'The Persistence of Poverty'

I got round to reading 'The Persistence of Poverty' by Charles Karelis, as recommended by Will Hutton. The Washington Post review summarises (accurately) Karelis' argument as follows:

'After doing lots of reading and giving it extensive thought, Karelis concluded that the reason some people are perpetually poor is that they don't have enough money.

Let me say that this isn't as self-evident, or tautological, a truth as it might appear. Rather, the argument goes something like this:

The reason the poor are poor is that they are more likely to not finish school, not work, not save, and get hooked on drugs and alcohol and run afoul of the law. Liberals tend to blame it on history (slavery) or lack of opportunity (poor schools, discrimination), while conservatives blame government (welfare) and personal failings (lack of discipline), but both sides agree that these behaviors are so contrary to self-interest that they must be irrational.

After all, the reason we study, work, save and generally behave ourselves is that these behaviors allow us to earn more money, and more money will improve our lives. And, by logic, that must be particularly true of the poor, for whom each extra dollar to be earned or saved for a rainy day is surely more valuable than it is for, say, Bill Gates.

In economics, this insight -- that the fifth ice cream sundae is less valuable than the first one -- is enshrined in the law of diminishing marginal utility.

But what if this iron law of economics is wrong? What if it doesn't apply at every point along the income scale? If you and everyone around you are desperately poor, maybe it's perfectly rational to think that an extra dollar or two won't make much of a difference in reducing your misery. Or that you won't be able to "study" your way out of the ghetto. Or that if you find a $100 bill on the street, maybe it's logical to blow it on one great night on the town rather than portion it out a dollar a day for 100 days.

On the other hand, maybe the point at which people are most willing to work hard, save and play by the rules isn't when they are very poor, or very rich, but in the neighborhoods on either side of the point you might call economic sufficiency -- a motivational sweet spot that, in statistical terms, might be defined as between 50 percent ($24,000) and 200 percent ($96,000) of median household income. And if that is so, then maybe the best way to break the cycle of poverty is to raise the hopes and expectations of the poor by putting them closer to the goal line.'

The argument that very poor people are behaving in an economically rational way is a very interesting one. Karelis light-heartedly suggests that the reason why economists believe that the same assumptions about what is rational apply to people who are well off as to people who aren't is because economists tend to be comfortably off themselves. He draws a distinction between spending aimed at increasing pleasure (the economics of the well-off), and spending aimed at mitigating or removing pain (the economics of the poor).

Some implications of this theory. Firstly, it challenges the idea that the way to make people who are out of work find jobs is by cutting benefits or imposing other sanctions. Anything that takes people further away from an adequate income is likely to reduce the likelihood that they will seek work, save money, acquire new skills, and other things that reduce the risk of poverty in the long term. In contrast, raising wages and government support which makes sure that low paid work offers people an adequate income is absolutely key in reducing poverty.

More than this, anything which raises the income of poor people, be it cash payments, cheap rent or childcare, help with utility bills or the cost of food is beneficial, and the positive effect gets greater the more help is given. This is a direct challenge to the theory of so-called 'welfare dependency', and it helps to explain a very puzzling phenomenon, which will also start to tell us if Karelis' argument is anything more than an interesting but meaningless academic theory from someone in their ivory tower.

Over the past thirty years, the relative levels of support for people out of work have fallen. Unemployment benefits are roughly £30/week in real terms lower than in 1977, rents are much higher for many people as the amount of social housing has fallen, and at the same time the standards of living for the better off have increased significantly. And yet to listen to the right-wing arguments, the problem of worklessness is caused by the generous level of benefits that so-called 'scroungers' receive.

Under Labour, billions of pounds have been spent on reducing child poverty, boosting the incomes of families both in and out of work, and introducing a whole range of subsidised services, provided through initiatives such as Sure Start. Now according to the theory of welfare dependency, the fact that, for example, lone parent families get much more money from the government and have less need to work as a result should have created an underclass, dependent on the state. And yet, over the same time period, the number of lone parents in work has increased. Indeed, the proportion of lone parents who have been in work at some point in the past three years is 80%, one of the highest in the world. Score one for Karelis.

In the past, the debate about poverty has tended to be a clash between a moral case that 'something must be done', and an economic case which has been sceptical of 'do-gooders'. What this work suggests is that there is a strong economic case for the principle of 'from each according to their abilities, to each according to their need'.

One objection is obvious. Karelis writes of this notion of an adequate income. But to make use of his theories, we need to know roughly how much this is. More on this soon, but there is some research out soon which attempts to answer exactly this question.