Confronting the challenge of poverty and inequality…

We often think that poverty is inevitable, and many people (think that they) know by itself that poverty is a cause of illness and social problems. The poor are always with us, they say, rather misreading Deuteronomy and St Matthew. Attitudes today are rather different from Victorian times, when the poor were seen as either ‘deserving’ or ‘non deserving’, groupings which were subjective and moralising. If you were ‘deserving’, you got into the workhouse; too bad if you were deemed ‘undeserving’. You only have to think of Fagin, Nancy, and Bill Sikes in Dickens’ Oliver Twist (poverty, theft, murder), or Mimi in Puccini’s La Bohème (poverty, TB); for a mid-20th century view, try watching the BBC series Call the Midwife.

Poverty is classified as absolute or relative. Absolute poverty is an income of less than $1.25 per day, and refers to what are usually called developing countries; in such countries the problems are of starvation, disease and survival. The improvements that public health efforts in the western world have brought aren’t common in such populations. Relative poverty, in the UK, is defined as an income less than 60% of the median income. In the UK, the median income is £26664, so that the ‘poverty line’ is about £16,000 per annum. In N Ireland the respective  figures are £21836, and £13100. A worker, on 40 hours per week at minimum wage of £6.50/hour, and working for 52 weeks, can expect a gross income, before any benefits, of £13250. (It also follows from this definition of relative poverty, that such poverty per se cannot be eradicated.)

Before settled agriculture, people lived as hunter-gatherers, in groups of up to 150. There are still ‘primitive’ tribes who live like this, yet such tribes have remarkable social integration, an absence of crime amongst the members; children are entirely safe, and are treated as precious by all—perhaps because their paternity is uncertain.

Before the industrial revolution, most people lived and worked in the country, in agriculture. The revolution brought mass production of material goods, or “stuff”, mass migration to cities, slums, overcrowding, very long working days. The exploitation of children and child labour, sending little boys up chimneys. And thus poverty, overcrowding, foetid atmosphere, rampant infection, and the inevitability of disease. Hardly an improvement from life in a rural hovel. Like the agricultural revolution, the industrial revolution has been called simultaneously both the greatest and the worst of all human innovations. The concept of “childhood” is a Victorian invention, concatenated with increasing education and ideals of purity and innocence.

Poverty in the mid-Victorian times and in the bourgeois mind was certainly associated with disease and criminality; the major improvements in health then (as they still do) came not from the treatment of individuals, but from improvements in public health. These included a clean, safe supply of drinking water, proper sanitation, food hygiene, refuse removal, and immunisation against smallpox. (Immunisation against other diseases came much later.) Even though the Victorians at this stage didn’t know about ‘germs’, some of them realised that some diseases, such as cholera, were water borne, rather than being caused by bad air and miasmas. The anaesthetist John Snow is said to have halted an outbreak of cholera in London’s Soho, by removing the handle of a communal water pump. A little earlier, Semmelweiss realised, from the results of a simple epidemiological study, that doctors coming directly from post mortems on maternity patients who had died of childbed fever were infecting the patients they then examined; he insisted that the physicians should wash their hands in disinfectant. He didn’t really in convincing his colleagues; perhaps calling them ‘murderers’ wasn’t tactful. Semmelweiss died in an insane asylum.

The next major health improvements came with immunisation against common infectious diseases, such as polio, measles, rubella, and pertussis, together with antibiotics. These great improvements in the control of infectious diseases are known as an ‘epidemiological transition’. The grossly polluted air in cities wasn’t addressed until after the London ‘pea-soupers’ of the 1950s and the recognition that they were associated with a very marked increase in deaths from respiratory illnesses.

Attention then turned to the diseases of “affluence” such as heart disease and cancer—though the apparent increase in these diseases was also related to greater longevity. What are called “life style choices” were implicated in these diseases, with the “usual suspects”, as Captain Renault might have called them, including smoking, poor diet, lack of exercise , stress, and alcohol. (Professor Sir Richard Doll originally thought that the great rise in lung cancer was related to tar and road works; the totally unexpected link to cigarette smoking took him by surprise.)

Heart disease was long felt to be a disease of executives, the rich, and somehow related to or caused by ‘stress’. To confirm this, investigators began a long-term study of civil servants—the Whitehall I study. (Its results were confirmed by the later Whitehall II study, which included women.) The expectation was that men in the highest levels of the civil service would have the biggest rates of heart attacks; but, to their surprise, investigators found exactly the opposite. Men in the lowest grades, such as messengers and door keepers had rates of heart disease and death three times higher than men in the highest grade.

