What is the Cause of Poverty?

David Hillary

[Reprinted from the Land-Theory online discussion, October 1999]

Given that we have a free market economy, generous welfare provisions and income based taxation it is hard to say that productive work will not result in a sufficient standard of living to support oneself and one's family. By its nature a free market economy involves an open environment in which individuals compete for income and wealth.

Todd Altman: This statement seems to presuppose access to land -- without which no such competition is possible in the first place. If the ownership of land is concentrated in the hands of a relative few, then the "environment" to which you refer is not necessarily "open" for those without land.

Given that wages make up over 60% of GDP a man with nothing but his time and skill can support himself and his family. Put simply most of the revenue that flows through the system is received by labour and spend or saved. Less than 30% of wages is collected in taxation.

Nearly 50% of GDP is after tax wages and the incidence of taxation is such that the poor pay the lowest rates. And of course the revenue from taxation is spent mainly on assistance payments to low income households and health and education. The problem of poverty is that some individuals or households do not have a share of the main revenue source -- wages.

Todd Altman: Yes, and as Henry George discovered over a century ago...

Produce - Rent = Wages + Interest

While it is convenient to fault poor people for not being productive enough, even when they *do* produce more, the general tendency is for land values to rise, and for the lions share of their produce to be consumed by title-holders who produce nothing.

Why do some individuals miss out?

1. It is clear that some individuals/households have such low productivity that they are not worth hiring at a positive wage or at a wage above the minimum wage.

Todd Altman: Of course, just as slaves were probably not worth hiring for decent wages after being "freed." Fortunately for them, their former masters, who just by coincidence happened to own all the land, were kind enough to hire many of them back for wages that, while low, at least allowed them to survive.

Someone like Henry George, Max Hirsch, or Albert J. Nock would have called this blaming the victim, but what did they know?

Given that the minimum wage is low and that its main effects are not on poor households I will ignore it. Individuals can have low productivity because they have few skills or because their capacity for productive work is impaired by attitude or actions that result in dismissal or losses to employers. Drug abuse, for example will make individuals unproductive and prone to causing losses to employers.

2. Some individuals prefer leisure over work and are able to survive on welfare payments or charity or family. The first reason is compounded by employers who prefer to pay efficiency wages.

Efficiency wages are above market clearing wages which are paid for the following reasons:

1. Better paid people can keep better health and strength by enjoying better food and health care and a better standard of living. This reduces sick days and improves productivity of workers.

2. Better pay attracts higher quality employees who are more productive.

3. Better pay provides a stronger incentive for workers to work because if they are caught shirking they have more to lose.

4. Better pay provides a stronger incentive to stay employed with the firm and thus reduces staff turnover and new staff training costs and longer serving employees are more experienced and productive.

5. Better paid workers are less likely to strike, unionize, complain or otherwise be unhappy. Strikes, some union activity, complaints and unhappy staff can reduce productivity and impose losses on the firm.

6. Better paid workers can be enticed to work longer hours without the need for overtime pay or other negotiation if the need arises. Likewise if there is a need to take on more staff there is no need to increase wages in order to attract them.

These factors can result in above market clearing wages being paid and, by definition, people are locked out of the labour market. Thankfully most of the unemployment this causes is "wait" unemployment where individuals simply have to wait to get a job rather than being without a job permanently. It also encourages workers to become more productive by taking courses and completing qualifications in order to be less likely to become unemployed or to overcome unemployment. It should also be noted that there are a lot of state measures to help unemployed and even employed persons to afford to increase their productivity this way. The fact that land rent is privatized does not have a large systematic effect on a group of people so as to make them stuck in poverty. The poverty a growing number of working age persons suffer is due to social rather than economic reasons. If it was economic reasons for their poverty it would be short-lived because there are opportunities to get the skills needed to exit poverty such as vocational courses.

The real reason people are in poverty is because of:

1. The breakup of families and

2. The breakdown of social functionality.

The majority of the poor in New Zealand are solo-parents and their children. They cost the state more than the unemployed to support and their plight is generally longer lived the that of the unemployed. Solo-parents are those whose relationships have broken down through death or separation or divorce. The probability of a relationship breaking up is heavily dependant on marriage. If people get married they have a very good chance of staying together (75% of those who get married for the first time stay married till death of one spouse). Those whose marry for a second time have a poorer chance of keeping it together but still not that bad. De facto relationships have a life expectancy of 18 months. Divorce is a social problem, but marriage has a hugely better chance of success than a de facto relationship.

The Maori people (who were here when the Europeans arrived) like to complain about how poor they are (statistically). They fail to point out that 75% of Maori children grow up in single parent households. The connection is obvious. The state has been too soft on men who are absent from the children and on women who cannot keep their relationships together. The result has been an increase in family breakdown and inequality and government expenditure on supporting solo parents. If social policy was reformed to encourage people to get married, to have more heavy liabilities on absentee parents and put more work obligations on solo parents the trend would reverse and poverty would reduce.

The second cause of ongoing poverty is breakdown of social functionality. By this I mean simply that a some individuals have lost the social skills and attitudes that would make them productive. Drugs, crime, laziness and irresponsibility characterize these people. They are usually men who go from relationship to relationship, are violent and have no sense of responsibility for what they leave behind. They may have never worked in their lives and they would not have done well in school. They have convictions for drink driving, theft, assault, drugs and petty crime. They get up usually in the afternoon.

