Our definition of poverty is misleading and inaccurate – it’s time for a change

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BY MADSEN PIRIE

To solve a problem, one needs to know what the problem is. Most people want to combat poverty, meaning that everyone should be able to access sufficient food, accommodation, healthcare, and other necessities. This is what the welfare state with its various benefits seeks to do.

The measurement of poverty is controversial, however, because some people prefer to describe inequality as poverty, which it clearly is not. They define as “in poverty” those earning less than 60 per cent of the median income. This is indeed a measure of inequality, but the figure of 60 per cent is arbitrary. It could just as readily have been 70 per cent or 50 per cent. There is nothing about 60 per cent that defines poverty. Furthermore, under this definition, poverty will never be solved unless everyone earns the same. As Jesus put it, “The poor you will always have with you.” Defining it in terms of relative inequality makes this true.

The measurement is even more complicated when it does not take into account the welfare distributions that have been applied. That is, ‘poverty’ is defined as the income before welfare assistance has been received, whereas the actual standard of living is represented by income after redistribution. The US notoriously measures incomes before redistribution, and appears to be wildly more unequal than it actually is after redistribution.

There are similar issues with the measurement of wealth, rather than income, to measure ‘poverty.’ The measures usually fail to include the forms of wealth that most people have, such as the right to free schooling for their children, to free healthcare, to below-market rents in social housing, and to a state retirement pension. All of these can be assigned cash values, in terms of what people would have to pay for them privately if the state did not provide them. They constitute parts of a person’s wealth less visible than the more tangible assets they possess.

Talk of “28 per cent of children are raised in poverty” does not fit the observed facts if it is taken to mean they do not receive adequate food, accommodation or healthcare. There is a good case for introducing a measure of poverty that actually measures poverty rather than inequality.

The Joseph Rowntree Foundation made a stab at this a few years back, calculating for different types of household what income they would need to have an acceptable minimum living standard, not one that took them to a percentage of median income, but one that gave them enough money to afford the necessities of life.

One might disagree with their sums, but their methodology was sound. If we want to relieve poverty, we need to know who is poor. Inequality is a different thing. There should be an independent body, like the one that calculates the Consumer Price Index by adding up the price of a basket of typical purchases. It should publish the sums each type of household needs to afford life’s necessities.

It should update annually, as society advances. Adam Smith observed that if most day-labourers can afford a linen shirt, then the man who cannot afford one is poor. Standards change over time as society becomes wealthier. If this were to happen, we would have a measure of how much poverty there as, as well as the measures that tell us how much inequality there is. Those who wanted to redress poverty, rather than inequality, would then have a yardstick with which to approach the problem.

Dr Madsen Pirie is President of the Adam Smith Institute.