Further analysis of these studies also showed that the lowest grade workers had not only more heart disease, but also more of some cancers, lung disease, digestive disease, depression, suicide. Was this difference the result of lifestyle, poverty or ‘low status’? Remember that all the people surveyed were employed, and weren’t in poverty. Researchers concluded that obesity and lack of exercise in the low status jobs were not enough to explain the differences; what else was going on?

The relationship between wealth inequality and health outcomes and social problems has been known to researchers for some time, but only more recently to the public at large. If at first the idea was that rich countries had better measures of health and social problems, it became apparent that this wasn’t the case. Consider this diagram of average incomes to an index of health and social problems in developed countries in the Western world. (These diagrams all come from Wilkinson & Pickett, The Spirit Level, 2009, or from the associated website.)

 

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There’s clearly no pattern here, nothing to indicate that some rich countries, such as the US, do better than relatively poor ones, such as Portugal—which they very clearly don’t.

Now, look at the income distributions in these countries:

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It’s clear here that there are very wide variations in income inequality between countries. Some of them are a lot richer than others, but none is poor in absolute terms, no country is ‘developing’.

 

If we take the Health and Social Problems Index in the diagram above, and rather than using average income we take the inequality of incomes, measured as between the bottom 20% and the top 20% of earners we get something quite different:

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The line up the graph measures ‘regression’; this is a statistical device showing the best fit between ‘Income inequality’ and ‘Index of Health and Social problems’. It is a measure of how likely the results are to be due to ‘chance’; here, the results here are very unlikely to be due to chance.

‘The index of health and social problems’ is a composite of all the factors shown on the right side of the graph; all are given equal weight. Note that some diseases are not measured directly; there is no association between breast and prostate cancer and Income inequality. Yet, increasing wealth inequality directly correlates with health and social problems.

Wilkinson and Pickett also compared this index with all 50 states of the USA, with similar results. They also presented graphs and further background information for each of the problems, finding similar patterns. There are occasional ‘outliers’—Finland has a higher homicide rate than would be otherwise expected. I say ‘expected’ because the position of any country on a graph of the individual problems will predict where that country will lie in respect of other problems. There are more such graphs on their website, here.

There was a mixed reception when The Spirit Level was published a few years. Some critics, mostly it seems from the ‘right’ questioned the data and the methodologies, those on the ‘left’ felt that their views were justified. Some of the data are a bit outdated now, though the general conclusions remain valid.

However, the diagrams do not explain just how income inequality could lead to such differences in health and social problems. There must be more going on, but what are these factors?

Recall the Whitehall I and II studies, where those in the lowest grades of the civil service had more heart attacks, and more of a whole range of problems. The researchers’ conclusions were that job stress and peoples’ sense of self-control over their work seemed to make the most difference. Low social status has a clear influence on physical health; but, more than this, there is a gradient across society, affecting all members. All these findings have been backed up by further research.

There is an interaction between the psyche, the mind,  and the soma, the body. Multiple associations have been described, and the whole can seem really complex at times. A rise in anxiety levels has been observed in a long-term study of American college students; anxiety is often associated with depression. Likewise, there has been a rise in ‘self-esteem’, though this has two components. There is ‘healthy’ self-esteem, people with a generally positive attitude, the ability to make friends and accept criticism. But there is also ‘unhealthy’ self-esteem, people who are defensive and who deny any weakness, described as an attempt to maintain self-esteem in the face of threats. Such people react badly to criticism, and this ‘insecure’ self-esteem can be called narcissism. A rise in this narcissism has also been found in US college students, that is, in the young.

Stress’ is a more complex, multifactorial concept, and is associated with ‘social-evaluative threats’ which damage self-esteem. Low social status, lack of friends and stress in early life (including as a foetus) are all sources of stress in general. Pride and its psychological opposite, shame have also been incriminated.

If the increases in these ‘bad’ psychological measures are increasing, and the evidence does strongly suggest that they are, how and why did this happen? It’s suggested that this is related to the fairly modern trend for communities to be disrupted; where once several generations of a family lived close to one another, people are more geographically mobile now, and perhaps lack a sense of community identity. Think of the difference between a nuclear family and a stem family; the latter lacks the wisdom gained from experience from senior members of the former, even if this isn’t always welcome. Greater inequality is also associated with greater distrust of other people, and there is certainly a replacement of judging people not by who they are, but by what they have—material ‘stuff’, and ‘conspicuous consumption’—and perceived ‘status’, based on possessions.

This is all getting overly complicated, and it is rather complicated, but the over-arching message is that greater income inequality in developed countries is clearly associated with greater levels of health and social problems, and these are strongly influenced  by our psychological responses. I’m trying to present a ‘broad brush’ approach, to see the underlying patterns, even at the extent of ignoring some complexities.

