Why the distinction between poverty and inequality is important

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January 22, 2015 by Paul Goldsmith

Why is the distinction between poverty and inequality important? Two exchanges in the media this week tell us why.

Firstly. It is important for you to know that there are two ways of measuring poverty: One is ‘absolute poverty’, which is measured using a fixed standard (The World Bank definition is $1.25 a day) and means being unable to meet someone’s basic needs. In Britain the definition has been expanded to someone not having an income enough to be able to play a part in the economic and social life of a nation.

The second measure us “relative poverty”, which is measured in the UK as being the number of people with an income of less than 60% of the UK’s median income. You might immediately notice that this is more a measure of inequality than absolute poverty, and that is important. The distinctions are blurred, particularly when a political party or a charity of pressure group wants to make a political point.

The most important point is that it should in theory be possible to eradicate absolute poverty, but it would be almost impossible to eradicate relative poverty, despite anyone’s good intentions, for the simple reason that people are not equal in their earning power, and the process of making them equal could damage the country.

Anyway – the first media exchange was an interesting debate on “Any Questions” on Radio 4 on Saturday between Sadiq Khan, the Labour Secretary of State for Transport, and Francis Maude, the Conservative Minister for the Cabinet Office. The question was on inequality, and Jonathan Dimbleby, the host, then read out a study from the non-partizan poverty campaigners Joseph Rowntree Foundation in which they had found that inequality in Britain had grown between 1997 and 2010 (when Labour were in Government), but fallen from 2010 (when the Conservative-led coalition were in government.

Sadiq Khan then launched into the usual Labour party political broadcast about bedroom tax, cuts, low wages, zero hours, cut to top rate of income tax, end of bankers bonus tax etc. He compared this to Labour policies such as the National Minimum wage, the ‘New Deal’ (a programme that got long-term unemployed, youth and single parent unemployed into employment), the bankers bonus tax etc. Francis Maude meanwhile was huffing and puffing because it had just been pointed out that inequality had worsened under Labour so Khan was being ridiculous.

Except he wasn’t. Inequality is relative poverty, and Sadiq Khan was talking about absolute poverty. Whilst inequality may have fallen under the Conservatives, the amount of people who are unable to afford food, heat and shelter has grown. Francis Maude would be well advised not to trumpet a million people using food banks. Meanwhile, Labour’s policies had been targeted closely at the previously marginalized and made a massive difference to absolute poverty. However, years of economic growth meant that the rich got richer. The poor, however, did NOT get poorer.

The distribution of income is NOT a zero sum game. Wealth is NOT a pie that the rich simply take more of. The size of the pie can grow, if conditions are right, and when it does, less people go hungry.

Which is why Oxfam should think very carefully about their use of statistics. They released some figures showing that the richest 1% in the world will soon own over 50% of the wealth. Now, I agree, as might many, that this distribution of wealth is unfair and unjust. But it simply does not mean people are poorer. At least, not when absolute poverty is involved.

The Spectator website provided some figures that suggest that the advances in technology, farming and healthcare have made a massive difference to poverty. The incentives to make those advances may have contributed to a rise in inequality, but NOT to a rise in poverty:

According to the United Nations, less people are hungry.

Screen Shot 2015-01-19 at 08.29.48

According to the Lancet – a peer-reviewed UK medical journal, health outcomes are better too:

War on Disease

The point is – by all means let’s decry the inequality of distribution of wealth and income. But let’s not pretend that it is the same thing as poverty. Helping the poor IS possible without bashing the rich, and too many anti-poverty campaigners are too focused in my opinion on hurting the rich, jumping on the political bandwagon.

Most importantly, as students of Economics, don’t forget the difference between absolute and relative poverty, and the different between poverty and inequality. If someone talks about reducing poverty, ask them what type of poverty. Nowhere are more statistics used irresponsibly than in this area.

And that’s before I get to the subject of the difference between correlation and cause!!

 

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