Treasury made a  egregious error in its calculation of the impact of Labour’s tax package on poverty. Can we learn from it?

I told my econometrics students I would not penalise them for a minor calculation error in any of the statistical problems I gave them, but would halve the marks if their conclusion was obviously absurd. I had already explained to them Moser’s Law: that if a statistic looked interesting it was probably wrong (i.e. the result of an entry or computational mistake). You could say that I was rewarding them for commonsense, a necessary attribute in statisticians (as it is among all professions).

I was surprised when the Treasury announced that the Government’s tax package would take 88,000 children out of poverty for it seemed remarkably effective given the modesty of the outlay. I trusted that the Treasury had got it right and put the issue of checking it aside while I dealt with other things.

(For the cognoscenti, the numbers of poor below a poverty line that a package will impact upon depends on its size and the slope of a particular statistical curve. The Treasury estimate suggested the curve was much steeper that I had ever come across and I thought I must investigate why.)

It has turned out that commonsense won, at least for me, for the Treasury made a dreadful error for which they have just apologised. (Full marks for the promptness and openness.) Apparently they forgot to apply the commonsense test of Moser’s Law.

I am disappointed. All statisticians make mistakes. Sometimes deep in the computer code there is an error; sometimes two analysts working on the same problem make conflicting assumptions; sometimes (often, in my case) you enter a number wrongly (so I have to double check each entry); sometimes definitions do not match what you think; and so on. But the commonsense test should identify the worst examples. If it fails, the statistician is sloppy or incompetent and not understanding what he or she is doing.

The Treasury said that such mistakes were extremely rare. If it meant an error of such egregious proportions, I am sure they are right. In regards to small errors, which commonsense cannot pick up (and which do not matter that much), such a claim would be boasting (or a very inaccurate estimate).

Yet, there is a sense that the poverty and inequality debate has been riddled with poor-quality quantitative analysis. I skip over a book or two with statistical charts which are badly labelled and give a couple of examples.

Consider the proposal to eliminate school fees. Commonsense tells you that reducing them will reduce financial pressures on parents. By how much? If you look at the poverty research you will find that there is no indication whatsoever so the government is not going to be able to pat itself quantitatively on the back. Moreover, in the past the fees were increasing, adding to poverty. Nobody mentioned this creep or that it was increasing hardship in families.

The current method for calculating poverty on an income basis is flawed because it ignores such impositions on the family. We know how to adjust for it – commonsense says we should – but far too many poverty commentators have not enough grasp of the statistics they are using to be able to think this through; explanations to them go down the black hole of their incomprehension.

Any income based poverty line is not absolute in itself but an indicator of a level of income at which most people face unacceptable hardship. It really needs to be calibrated against the way people live. Often it seems pulled out of thin air – very often by people who have had no personal experience of real hardship.

Second, did you realise that the way we set the poverty line means that if we took money from those in the middle of the income distribution and gave it to the rich, measured poverty would be reduced? Yes, you had better read the last sentence again. Apparently by making the rich richer the measure reports fewer poor. (This is not trickle-down, which is a second order effect, if it exists at all.),

The paradox arises because we use a poverty measure based on the (median) income of the middle person in the distribution. If that median income is reduced by those in the middle paying more taxes (while cutting taxes on top incomes), the level of what constitutes the poverty threshold falls and, ergo, there is less measured poverty, despite there being no change to the hardship the poor are experiencing. The apparent fall is an artefact of the statistics.

This is not just an exercise in statistical understanding for students. It actually happened in the early 1990s. The government tax packages were redistributing income from those in the middle to the rich. Consequently the measured poverty line fell; so did the measured number of poor. The neoliberal Business Roundtable and the Treasury of the time (a somewhat more challenged one than today’s) seized on the result as evidence that the government policies were working. Had they been in touch with reality, commonsense would have told them that since the voluntary sector was struggling with unprecedented requests for food aid and other assistance, hardship was really rising.

Curiously, those who calculated the statistic that the BRT and Treasury quoted denied that their data was deceptive saying that they would never do anything that would misrepresent the state of the poor. (One was reminded of Ronald Reagan who said he would never do anything to increase the US budget deficit as he signed approval to increase military expenditure which did exactly that.)

Yet, we have persisted with using the median income as the reference income for calculating the poverty line. The government has said it will be reviewing the definition of the line. Compared to a quarter of a century ago we have more much information about living standards, which will help us calibrate a more authoritative poverty line. (As it happens, the living standards method was used in a special 1974 study of the incomes of the elderly, but it was never followed up.)

It will be interesting to see how seriously the government undertakes the task. Will it use independent advisers with the technical skills and commonsense or will it rely on people of goodwill but with little competence or practical shrewdness?

Whatever, it is to be hoped that the Government does not use the excuse of the Treasury error to renege on its election promise to substantially reduce poverty among children and their guardians. Since the Opposition made the same promise, it will be holding them to account. So should we.