The Nordic countries and Japan have low levels of income inequality and health and social problems. But their low income inequality comes from two different mechanisms. In Japan, there is a small gap between the gross pay of the lowest earners and the highest. In the Nordic countries, this relative equality is achieved by a combination of heavy taxation on high earners, and a generous range of benefits. It’s hardly a coincidence that the Nordic countries not only have high standards of living, but in global surveys, also have high levels of happiness. And the educational system in Finland is seen as the best in the world.

The conclusions of The Spirit Level have been repeated and expanded in several recent publications, listed on the website.

Finally, the authors of The Spirit Level originally considered calling it Evidence-based Politics.

It was, perhaps, the ‘Occupy’ movement that brought income and wealth disparity into public consciousness. They split society into the 99% and the 1%, with the latter branded as the ‘elite’. It’s a simple message, but not quite correct. To be in the 1% you need an income of £150k, something that many professionals achieve without feeling themselves to be ‘super-rich’. The really rich, the mega-rich are a much smaller subset of the 1%, perhaps 1% of them. But Oxfam publicised this recently at the Davos Economic Forum.

Be that as it may, the idea that there is marked wealth and income equality in much of the western, developed world has certainly taken hold, though the consequences of poorer outcomes in health and social problems isn’t nearly so clear, even if there has been a lot of publicity about the effects of ‘austerity’ on the poor. How did we get to be so unequal? Can anything be done about it?—for improving monetary inequality can be surely expected to reduce health and social problems. And if we as a society really want to do something about this, isn’t this the way to do it?

Certainly, there have been many very rich people in the past, though the absence of data about what other people (the ‘proles’) earned makes it difficult to be sure of the level of inequality, though it was probably very high. The Sun King and his court at Versailles financed their extravagance through taxes on the ‘common people’, the aristocracy and the church (the ‘elite’ of their time) didn’t pay tax; the French Revolution ended that line of the Bourbon monarchy. The French economist Thomas Piketty in his recent book ‘Capital in the Twenty-First Century’ goes far back into historical records both in France and in the UK.

The UK, and the US, were very financially unequal countries just before the Great War. In the UK, people were either rich because they were ‘landed gentry’, and lived off the income their capital produced; or they were successful businessmen and entrepreneurs who made their money in ‘trade’. The really rich in the US at that stage were the ‘robber barons’, giants of industry. The war changed the position of the rich; taxes were significantly increased to pay for the war, and though they recovered somewhat in the 1920s and 1930s, still taxation was very high. During the second World War, the incomes of the poor increased, while those of the middling class declined; there was full employment, and a sense of common purpose.

After this war ended there was what the French call les trente glorieuses (thirty glorious years), characterised by full or nearly full employment and gradually increasing levels of prosperity and living standards, characterised by Supermac’s phrase, ‘you’ve never had it so good’.

Taxation remained high during this time, with the highest rate of UK income tax on earnings being 83%; if your income was unearned, there was a 15% extra levy, taxation until ‘the pips squeaked’. Some would call a taxation rate of 98% ‘confiscatory’. There was tight control on credit and what banks and stock markets could do.

This approach changed in the late 1970s and early 1980s. Such tax rates and control of business were felt to be a hindrance to the country’s economic growth. Reaganism and Thatcherism were the new ideals, the concepts taken up avidly in the Anglo-American world, but to a lesser extent elsewhere. These ideas were based on the theories of the Austrian economist, Friedrich von Hayek, and were also called ’neo-liberalism’ or the Austrian model. They included the idea of a ‘free market’, that is one which is untrammelled by Government regulation, together with the ‘privatisation’ of government or state assets; and lower taxation. By contrast, the previous model, based on the theories of John Maynard Keynes included an active fiscal policy, with income redistribution. In good times, when there was growth in the economy, the government should save, and use these savings to stimulate growth during economic downturns.

In the UK, privatisation began with the sale of council houses, and has continued with the sale of utilities—as Supermac, in one of his last speeches, said it was ‘selling off the family silver’.

Likewise the stock market ‘modernised’, with transactions done electronically, by computer rather than face to face. Controls over banks were relaxed, both in the UK and the US.

Banks, particularly in the US, developed some remarkably complex financial ‘products’, such as collateralised debt obligations (CDOs); some of these were so complicated that more senior bankers didn’t understand what they were, or their potential for loss—for risk, it was felt, had been (almost) eliminated from the system.

