Kristian Niemietz Blog

published on the Institute of Economic Affairs (IEA) blog, November 2009

Policy Exchange has just released a report aptly titled Poverty of Ambition, which criticises the major parties’ approach to child poverty. It explains why our conventional poverty measures are flawed and how this translates into misguided policies.

In order to meet the relative child poverty targets, incomes at the bottom of the distribution have to rise faster than average. Since the former largely consist of transfer payments, this is essentially a commitment to increase benefits, which can reinforce the poverty trap by making not working more attractive relative to working. This strategy is akin to a pill that treats the symptoms of a disease, while at the same time weakening the body’s ability to fight the virus.

The authors rightly point out the weak association between incomes and living standards, especially towards the bottom of the distribution. Due to underreporting of transfer incomes, the sometimes short duration of low-income spells, and non-cash benefits, income figures can be misleading. Many of those far below the poverty line appear to be much better off on other measures than those just slightly below the poverty line. The authors recommend a much broader analysis of child wellbeing.

In criticising the existing poverty measures and the misguided policy conclusions they produce, the Policy Exchange report is very much in tune with my own paper, “Poverty in Britain, past and present”, which will appear in the December issue of Economic Affairs. It differs, however, in one respect. The authors conclude that the government’s “Absolute Low Income” measure, which uses a poverty line that is constant in real terms, represents “the most suitable and useful measure of child poverty”.

Does it? The authors themselves have provided a host of good arguments against the use of income-based measures, each of which applies to conventional absolute measures. And there are additional problems. Suppose environmental legislation pushed up the price of energy and transport, or protectionist legislation pushed up the price of clothing and food. If the overall effect of this on the CPI (consumer price index) is small (because of offsetting effects elsewhere), then the absolute poverty rate will remain largely unchanged, even though the poor are affected disproportionately. Absolute measures also obstruct the view of a fairly obvious alternative anti-poverty strategy: unleash the forces of competition in those markets which the poor rely most upon.