Comments (15)

by KJT on January 27, 2018
KJT

Agree. Something like a percentage of the income of the middle 60th percentile would be a better comparison, as prices, and living costs, tend to reflect the amount a majority of customers can pay. Living wage research also gives an indication of where the poverty line exists. Most calculations also ignore asset ownership, which makes a huge difference to poverty. E.g. Elderly who own a house and contents outright.

 

 

 

 

 

 

 

 

 

 

 

 

 

by James Green on January 27, 2018
James Green

Here's one I just thought of while reading this: if, on aveage, you had access to less than  $1000 of your own money over the past month then you are in poverty.

by Charlie on January 27, 2018
Charlie

It is absurd to measure poverty in relativistic terms. Too easily it can lead us astray from the true meaning of poverty.

For example, if we asked a handful of the most wealthy people to leave New Zealand we would magically lift many from 'poverty' because the average income would fall. Similarly, if a bunch of rich people decide to settle in NZ we have suddenly created a poverty problem.

So clearly we require an absolute measure of poverty if we're to make any sense of this.

But wait! There already is one:

The World Bank defines poverty in absolute terms. The bank defines extreme poverty as living on less than US$1.90 per day> (PPP), and moderate poverty as less than $3.10 a day. It has been estimated that in 2008, 1.4 billion people had consumption levels below US$1.25 a day and 2.7 billion lived on less than $2 a day.

 What could possibly be better than an internationally recognised measure?

Oops! By this measure there is no true poverty in NZ. Not even "moderate poverty"

Job done!  ;-)

 

by Colin Fleming on January 28, 2018
Colin Fleming

It is equally absurd to define poverty in absolute terms with no reference to the cost of living. There are large parts of the world where it might be possible to live on $2 a day - an advanced country like NZ with the resulting high cost of living is not one of those places.

So, job done, if your objective is just clearing your conscience so you don't have to worry about poverty.

by Charlie on January 28, 2018
Charlie

Colin

You can here too. A 750g packet of quick oats costs $2 at Countdown

https://shop.countdown.co.nz/shop/SearchProducts?search=oats#url=/Shop/P...

This is enough to last me for a couple of weeks for breakfasts so a whole family could subsist on it for a day.

When I lived in central Africa the typical purchase was a sack of maize meal for a (large) family to last a month. That together with whatever fruit & veg and insects they could scrounge or grow made up the entire diet. (Fried grasshoppers and cicada are highly nutritious and relish made from caterpillars is a meal never forgotten!)

 

by Ross on January 28, 2018
Ross

The current method for calculating poverty on an income basis is flawed because it ignores such impositions on the family.

Brian, how would you like to see poverty calculated? Is the current measure of 60% of median income appropriate?

by Colin Fleming on January 28, 2018
Colin Fleming

Let them eat oats, I say!

by Ross on January 28, 2018
Ross

You can here too. A 750g packet of quick oats costs $2 at Countdown

Oats aren't fruit and vegetables, which are quite useful for nutritional purposes. Meat comes in handy too - I presume you think people should be able to eat meat now and again. There's also accommodation, clothing, transport, heating, etc to factor in to costs. 

by Charlie on January 29, 2018
Charlie

Ross:

Oats aren't fruit and vegetables, which are quite useful for nutritional purposes. Meat comes in handy too - I presume you think people should be able to eat meat now and again. There's also accommodation, clothing, transport, heating, etc to factor in to costs

...and the ciggies and the beer. Oh and it's a 'human right' to have a car of course.

Point is, there is no real poverty in NZ. Just self inflicted hoplessness.

 

by Brian Easton on February 01, 2018
Brian Easton

What poverty means is trickier that you make it Charlie. We tend to tackle it rather superficially as if it is a simple basic concept rather than as a summary for fundamental notions about the sort of society we want. In my view absolute poverty is having sufficient to sustain oneself, the amount of which which will differ from society to society. Relative poverty is about having sufficient to participate in and belong to one’s society. (I am using the notions of the 1972 Royal commission on Social Security. )
Others may want to use other definitions. Fair enough,’ but they need to be explicit instead of jumping in the deep end using the notion of poverty as though it was a fundamental one needing no further definition.

You will see, Ross, that I cannot tell you whether this measure or that tells us that most of the people with incomes which enable them to participate in and belong to New Zealand society (or whatever definition you use for relative poverty). There are hints via the material living standards surveys but they suffer from various weaknesses.

by Charlie on February 02, 2018
Charlie

Fair points Brian especially "..sufficient to participate in and belong to one’s society". Unfortunately it's often not material things that are the barrier.

Having been really poor in my formative years, for me being poor isn't about a simple financial yardstick. It's far more complex and intangible.

