Wednesday, 9 December 2015

Inequality - 5 Myths Debunked: Myth 3

Continuing the series…

Myth 3: Inequality is all about income

Reality: Incomes aren't as much of a great indicator of people's well-being as is often assumed.

What's far more important is how people are able to live. That is to say, inequality of income isn't that important compared to inequality of consumption - i.e. having a home, food, drink, warmth, transport, access to education, health care, and so on. There is a bad tendency to frame the debate in terms of inequality income - but after tax, and after consideration of people's well-being in terms of consumption, inequality isn't a big issue at all, and post-tax, things aren't anything like as bad as the reactionaries suggest. According to the IEA, those in the richest quintile earn about 15 times more than those in the poorest quintile before the government intervenes with tax, and only about 4 times as much after tax, which isn't outrageous, and gives exhibition to an awful lot of redistribution already taking place. It's a lot easier to feel outraged if you measure inequality by capital and nothing else, but it's the wrong way to measure it.

In actual fact, society needn't dole out equality with fanciful measures. There are lots of ways that Rich Ron and Poor Pete are unequal besides money, and not all to the benefit of Rich Ron. Perhaps Rich Ron could complain he pays far more tax and gets penalised for his success; perhaps he has less leisure time; perhaps Poor Pete has less stress, less public pressure, and less on his conscience as he doesn't make the tough decisions Rich Ron makes; perhaps Poor Pete has a happier marriage because he spends more time with his wife and kids. There are many factors.

The upshot is, using disposable income as a measure of real poverty is a mistake. Most people in the lowest quintile for earnings are beneficiaries of a welfare system that pays for their education, health, housing, and gives vouchers or allowances for food, clothing and bills.

Here's an analogy. Suppose Tom is poor because his household income is only 40% of the national median, and Tim is not poor because his is 80%. Would this make Tim twice as well off as Tom? Certainly not. Tom and Tim could live on the same road, have the same size house, go to the same school, have more or less the same weekly food consumption, and so forth. Their lives would be almost identical, except perhaps Tim might go on slightly nicer holidays - to New York instead of Ibiza, perhaps. Yet Tom is adding to the 'poverty' statistics and Tim is adding to the rich statistics.

Suppose also that Tom gets £5 a week pocket money and Tim gets £10. If we only count this income, Tim is 100% richer than Tom. Tim is a prince and Tom is a pauper. But both Tim and Tom's parents spend money per week (let's say £150) on their clothes, their food, their sports equipment, their bus fares, and so on. Under this consideration, Tim's real spending capacity is £160 and Tom's is £155 - a mere difference of under 4%. Evidently it is ridiculous to call Tim well off and Tom in poverty just because Tim can buy an extra £5 worth of comics and sweets each week. This is the kind of mess you can get into when you talk about relative poverty only in terms of income.