Understanding Poverty

Abhijit Banerjee, Roland Benabou and Dilip Mookherjee edited "Understanding Poverty", a 2006 Oxford Press book that brings together an impressive collection of work by economists on poverty, described by the editors as "one of the central problems of economics."  About one fifth of the world's people--1 billion people--live in poverty (defined as less than $1 a day).  The poor are "cold, and hungry," "illiterate, prone to sickness, unemployment, alcoholism and depression," "excluded from many markets and social groups" and "vulnerable to natural disasters and predation by organized crime and rapacious officials." They are often unaware of their rights and unable to access legal institutions to protect them.  Ultimately, "[p]overty is a tragedy not only for the individuals concerned but also for the world at large, being intimately linked with some of the most pressing social and political problems of our time."  Introduction, at xiii. 

The book brings together essays on diferent aspects of the problem of poverty that have been learned in the last twenty years.  In particular, the essays address market failues that keep the poor from making the kind of investments they need to escape poverty and government failures that allow elites to capture government institutions.   The first four essays provide a sense of the issues addressed throughout the book.

Deaton considers how we measure poverty.  Purportedlyl scientific measurement--how many calories it takes to satisfy a minimal standard of eating--was apparently the basic measure of the "poverty line" in most countries, but Deaton notes that in the US the amount was "adjusted" to coincide with the value already in use by the administration of the time.  Id. at 6.  Deaton notes that the calculation of the poverty line is generally just "food rhetoric."  Arguably the line should be revised upward, but no one wants to admit there are really more poor people who should be the beneficiaries of redistributive legislation.   Furthermore, there is little reason for drawing an arbitrary line and then treating everyone above the line as being capable of caring for themselves while those below the arbitrary line receive transfers.

Acemoglu et al looks at historical data from European colonies in the US and slave plantations in the Caribbean, to conclude that institutions that enforced property rights and constrained elites produced the best post-colonization per capital outcomes, whereas extractive institutions caused relatively rich places to get poor over time. 

Engerman et al look at the role of inequality in the long-term development of colonial countries, and find that extreme inequality in wealth and human capital led to societies that ultimately prove less successful in the long run.  They argue that greater equality led to "more democratic political insitutions, to more investmentin public goods and infrastructure, and to institutions that offered relatively broad access to property rights and economic opportunnities.  In contrast, where there was extreme inequality, political institutions were less democratic, investments in public goods and infrastructure were far more limited, and the institutions that evolved, tended to provide highly unbalanced (favoring elites) access to property rights and economic opportunities.  The resulting differences in access to opportunities may be important in accounting for the disparate records of long-term growth."  Id. at 41.  The study also note that successful countries like the U.S. began with local governments with progressive patterns of expenditures on schools, roads and other infrastructure that provide broadly distributed social goods, and heavy reliance on property and inheritance taxes that placed relatively more of the tax burden on those with wealth.  The U.S. 1862 Homestead Act, providing free land to those who worked it, was another egalitarian policy that supported productive economic growth.

Thomas Piketty examines the Kuznet curve hypothesis, which suggests that inequality should rise with industrialization and then decline as more workers join high productivity sectors of the economy.  In the US, the curve is viewed as having "doubled back on itself" with falling inequality giving way to sharply rising inequality since the 1970s.  Piketty suggests that decline in inequality during the twentieth century was due to upheavals caused by two world wars and the Great Depression, which led to a decline in the concentration of capital incomes, while wage incomes remained relatively stable. Since WWII, the increase in inequality has been limited by progressive taxation of income and wealth.   His statement here is worth quoting in full.

"[T]he rise of progressive income and estate taxation probably explains (at least in part) why top capital incomes were not able to fully recover from the 1914-1945 shocks and why capital concentration never returned to its prewar level.  That is, progressive taxation can have a substantial long-run impact on pretax income inequality, via its effects on future capital concentration.  Although this view was fairly common early in the twentieth century, it has been overly neglected during recent decades.  Cutting back on progressivity can have important long-run consequences on wealth inequality and the resurgence of rentiers, both in poor countries and in developed economies."  Id. at 67.  (emphasis added).

And these progressive policies, he concludes, did not harm growth.  In fact, they may have supported growth by widening access to human capital and entrepreneurial finance.

"[P]er capital growth rates have been substantially higher in the postwar period than during the nineteenth century and all the more so in countries such as France and Germany, where the shocks incurred by capital owners were particularly severe.  This is consistent with the theory of capital market imperfections: in the presence of credit constraints, excessive wealthy inequality entails megative consequences for social mobility and growth.  There are good reasons to believe that the 1914-1945 shocks allowed new generations of talented entrepreneurs to replace old-style capitalist dynasties at a faster pace than would otherwise have been the case."  Id. at 67.

Piketty attributes today's increased inequality to a variety of factors, such as: "slowdown in the rate of growth of educational attainment," changes in the minimum wage, "dramatic rise of very top wages in the United States" and "changing social norms and attitudes toward inequality."   He concludes that "[t]here is today in many parts of the world a wider acceptance of inequality than was the case a few decades ago, and this probably has a strong impact on actual inequality."

These studies are worth reading and pondering.  In spite of the many fiscal constraints on our economy, we are a wealthy country that has the ability to take more significant action to alleviate poverty. We should not ignore the likely negative impact of increasing inequality on the most vulnerable among us or on the democratic institutions through which we govern ourselves.