Lies, damned lies, and electioneering statistics: wealth is just accumulating at the top

In my last blog, I lamented the rise of questionable facts in the election campaign, as politicians bid for votes. I used the claim that there is a “tide of privatisation in our NHS” as case study. I now examine the claim that “The last four decades have seen wealth accumulate at the top of society while those at the bottom struggle to get by." The rich are getting richer, but so are the poor

The world is getting better. Just look at three of the key UN measures of poverty and living standards.

• Since 1990 extreme poverty (measured as living on less than $1.25) has more than halved.
• Since 1990 the proportion of people without drinking water has also more than halved.
• Since 1990 child mortality (deaths under the age of 5 per 1000 live births) has – you guessed it - more than halved.

For more on our better world, read Matt Ridley’s classic The Rational Optimist.

What about poverty in Britain? It’s getting better too.

Since 1977 disposable income for the poorest fifth of households in Britain has nearly doubled (even after taking account of inflation and changes in household structures). With the recent turnaround in the economy, and greater incentives to work from welfare reform, the employment rate and average income of the bottom fifth should continue to rise.

Even measures of inequality have been relatively stable since the late 80s.

Income stats hide services the poor can consume from the state

Income statistics only tell some of the story though. The poor are better off than is initially claimed. Firstly, these income statistics and most others, focus on disposable income. They don’t take into account the wide range of services that the poor consume from the state, free at the point of use.

Income statistics are a static snapshot, they don’t capture generational gains

Secondly, income statistics don’t capture individual progress across generations. The young are poor, indebted and have no assets. The middle aged at the peak of their careers are richer, have paid debts off, own property and have made some savings towards retirement. The young will all one day become old and with time, have opportunities to better their lot.

Income statistics don’t reflect the benefits of innovation

Finally, income and wealth don’t reflect the great technological advances of the last four decades. People in Britain are vastly better off today thanks to innovation, particularly driven by the private sector. The poor consume more services as the costs of the basics has fallen as a proportion of income, and have access to new services altogether.

Take computing, which has gone from a luxury good restricted to the super rich and big companies, to being accessible to all. A gigabyte of data storage cost around £200,000 in 1980. Today I was able to find storage on amazon at just 3 pence per gigabyte - cloud services will even give you a load for free. In 1980 we didn’t have mobile phones, today there are 1.3 per person in the UK and 86% of people use the internet. The pace of technology adoption is speeding up too.

An honest debate would reflect on our success and focus on creating more opportunities

Economic Nonsense: 44. Big business thrives on poor country sweatshops and child labour

In undeveloped countries people struggle to survive in agricultural economies.  Life is characterized by dawn to dusk heavy labour, even for children, and the rewards are meagre.  Diet is poor and the risk of starvation or at least malnourishment is prevalent.  

In the early years of Britain's industrial revolution, conditions were poor.  Workers toiled for long hours amid safety standards that were often low.  There were sweatshops, and children worked in factories and mines.  This represented an early stage in economic development.  It was a considerable step up from life on farms, where conditions had been worse.  As capital grew, so did the machines that increased productivity and enabled labour conditions to be improved, and for women to leave sweatshops and children to leave the labour force.  It was wealth that made this possible.

Today in developing economies things are made cheaply in crowded working conditions with safety standards considerably below those in the developed world.  Although most countries have rules against it, there are undoubtedly children at work in several of them.  This, too, represents an improvement on the conditions found in the countryside.  The wages paid in sweatshops, well below those in the West, are far above those afforded by the agrarian economy.  Sweatshop workers enjoy higher living standards than their counterparts outside, and put their families' and relatives' names on the waiting list for any vacancies that occur.

This is not "big business" grinding the poor.  It represents a country's labour force reaching up to improve its lot by earning wages not possible elsewhere.  Globalization has made this possible, bringing many of the world's poorest people into the world market.  The goods made cheaply in poorer countries sell to richer ones, providing an inflow of cash to boost the poor country's economy.  This is how China and India have achieved growth rates that have lifted over a billion people out of dire poverty.