For me, being poor was:

  • Not knowing how to get some basic things done that others take for granted and not having a parent or relative who is not poor who can explain how the world works outside your narrow mental ghetto. This covers an enormous range of things from how to revise for an exam or how to apply for a job or a bank loan. How to behave in an office environment. Which knife and fork to use in a restaurant. The list of things we take for granted is endless.
  • Not having the confidence to ask for something, and sometimes not knowing that some things are available, just for the asking. It's easy to think you don't 'deserve' things where a more confident, middle class kid would breezily ask and receive.
  • Working on the false assumption that everyone is better and smarter than you are, and it becoming a self fullfilling prophesy unless the spell is somehow broken, as it was for me.
  • Not having the right 'stuff' (clothes, shoes etc) so that you're singled out as being inferior and maybe becoming a target. Particularly hard for a teenager.
  • Accepting that your current state is the norm and hopelessness setting in. Even worse, doing something rash to 'get your own back'.

I never missed a meal during this period of my life because my mother and I were very, very careful. I still know how to grow veggies and store them correctly so they last all winter (althought the carrots were a bit soft in the spring and the rotten bits had to be cut off the onions)

So was I poor? No. I was just poor between my ears.

How do we fix this?

by Sam on February 02, 2018
Sam

Personally I look at poverty as some thing people can't do in a particular market<<< that's something I can say any where whether in Antartica or or Vatican City, which is not something Chalrie can do given his 11 paragraphs of written dream killer.

 

You see Chalrie. People like me survive because I know things. And people like my family and a lesser extent the community we live in survive because they were taught to be disciplined. And people like you Charlie survive by making people feel sorry for you. A classic Charlie is-

 

-"For me being poor is:" ya da, ya da, ya da. And so one 5 times.

 

Thats how you survive Charlie. You suck up to every one in the comments section so they feel sorry for you and suck the life out of the conversation Charlie.  

by Ian Tinkler on February 02, 2018
Ian Tinkler

Charlie me thinks you have some things to learn

 "if we asked a handful of the most wealthy people to leave New Zealand we would magically lift many from 'poverty' because the average income would fall."

The average measure used is the median, and if the 10,000  highest income earners packed their bags and left NZ tomorrow the median income would move very little (maybe a few dollars).   So no mfewer people with be measured poor.

As Brian pointed out this is a flawed measure. Expenditure measure of poverty would be better however the data is harder to gather and what is available has quality issues. Expenditure can also be impacted on by cultural upbring and beliefs as well as needs (including weather, mental health and addictions)

by Charlie on February 03, 2018
Charlie

Sam,

You misunderstand me - I'm a multi millionaire now living on Northcote Point, so need to feel sorry for me because I overcame all those obstacles. And if I can, others can.

Ian,

You're right. Labour will have to drag a lot more people down than I thought in order to reduce poverty!

 

by Sam on February 04, 2018
Sam

All millionaires understand the 'double coincidence of wants". For the benefit of those who haven't googled it yet basically it says there are two types of greed. One type of greed accumulates resources for yourself, your family and the community you live in. The other type of greed destroys the community for needs and wants. It's very popular to wank ideology to have these views of poverty that it's all there fault ('no it's not') when capital takes flight, straight away workers go back to what they were doing before which is honourable work tilling the land. If there's no alternative then, just for example, if some one was born with zero capital doesn't mean people in poverty are uneducated or the system is unfair, they just need to understand the role of capital and the function of labour.

So all of these messages you spin about poverty, that poverty is a function of the others, 'no it's not, greed is a function of poverty'. People that I know like myself, who are with money, that have done quite well for themselves, we know this because we're not stupid and they absolutely know money doesn't make you happy. Generally speaking we are exactly the same people when we were young and had no money, so they're exactly the same type of people, they're just a little bit older and wiser.

So all these messages your sending about poverty are just wrong, so first off all not understanding the function of labour in order to survive as a community. But your second problem Charlie is having emotional barriers towards poverty<<< And that's your second problem. So the question is what do you think people in poverty say about you? Other than some random on the internet lives in northcoat pt they don't think about you at all. People don't know you so whether you have ?100k, $1mln or a $1bln, it dosnt mater. Because even if you had $100k, $1mln or a $1bln the money dosnt think anything of you and neither would any one else. So there is no difference except monetary value.

And this is your second major malfunction because the more you speak about poverty the more you think of it. Because you think about all the things that you went through, then say it's all easily replicated, easily repeated and easily taught and mentored. The key is to be indifferent. So go back to the beginning - understanding the function of labour gives you respect for others, But - also at the same time you have to reduce to zero your emotional barriers around poverty and you have to be indifferent.

And this brings up another interesting point. How can you be respectful of poverty and at the same time indifferent? And that's kind of contradictory question but it's not. Respect for labour and people in poverty is simply having awareness. So it's having respect for labour and being indifferent to poverty when you see more and more and more of it.

And that's the key. So being aware of labour and understanding where it comes from.

So if you are aware of labour and understanding its functions and where it comes from, and respectful to it, while at the same time being indifferent to poverty. That is the key to unlocking successful communities.

If you guys disagree with anything Iv said please do not pursue legal action. I cuck to thee. Alright? Amen.

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