In this country they or their children are called "at risk." The cause of this breakdown of social functionality is human depravity being inadequately restrained by social pressures and the law. Restraining this depravity must involve reforms to the criminal justice system, the social welfare system. The criminal justice system is pre-occupied with the use of prison to punish, rather than focusing on restitution and financial or work related punishments. Judges should have the liberty to impose punishments which take away only the liberties that have been abused -- not all of them. If someone is a thief or fraudster the punishment should be financial restitution and in the case of the criminal being unable to pay they must be bankrupted and their assets, including their ability to labour (for a limited period of time), must be sold to recover as much of the debt as possible.

In the case of someone who cannot pay their Child Support liabilities because they have had too many children that they cannot support (liabilities should be heavy and cumulative), should be sterilized and bankrupted and undergo forced labour till they can pay their debts or their children can support themselves. Those who rape should be imprisoned/enslaved for a few years and castrated before they leave. The social welfare system should be available only for a limited period of time before recipients become required to participate in appropriate programs and other obligations designed to strengthen the work ethic and improve productivity and employability. These types of measures would drastically reduce poverty, crime, drug abuse and other evils simply by acting as a more forceful restraint on human depravity.

The socialization of land rent offers a number of exciting possibilities for public policy. Clearly the fact that revenue taxation would be ended and deadweight costs avoided would be one of the best features of the system. I suspect that the socialization of land rents will lead to about 10-20% of GDP being available either for social spending or for a Citizen's Dividend. It is likely that if a Citizen's dividend were to be the only means of using these resources that the quantity would be about the same as current programs in terms of income support, although if health and education benefits were included the level of support would be considerably lower. Health and education expenditures are touted as being an essential driver or productivity, after all, they say, were it not for these expenditures, we would have a less healthy and educated work-force and therefore a less productive one.

I have a number of concerns with the extensive use of a Citizen's Dividend and a lack of targeted and specialized programs. The CD approach treats people as rational economic agents and the cause of poverty is not that rational economic agents receive the wrong economic incentives but that social, moral and legal institutions and customs are in a state of disarray.

Although clearly a free market economy and socialization of rent would provide better opportunities compared with some of the counterproductive taxes and regulations that currently exist, I suspect that this change would assist those who were most able to help themselves anyway, while those who suffered the worst poverty and could/would least help themselves would be left with a small income and effectively ignored. A Citizen's Dividend of 7-10% of GDP and targeted welfare programs (encompassing assistance for health and education as well) costing about 5% of GDP would seem to me to be a good system. The CD would allow you to concentrate welfare expenditures on those who really needed assistance via fairly long stand-down periods (the more the income in the last 12 months the longer the stand down) and allow the overall payments to be low enough so that the most basic wage exceeded it. For example if the Citizen's Dividend was 10% of GDP, or $2600 per person per year, that would give a family of four about $200 a week. If the same Family were to be on the Unemployment Benefit they would currently receive about $350 a week (includes Family Support and Accommodation Supplement). This means that the unemployment benefit could be reduced to only, say, $200 a week, which is less than 30 hours work at the current minimum wage. If he got a job for $10 an hour for 40 hours a week he would be $200 a week better off and he would retain his CD which would enable him to send his children to school and buy health insurance without assistance.

The CD takes away the need pay Family Support and Independent Family Tax Credit (a top up to family support for families not receiving a benefit), and Guaranteed Minimum Family Income (a top up of income to the minimum wage level for those not receiving a benefit). It also makes the basic benefit costs lower too. New Zealand Superannuation could be reduced by most of the amount of the CD. I therefore suspect that the current programs could be continued at a cost of not 13% of GDP (current cost) but 5% of GDP (given that currently benefits are income taxed and consumption of the balance subject to GST and that the citizen's dividend would reduce the benefit levels required by about one third and that unemployment would fall).

So lets get real about the non-economic causes of poverty and about the size of the wage pool available for those who work.

Chris Toto: Call me simple minded but I think the causes of poverty can be simply traced to a few basic causes.

1. Government dole programs forbid, punish and limit productivity. The CD based on right instead of entitlement would be a major improvement, as you say. Means-tested programs forbid production on pain of losing the dole. Strike One against the poor's learning the lesson of personal productivity.

2. Government granted privileges to collect monopoly rents drastically reduce the potential net surplus of direct personal productivity as well as agregate economy. Strike Two.

3. The cost of living is hugely bloated by the hidden, trickle-down costs of sales, income, productivity taxes as well as regulatory costs. This drastically cuts away potential net surplus of personal productivity. Strike Three.

4. The crushing weight of the artificially imposed costs of 1-3 tend to atomize, divide and conquer the tri-generational family system. There is less surplus time and wealth resources to care for others in the family. Strike Four.

5. Governmental intervention into social traditions directly sabotage the tri-generational family system. Drafting children away from parents and grandparents for Concentraining camps obedience lessons voids the positive effects of family transmitted values, experience and wisdom. Government sponsorship of Old Age homes tears away the oldest generation from the family. Children no longer learn to care for and to teach each other. They learn obedience to arbitrary authority of strangers instead of the give and take of mutually earned respect and trust. Strike Five.

6. The many hidden attrition costs to personal production of surplus short circuit the natural process of greed. The greed to self-improve, to self-finance further re-investment to generate even larger surplus production capacity with greater ease is frustrated by the various direct and indirect imposts of production punishing economies. The less surplus one has, the less one can independently experiment with self improvement.

The more often one works resulting in little surplus to prove the worth of the effort, the more the lesson is learned that personal effort is not worth the effort.

The more one experiences the subsidized rewards of dependency are as good or better than independent diligent industry, the more one learns that lesson. Strike Six.

The governmental intrusions (5) and burdens (4, 6) that disrupt family cohesion, disable the buffering, counterbalancing healthy and ultimately productive aids of familial cooperation, advice, counsel, and perspective. This includes the extremely important process of learning how to select life partners as well as how to best fulfill most personal and social needs.