As the UK became richer, it was able to improve working conditions and pay, and to eliminate sweatshops and child labour.  The same will be true of today's developing countries.  Many of them are already doing so.  The faster they become wealthy, the sooner this will happen.  The way to speed it up is for rich countries to open their markets and buy as much as they can from poorer ones.

Economic Nonsense: 25. With free markets the poor are left behind

No. It is the poor who benefit most from free markets. The expensive new products that initially only the rich can afford become cheaper as time passes until they fall within what most people can afford. Colour televisions were initially a luxury product for rich people, but there was money to be made so more producers entered the market. The competition spurred firms to develop cheaper methods of production and improvements in quality. Colour TVs are now something that even poor people in rich countries are expected to own. Many consumer goods follow the same trajectory; most recently smartphones have done so. Far from being left behind, the poor are pulled along by the progress that initially caters for the rich.

Free markets offer a great variety, a variety that includes high fashion items for wealthy buyers, but also serviceable and affordable versions for those not so well off. A Bentley is a very fashionable, high quality car with four wheels that enables its owner to get around. A Vauxhall is less fashionable and less high quality, but it has four wheels and enables its owner to get around. The rich eat caviar, while the poor eat the equally nutritious but less fashionable cod roe. The princess and the movie star can wear the latest couturier designed Paris dress; others can await the High Street department store version inspired by it a few weeks later.

On a global scale, the world's poor have made huge gains because of free markets. Hundreds of millions have been lifted from subsistence and starvation because global free markets have enabled them to produce goods or services that sell to people in richer countries. They have not been left behind because globalization has admitted them into markets and allowed them to advance their living standards.

Economic Nonsense: 22. Only by understanding the causes of poverty can we act to reduce it

This assertion is nonsense because it erroneously supposes that poverty has causes; in fact it is the lack of poverty that has causes. Poverty is, alas, the default condition. It is what happens when you do nothing. Anyone who wants to experience poverty has only to do nothing for a year. If they survive that long, they will be poor, poor because they have not done the things it takes to create wealth. Poverty has unfortunately been the lot of most of humankind for most of its existence. First by hunting and gathering, then by agriculture and animal husbandry, people have lived on the edge of survival, always striving to obtain their food supply. If they had a few bad days at hunting, or a bad harvest at farming, poverty would come, bringing malnutrition and death with it.

At some stage people developed trade, exchanging goods with other, sometimes distant peoples. They learned how to specialize and to generate wealth. With the Industrial Revolution our ability to do this multiplied enormously. Wealth was created on an unprecedented scale, and for most people in the richer countries extreme poverty has become a thing of the past.

Other nations that have followed the same route have achieved similar progress themselves. Only in the past few decades has wealth been multiplied in poorer countries. First Japan became rich, then the 'tiger' economies of South Korea, Singapore, Hong Kong and Taiwan. Following them have been countries such as Malaysia and Thailand, and most dramatically of all, the giants of India and China, lifting over a billion people out of poverty.

To move out of poverty takes trade, specialization, investment and infrastructure. It takes stable property rights, clear titles to land, efficient and honest courts, and governments that are neither predatory nor rapacious. These are the conditions under which people find space to improve their lot and to create wealth. Failure to achieve a reasonable measure of these will keep a country in poverty. Poverty is not caused by things people do, but by things they fail to do.

President Obama: the ultimate poverty hypocrite

Americans are experiencing buyer's remorse. Last summer CNN found that 53% of those polled would choose Mitt Romney to be president today, over the 44% who chose Barack Obama. And with Obama’s approval ratings fixed these days below 50%, I suppose it’s only human to get a bit testy with those you're compared to:

President Obama poked fun at former rival Mitt Romney and leading Republicans on Thursday, saying the GOP’s rhetoric on the economy was “starting to sound pretty Democratic.”

