Do We Need Poverty Targets?

No, but we need to address poverty. Focusing on poverty targets which are not to be achieved in the time of the government which sets them is wasting energy and opportunity. 

Despite being frequently ignored, Gilling’s Law is one of the most powerful social laws I know. Formulated by Don Gilling, a retired professor of accounting and finance, it states that the way you score the game shapes the way the game is played. A simple illustration is that when they increased the points for a try, rugby games became more attacking in order to score more tries.

Very often the scoring system distorts the intention. Most academics recognise that is true for the Performance Based Research Fund where, in order to get high grades according to the scoring system, many researchers found themselves changing their research strategy for the worse. (Additionally, there is a huge waste of resources that could be used for research which are used, instead, to achieve the points of the PBRF system, further reducing the amount available for genuine research.)

But not only universities suffer from this stupidity. Every so often the government imposes a target on officials. Before long the officials start thinking of ways around the target. For instance, there is a target for recidivism. One way to reduce the proportion of re-offenders is to incarcerate more people who will not re-offend.

This tendency for targets to distort policies is the reason why I am chary about pursuing specific poverty targets. The prime minister is quite correct to say that it is difficult to set good quality targets. Virtually every one I know of can be circumvented. That does not mean to say there is no poverty, nor that when we visit some very poor people, we are unable to see they are deprived. But there are many households where the judgement is more ambiguous. Poverty does not go away if we doubt our ability to measure it, nor should we stop trying to do something about the state of the poor.

I can claim a little expertise in this area, because in 1975 I wrote a paper on poverty in New Zealand which included an estimate of the proportion of the population that were poor – the  first attempt of its kind. It had the revolutionary conclusion that the majority of our poor were children and their parents and guardians; prior to that the conventional wisdom ignored child poverty. This conclusion is virtually independent of the precise poverty line which is chosen although, of course, the exact number of poor depends upon the particular line.

The poverty line I used was the level which the 1972 Royal Commission on Social Security nominated as providing an adequate income for beneficiaries. In 1990 the real benefit level was cut to below the Royal Commission recommendation. That is the level it remains at today (except for the small increase in family support last April). Beneficiaries have a basic income level which was judged by an informed panel to be inadequate 44 years ago and they have not had any share in the increased prosperity since.

Today the poverty line  favoured by the uninformed is a percentage of median household income. The median is the middle of the income distribution with as many above it as below it. Advocates argue over whether the percentage should be 50 or 60 of the median income, a gap large enough to warn you of the arbitrariness of the choice of level. (Today there are also material deprivation indexes. Space means I shall have to omit discussion on them.)

What I am about to say is so paradoxical to a non-statistician that I am going to have to explain it in a little detail. A median-income-based poverty line makes it possible for poverty to be reduced by taking income from those in the middle of the income distribution and giving it to those at the top (yes, I mean the rich). The income of the middle household would fall. So would the median-income-based poverty line. Thus numbers of those measured in poverty are reduced even though there is no change in the living standards of the poor, while overall income inequality increases. Absurd, you say? It is the definition of the poverty level which is absurd.

Here is an example which illustrates the absurdity. Suppose the median (middle) income is 100 units, and we use the 50 percent of median income poverty line, so anyone in a household below 50 units is in poverty. Now suppose the government rejigs the tax system in favour of the rich by raising taxes on those in the middle and using the proceeds to cut taxes at the top. For illustration, suppose the effect of the higher taxes on the middle was to reduce the median income to 80 units from 100 units. It follows that the poverty level has now fallen to 40 units and all the people in the 40 units to 50 units  income range are no longer deemed to be in poverty. Hallelujah!

This is not just a meticulous scholar generating a theoretical paradox. It actually happened. In the early 1990s, the government redistribution policy transferred income to the rich; the numbers deemed to be in poverty fell. Any objective observer saw plenty of evidence of poverty rising as a result of the government’s redistributive policies, but the poverty measure showed exactly the opposite. Both the Treasury and the right-wing think-tank, the Business Round Table, trumpeted the success of their pro-rich redistributive policies at reducing poverty. Hallelujah! Hallelujah!

The poverty advocates who chose the median based poverty line scored an own goal, putting back their cause by years.

Not having a poverty target does not prevent us from tackling poverty. Given current circumstances we could introduce a Universal Family Benefit (UFB) in September 2017 (just before the election). I’d make it taxable, so it was less valuable to high income families, and index it to wages, like New Zealand Superannuation (NZS).

In the longer term we need to do something about affordable quality housing; were I the government I’d be planning a package biased towards poor families to prop up the housing market when it goes phut. We also need to do something about the byzantine, inequitable and inefficient Working For Families program (WFF, although many think of it as WTF). I’d also treat as a tax deductible as an employment expense the cost of childcare for working mothers.

Fiscal prudence would mean that a September 2017 package would be insufficient. So we need to keep increasing the UFB up to, say, 70 percent of NZS (although there is a case for the proportion varying with the child’s age).

No targets, just practical policy initiatives based on the research. Instead, use the measures of poverty based on poverty levels to assess the degree of progress that the government is making. (Another set of measures are those which assess economic inequality. Child poverty is probably the greatest source of the inequality; the other great source is the favourable situation of the rich.) The measures are only available a couple of years and more after implementation so we need sophisticated means of making interim assessments.

Since there are a lot of measures, and the public is likely to have strong opinions, the government would be faced with addressing the poverty issue directly rather than setting a target which it can cheat on. (For instance, were it to abandon free primary and secondary education – something it seems to be doing incrementally – and give the cash to families (or even the rich), the numbers of poor below the conventional median-based poverty lines would fall while hardship went up.)

Measures for monitoring poverty are useful, but policy targets are to be avoided. Let’s get directly onto addressing the problem of child (and their parents and guardians) poverty.