Absolute minimums and relative poverty

Recently we discussed the idea of the equity-efficiency trade-off in very broad terms.  As we noted, in order to discuss such a concept we need to think about a series of issues about groups.  Some of these are easier to conceptualise than others – one of the simplest (albeit not simple) is poverty.

Now anti-poverty policy has had a long, and varying, history.  And as this video from Marginal Revolution discusses, many of the principles that we now argue about society has been debating for a long time.

Furthermore sometimes people talk as if poverty has been conquered – and in an “absolute poverty sense” the data seems to back this.

However, although poverty is an “absolute” concept, it isn’t so much about absolute income – as absolute deprivation in terms of capabilities (which includes the ability to function within society, and self-worth in a community).

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Global income inequality

Via Overcoming Bias I spotted this paper on global income inequality, 1970-2009.  Robin points out to be careful, as this doesn’t capture non-financial inequality, and it doesn’t look at the “lifecycle” of individuals – just snapshots of income dispersion at a point in time.  Of course, these missing bits are due to data limitations, the authors would have known this full well.

It shows the global static income inequality has fallen, especially over the last decade.  Lovely.  However, we only get a small part of the story by looking at that graph – the paper also decomposed changes in the global Gini coefficient into ‘between’, ‘within’, and ‘overlapping’ components.  In fact, this decomposition was really the main purpose of the paper!

So let us talk about these things, talk about what happened with them, and see where that leaves us 🙂

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Also, careful justifying inequality

You have seen me say that some inequality is “good”, and you have seen Shamubeel say that inequality is “natural”.  It was with this in mind that Shaz told me to post about this comment from Boris Johnson.

Despite calling for more to be done to help talented people from poor backgrounds to advance — including state-funded places at private schools — Mr Johnson said some people would always find it easier to get ahead than others.

He said: “I don’t believe that economic equality is possible; indeed, some measure of inequality is essential for the spirit of envy and keeping up with the Joneses and so on that it is a valuable spur to economic activity.”

I fear that people think the value judgments espoused by Johnson are similar to the ones economists hold when discussing inequality – this is not the case.

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The equity-efficiency trade-off and simplifying assumptions

Given my admission that I am now going to talk more about inequality, it is important for me to show a bit more analytical respect to the concept of the ‘equity-efficiency trade-off’.  This is a term that is often used in economics, and that we often use here, but which on the blog I have only explicitly dug into once before – back in 2008.

The reason I often prefer not digging myself into the equity-efficiency trade-off concept too much is that I fear I won’t dig myself out, and if I do I doubt much would come from it.  It is an overarching concept that exists in economics, one that we have to be sure we consider whenever we ask a specific question.  However, without reference to a question there isn’t terribly much to say.

When it comes to the equity-efficiency trade-off associated with policy and social organisation, it is clear that we cannot clearly separate individual concepts associated with fairness – ideas of inequality and poverty will be inextricably linked, one of the key reasons why I dislike to push by the Spirit Level to solely place focus on inequality.

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NZ inequality statistics: Some of the research

Donal over at Economics New Zealand posted up some OECD figures that indicate that the Gini coefficient over the OECD was the same in 2010 as it was in the mid-1990s, and that it is actually lower in New Zealand.

As I have noted earlier, I am going to start writing about inequality on the blog.  So I have been spending a little bit of time reading about it!

Given this, I’ve realised we can take this analysis a step further.  Bryan Perry from MSD discussed the Gini coefficient, and other indicators, in his introduction for the inequality conference in July.  I wasn’t there – but I know the document is here, and I know Figure D.17 (third page of the pdf) has a graph of the Gini coefficient through time, and a trend line through it.

A couple of things should stand out when we look at this:

  1. The Gini coefficient has more been “flat” rather than “falling” since the mid-1990s if we look at the trend – the drop the OECD recorded looks like it may have been from comparing direct points, which are volatile
  2. When people complain about the large increase in the Gini coefficient they are not talking about the mid-1990s to today – they are talking about the reform period.  This figure shows that there was a very sharp increase in the Gini coefficient between about 1987 and 1992.

So unlike other countries, the complaints are NOT about a creeping increase in inequality through time – but about the level shift in inequality that New Zealand experienced following the reforms.  Ultimately, there is a view by these groups that the “equity-efficiency trade-off” New Zealand decided to make at that point wasn’t the right or just one.

Now I am not sure how we are even supposed to evaluate that claim without thinking about why, and how, inequality has changed.  To give some flavour for this, I’ll comment on a few of the New Zealand specific research papers we have had about this change – if you know any other similar work, flick me a line in the comments 😉

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Some ‘inequality’ is good and other unpopular statements

We have an attitude as individuals to define things as “inherently good” or “inherently bad”.  And when this comes to policy indicators this is dangerous.

Shamubeel has already discussed this when thinking about the broad idea of equality, and so has Sen – although those posts were just us quoting him!  However, a lot of recent discussions have been specifically on a more narrow measure, that of measures of static income inequality [think Gini coefficient, inter-quartile range, 80-20 income range, etc].  We are being told these are inherent bads which must be squashed!  But does this make sense?  Or is some inequality in these measures really a good thing?

Note:  I read this post after writing my post.  It is very good.

Bah, inequality is bad – it’s obvious

Yes, yes, the most common response I get – but you’re here now, so lets have a think about what we are doing. Read more