At the House Democratic Caucus retreat in Philadelphia, Obama noted that a "former Republican presidential candidate" was “suddenly, deeply concerned about poverty.”

“That's great! Let's go do something about it!” Obama added in a not-so-veiled jab at Romney.

What’s not particularly smart, however, is to frivolously attack someone’s track record on poverty when your own record looks abysmal:

A few ugly facts about the Obama Presidency:

• Median household income has slumped from $53,285 in 2009 to $51,017 in 2012 just up to $51,939 in 2013.

• In comparison to his three previous successors, this fall in median income looks even worse:

• Real median household income was 8.0% lower in 2013 than in 2007.
• Nearly 5.5 million more Americans have fallen into poverty since Obama took office.
• Obama oversaw the first time the poverty rate remained at or above 15% three years running since 1965.
• Home ownership fell from 67.3% in Q1 2009 to 64.8% in Q1 2014; black home ownership dropped from 46.1% to 43.3%.
• Labour force participation rate fell from 65.7% in January 2009 to 62.7% in December 2014.
• The federal debt owed to the public has more than doubled under Obama, rising by 103 percent.
• 13 million Americans have been added to the food stamp roll since Obama took office.

Obama has been very successful in painting a picture of himself and the Democrats as the 'Party of the Poor', and did an even more sensational job convincing 2012 voters that Romney's riches and successes put him out of touch with the middle-class America. But in reality, the president's policies have pushed millions more people into financial stress and poverty.

And he's still causing damage; even his latest State of the Union address called to raise taxes on university savings accounts and still cited fake unemployment numbers, as if this somehow helps the double-digit workers who have given up looking for jobs.

Perhaps the president really thinks his increased federal spending will pay off for the poor. Maybe he really believes that multi-millions more on food stamps is a saving grace instead of a tragedy. But regardless of intention, the facts speak for themselves.

Obama's talk on poverty is cheap. And his mockery of Romney cheaper.

It's the absence of markets that causes poverty

There's an excellent discussion of a recent finding in development economics over here.

If markets are missing completely, or so unreliable as to effectively be missing, then household separation fails. The extreme case is easiest to think of. If a household is completely autarkic, and can trade with no one else, then it can only consume what it produces. The two decisions are inseparable. If they want a new TV, then they’d better have a source of rare earth elements in their back yard and a passion for soldering.

The importance of knowing if household separation holds or not is that it tells us something fundamentally important about why a developing area is poor.

What's being looked at is that horrible, $1 a day, poverty that far too many of our fellow humans are stuck in. The big question being, well, are they stuck there because of the way that markets operate? Perhaps "the market" means they can't get enough fertiliser for example. Or is it that markets simply do not exist and thus they cannot reap the benefits of the division and specialisation of labour and the subsequent trade in the increased production?

The answer appears to be the absence of markets rather than any failure in them. Which leads to an interesting thought about what should be the right way to aid them.

Instead of sending money with which to buy them stuff we should be trying to work out how to create markets. And the most important part of that is in fact information. Not from us to them, but within such communities. And that ties in neatly with something that is becoming apparent from another part of the literature. It may well be that the mobile telephone is the greatest poverty reducing technology of our times. Simply because it does do exactly that, allow the spread of the information that enables markets to do their wealth creation thing. As this excellent paper makes clear.

It's not quite as simple as "make sure there's a phone network everywhere and the poor will get rich" but we're increasingly coming to the view that that's a damn good start to solving the problem.

Oxfam, capitalism, and poverty

After Thomas Piketty's Capital in the 21st Century told us about rising inequality, it's perhaps unsurprising that a new report from Oxfam tells us the global 1% will soon own half of all the world's wealth. But things are not quite as they seem. Oxfam's figures look at net wealth, implying that Societe Generale rogue investment banker Jerome Kerviel is the world's poorest person, and Michael Jackson was afflicted by the direst poverty before he died.

