeding opportunities and genetically exterminate the poor. Also pre-industrial society there was far less potential for broad benefits stemming from economic activity by the rich. So we are still genetically wired for wealth envy.

AlanG writes:

Comparing India and the US is fraught with peril. Poverty in the US is addressed through an almost decent social net (almost because it varies by state and some states do a better job than others). There is virtually no safety net in India and intrepid readers are referred to Katherine Boo's award winning book "Behind the Beautiful Forevers (don't know if Alex has read this or not) about a Mumbai undercity.

It's well known that wealth in the US is in the hands of a very small percent of the populace. Unfortunately, I'm not sure about the wealth distribution in India and perhaps Scott or one of the commenters can provide that information.

Scott is correct about the inequality in housing prices between NYC & OKC. Every Sunday I look at the three houses for sale in the business section of the US to see what the $$$ amount that week will by. Three distinct geographic areas are always represented and the further one is away from an expensive metro area, the more house one can by. One also needs to look at the cost of living which is much higher in NYC and OKC, and don't forget property taxes/condo fees. However, one has many more cultural advantages living in NYC and a two hour drive in almost any direction will get you to some very interesting areas for a nice weekend vacation. A two hour drive from OKC gets you pretty much to more flat lands and little of interest (weekend for two in Amarillo TX anyone?).

Regarding Scott's comment on "struggling middle class Americans", I am sympathetic to this. However, I would add to this job insecurity which is something I've observed over the years. Individuals have to be much more resilient and have adequate skills that they can transition when there are layoffs or companies just go belly up (lots of Internet companies fall into this category and I've seen a number of friend's children move on because they are prepared). Of course India has nowhere near the job opportunities to lift the majority of the poor out of their current state (though India my insist the caste system was done away with, any sociological examination will prove this false).

Intriguing post as always.

hanmeng writes:

It's not like there aren't sites like Global Rich List or World Wealth Calculator to show Americans how comparatively well off they are.

Scott Sumner writes:

Thanks everyone, lots of good comments.

Poverty and inequality are not to be compared in terms of which is more problematic but in terms of relationship in any economy. Poverty is about how individuals within the economy is being impacted. Inequality is about the structure of the economy for money to circulated.

Vitor Margato writes:

Unless I'm missing something important, your post can also serve as criticism of the adoption of a utility function based on log (income), as is standard in welfare economics. Yes all models are wrong, but the whole point is to make them progressively less wrong (especially if the practical gains are worth it). If one uses something like U = k log (I), then a 10-fold income ratio between a wealthy American and his or her middle-class counterpart should correspond to the same absolute difference in utility between a middle-class citizen and his/her very poor (10 times as poor) counterpart.

Since I am not an economist, I would not classify my comment of January 31st as critique. Rather, I am trying to put various comments into clearer perspective. Most comments seem to tend towards being concerned about poverty at the expense of income inequality.

Vitor Margato writes:

Joshua, was that a reply to my comment? I'm sorry if what I wrote was ambiguous -- by "your post", I meant the text by Scott Sumner, not your comment on it.

Joseph K writes:

The way I see it, the issue really is with the measures of inequality, not with the idea that inequality doesn't matter or isn't important. In other words, I think it's better to say not that inequality doesn't matter but that it isn't particularly a problem in the US because it's not really that high.

To demonstrate that, we'd need a better measure than the Gini coefficient. I'm no expert on this, but it seems like the main problem with Gini is with scale independence. Gini is constructed in such a way that if everyone were to magically become twice as rich in this country, the Gini coefficient wouldn't change. But this seems completely wrong. It should shrink because absolutely differences in income matter less at higher incomes. It makes a huge difference if you're income doubles from 10k a year to 20k a year. But not so much if it doubles from 10 million to 20 million. In fact, if you look into it, you'll see but the income differences between the poorest one-percenters and the richest one-percenters is huge. But in all relevant ways, they're both pretty much living the same quality of lifestyle.

If we had a better measure than Gini, I think it'd show that measured inequality in the US is exaggerated and thus a more minor concern, though it is a big concern in some countries, like India.

Jesse C writes:

Interesting post!

AlanG's post made me think - suppose the 10 richest Americans moved from the US to India, and all else unchanged. Now, wealth inequality in India has skyrocketed, and the US's inequality has diminished. (Assuming we're using the "X% of wealth held by richest Y%" proxy for wealth inequality).

Does this help the least wealthy Americans and hurt the least wealthy Indians? I don't see how, unless you account for jealousy or something.

Wealth inequality is like a bad heuristic in the place of something meaningful, like absolute standards of living. "Inequality" is used a bit like "household income" - if the measure you were using before (individual income) don't paint the picture you want, change the measure to something that blatantly obscures the part you don't want to see.

Floccina writes:

BTW it also seems to me that the lowest income US citizens (the long term unemployed,those with spotty work records, low skill service workers etc.) benefit the most from international trade if it lowers prices, while some blue collar middle income people drop to their ranks. Not so bad. Resist low aversion and sympathy for those experiencing it.

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