At the start of the 1980s, the pay differential between senior executives of large firms and the pay of the ‘average’ employee was about 40:1. Average pay showed little, if any real growth over the next 30+ years; yet at that time, differentials had increased to perhaps 300:1, or even more. In some companies, the best paid executive could ‘earn’ more in a day than the average worker in a year.

What happened in 2008, the crash, and why it happened are well known—CDOs based on sub-prime mortgages, the ‘greed is good’ mentality growing the economy on the back of debt, and lending to borrowers who in reality could never pay back. Once in the UK, most of us rented out homes; this gradually changed, and ‘property’ was seen as a safe long-term investment, and a ‘right’. Banks were seen to be ‘too big to fail’, and were bailed out, though this is hardly letting the market do its work—that logic would imply that the banks should have been allowed to go bankrupt—as indeed were a very few, such as the Islandic banks, and Lehman Bros. Rather governments took on the extra debts that the banks had accumulated, which the ordinary taxpayer is now expected to pay for, through ‘austerity’, the idea that saving and financial retraction by the state will effect a cure. Yet, even the crash of 2008 was only a temporary setback to this apparently inexorable rise in pay inequality; the 99% are still worse off than they were beforehand. The effects of this austerity are clearly seen in Greece, where the economy is 25% smaller than previously, and 25% are unemployed. How can a country in such a position repay its debts. In the UK, we are seeing the emergence of an ‘hourglass’ economy; a squeezed middle, with an increase in the super-rich, and also those icing close to the margin of survival.

Piketty’s analysis produced a formula to show when wealth inequality will increase; the rich derive much (or all) of their income from invested capital, rather than through work:

r > g

Where r is the ‘rent’ or interest received on invested capital, and g is the rate of growth in the economy. This is what’s happening now, and what happened in the past when inequality rose.

High taxation did produce less wealth inequality, but is seen now as offensive, almost ‘morally’ wrong. There has been growth, if that’s an appropriate expression, in tax avoidance (which is legal), and tax evasion. Tax evasion is generally illegal, though in some jurisdictions, such as Switzerland, the illegality is less than in others. Elaborate schemes have been devised to ‘protect’ income from the tax man; such causes aren’t helped by anecdotes such as, ‘only the little people pay tax’ and, ‘I pay less tax than my cleaner’.

The Laffer curve describes, in theory, what happens, or is supposed to happen, as tax rates rise; there is a point beyond which increasing tax rates reduces taxation return:

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This is said, by some, to be the justification for the recent Coalition government’s decision to reduce the top rate of income tax from 50% to 45%.

Piketty suggests that some form of taxation is required to reduce inequality; perhaps a tax on the millions of daily share transactions. Alternatively, a tax on wealth rather than increases on taxation of income and expenditure; these are seen as ‘regressive’. Further, it’s probable that even if government were to take on board the evidence that inequality is a bad thing, and attempt to correct it, this would take more than one parliament. Yet governments must keep an eye on the short term, if they are to win the next election. Significant change comes from a change in culture, yet such a cultural change is slow, needing one or two generations to be realised. Think about the introduction of seat-belts, or the appreciation that ‘drink-driving’ was irresponsible. How long did it take for these societal, cultural changes to happen.

Finally, recall that a suggested title for The Spirit Level was Evidence-based Politics. In the same vein, there is a small insert in Ha-Joon Chang’s excellent book Economics: the User’s Guide:

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  • T.E.Lawrence

    “perhaps a tax on the millions of daily share transactions” Agreed with this strategy until a friend informed me all you will do is push the buyers and sellers into another trading market place.

  • Sir Rantsalot

    Relative poverty needs to be dropped as a term. As you say, it is just a calculation based on incomes in a country. The bottom income level will always be in the relative poverty bracket. Maybe look at whether they have certain essentials like clean water on demand, a roof over their head, and the possibility of purchasing a healthy diet of food.

  • Reader

    Not just that. Many of the transactions make micro-profits, are only worth doing because computers do all the work, and those trades just won’t happen if they are taxed.
    There were proposals doing the rounds a couple of years back about taxing huge numbers of trades to make us all rich (not just share trading, but currency trading too). Problem is as above. Any tax that raises large sums of money will change behaviour. If I have to pay 5 pounds tax every time I pay for goods in a shop I’m going to buy in bulk.

  • Korhomme

    It’s also relative between countries. For instance, in the US there are plenty of people in poverty, living below the Federal level. People often complain that such people have mobile phones, large TVs etc, saying in effect that they aren’t actually in poverty. But that’s a simplistic view; many consumer goods are so cheap today; what these people don’t have is proper food—you can imply that they are prioritising their ‘stuff’ over their food. This is a moral judgement, going back to the days of the ‘undeserving poor’.