Ivy League graduates about to start a job as an investment banker at Goldman Sachs are judged far poorer than rural Indian farmers with the tiniest amount of capital.

Seven point five per cent of the poorest tenth of the world live in the USA, the figures say, almost as many as live in India.

And the claim that 85 own as much as 3.5bn is even more misleading, since the bottom 2bn don't have nothing, but negative wealth—something like $500bn of it.

What's more the global 1% probably contains more Times readers than CEOs or oil sheikhs—you need own a house worth around £530,000 to enter it.

All these facts skew Oxfam’s figures to make them astonishingly misleading.

Better figures tell a completely different and far more optimistic story.

Global poverty has actually fallen enormously with the rise of global capitalism. The fraction of the world's population living on less than $2 a day (measured in constant dollars) has crashed from 69.6 per cent in 1981 to 43 per cent today.

Even if you take out India and China, where the most spectacular improvements have been made, and look only at Sub-Saharan Africa, the worst-off region, there have been improvements. From 1981-2006 8.6 percentage points fewer were living on under $1 a day and 4.9 percentage points fewer were living on under $2 a day.

In virtually every respect global poverty is falling and poor people are living longer, better lives. That is less sexy than Oxfam’s claims, but at least it is true.

The amusement of Oxfam's wealth report

Oxfam is one of those groups jetting off to Davos this week to talk about how to set the world to rights. And they're doing so by going to sit among the plutocrats and telling everyone that it's the very plutocrats that are the problem. The top 80 people have more wealth than the bottom 50%, this is appalling and so on. You can see the report here.

Wealth: Having it all and wanting more, a research paper published today by Oxfam, shows that the richest 1 per cent have seen their share of global wealth increase from 44 per cent in 2009 to 48 per cent in 2014 and at this rate will be more than 50 per cent in 2016. Members of this global elite had an average wealth of $2.7m per adult in 2014.

Of the remaining 52 per cent of global wealth, almost all (46 per cent) is owned by the rest of the richest fifth of the world's population. The other 80 per cent share just 5.5 per cent and had an average wealth of $3,851 per adult - that's 1/700th of the average wealth of the 1 per cent.

Winnie Byanyima, Executive Director of Oxfam International, said: "Do we really want to live in a world where the one per cent own more than the rest of us combined? The scale of global inequality is quite simply staggering and despite the issues shooting up the global agenda, the gap between the richest and the rest is widening fast.

Winnie needs to get out more. As Saez, Zucman and Piketty have been explaining to us all this is just how wealth distributions work. The bottom 50% always have less than 10%.

Fraser Nelson is very good here. This global capitalism stuff has been reducing poverty like billyo these past few decades. And for a charity like Oxfam, nominally focused upon poverty, we might think that's a good thing. But they seem to have changed their minds a bit.

But for one elegant point about this brouhaha have a look at Figure 1 on page 2 of that very Oxfam report. Their actual complaint is that global wealth inequality is climbing back to, but is still under, the level reached in 2000 and 2001. This isn't unprecedented, it's not staggering and it's not even unusual. Wealth inequality is actually lower than it was 15 years ago.

Ideas can mean the difference between wealth and poverty

Adam Smith never said that “The real tragedy of the poor is the poverty of their aspirations”, as some people who have never read him think. It is hard to think of a less Smithian view – he was the opposite of that quote's patrician and patronising voice, and had a deep compassion for people who had been unlucky in life. But there is some evidence that disadvantaged people underinvest their savings at a huge cost to themselves. This seems to be true even when there are no social constraints or market failures that might cause this to happen.

One reason for this may simply be that poor people do not realise that the investment opportunities exist, or do not really consider that they might benefit from them. Consider those bright young students from deprived backgrounds who have never even considered applying to university, just because nobody in their families ever has either. Your experience of the world shapes how you react to various opportunities that you get.

To test this hypothesis, a group of researchers at Oxford performed a controlled trial in remote Ethiopian villages, where they showed one of several one-hour documentaries about poor Ethiopian farmers who had expanded a business, improved their farming practices or broken cultural norms by, say, marrying for love. “Individuals succeeded largely through their own efforts and by drawing on assistance from community members and available resources, not through outside government or NGO intervention.”

The trial involved a placebo group (shown a comedy movie) and a control group (shown nothing at all) and it seems to have been a success. Six months after the screenings, the documentary group’s savings rate had risen significantly above the control group’s and had also begun to access credit at a higher rate. (These are some of the poorest people in the world, so the absolute amounts – a few pounds – may seem very small to our eyes.)

School enrolment was up by 15 percent in the documentary group, although it was also up by 10 percent in the placebo group so the effect is unclear, and spending on school expenses was up by 17% (compared to no change in the placebo group).

Overall, the results seem to show that showing extremely poor people examples of people like them who had made something of themselves inspired them to invest in themselves and their families.

It’s just one study, but it hints at something bigger. Incentives matter, of course, but you have to be aware of the existence of an incentive for it to work on you. Even if you’re aware of it, you might discount (or exaggerate) its significance according to your experiences. In a complex world, each of us uses a different pair of glasses to focus on what matters and filter out what doesn't. And no pair is perfect.

There is no obvious public policy lesson from any of this, except perhaps that people don’t always react predictably to incentives. Incentives matter – but so do ideas.

Democratic discrimination: Minors’ voting rights, poorer households and inequality

Usually, across countries, relatively low-income households tend to have more children than higher-income households; this difference also holds between countries that have relatively high incomes versus low incomes. It’s also the case that the voting age in most countries coincides with the age at which one is no longer considered a minor but a fully-grown adult (16, 18 or 21, usually). Since it’s not just the individuals who vote but also the entire household that is affected by the government’s economic policies – the moral principle of affected interests, would seem to imply that children should be granted the vote. Poorer households have, on average, more children than wealthier households, by denying minors the right to vote, the law is essentially discriminating against poorer households and communities on the whole. Even though both wealthy and poor households are affected by the elected government’s policies, if we presume that both households have an equal number of adults (say, for example, 2), the average wealthier household would actually have a disproportionately higher voting power relative to its own size and the size of the average poorer household. So, if the poorer household had 2 adults and 3 minors (a total of 5) and the wealthier household had 2 adults and 2 minors (a total of 4), though the poorer household is larger and, therefore, more people are impacted by the government’s policies, their voting power is equal to the wealthier household’s since only the adults can vote. In this way, by denying ‘minors’ the right to vote, the wealthier household is favoured and the poorer household is discriminated against.

In many developing countries, there is a high fertility rate amongst both urban and agricultural communities when compared to their developed counterparts and, furthermore, within these poorer countries, the difference in the fertility rate between a wealthier and a poorer household is even larger than in a supposedly free, developed country. Therefore, denying minors the right to vote discriminates against poorer households even more so in developing countries than poorer households in developed ones and, by that same logic, favours the wealthy elite in the developing nations even more so than the wealthy in developed countries!

This has repercussions for subsequent policymaking and the government’s calculations for re-election next term. If those who are less fortunate have proportionally less self-determining power in elections than others, less attention will be paid to them in proportion to those biased proportions.

Furthermore, people are generally much younger in developing countries and when we consider that various diseases, poor employment opportunities, food shortages etc. might lead to a large number of children in many developing countries dying before they even reach the legislated voting age, it is imperative that they be given the chance for self-determination as soon as possible.

One could easily argue that although there are many minors who might be able to walk, talk and vote independently, there are still those who might be unable to do so in an adequate manner (such as newly born babies and toddlers). My suggestion would be to allow children to claim their right to vote whenever they feel ready rather than at some arbitrary, legally imposed age that results in biased representation of socioeconomic groups in elections.