Last week’s report on wellbeing and the household income distribution told us some new things. Are we listening?

Sadly, the latest MSD report The Material Wellbeing of NZ Households, by Bryan Perry, released last week, passed by quickly. It said, broadly, that there is no obviously significant shift in the level of inequality in recent years. We all know that inequality is high but no change is no news. The usual suspects selected a particular statistic from pages and pages of findings (the summary report is 45 pages long by itself) to suit their narratives. 

What was bypassed was that this research project is steadily increasing our understanding of poverty – it is a complex phenomenon.

We knew this when the basic framework was developed forty years ago. At that time we had a limited data base and all we could do was conjecture, in a common sense way, that what we could measure was relevant. But anecdote is not always right, it rarely produces new truths as it is backward-looking and it does not provide quantitative estimates which tell us of the relative importance of causes or more-effective policies. Nor do anecdotes enable an investigation into the intricacies of the ways characteristics interact.

I am not ashamed of that work forty years ago but it needs to be progressed. Sadly, some of those who pontificate on the poverty measures are still locked back in the primitive framework of the 1970s. Here I want to report some results which do represent progress and need to be incorporated into our thinking.

Forty years ago, we used income as a measure of poverty. It was all we had. A more sophisticated argument, which applies even today, is that income is one of the few significant policy instruments we have to alleviate poverty.

Yet we all know people on low incomes who choose to live frugal but comfortable lives. Then there are people who are on high incomes with much of their spending wasted and living pretty awful lives. And what about those who are but temporarily on low incomes or on high incomes?

The MSD study reports that there is now a material wellbeing index (MWI). It involves asking households about how they live; for instance they are asked whether they are able to afford two pairs of shoes in a good condition and suitable for daily activities. (The complete list is an appendix to the summary report; you can even score yourself on the scale.).

We can compare the MWI of a household with its income. The match is not perfect, but there is a correlation. (An econometrician with a social conscience might want to refine this analysis, especially looking for interactions.)

To make an obvious – if frequently overlooked point – a dollar is worth more to the very poor in lifting their material wellbeing than it is to the rich. Our standard measure of incomes ignores this.

The eminent economist, Amartya Sen, argues that we should compare percent changes of incomes rather than dollar changes, so that $20 given to (or taken from) a persons on $20,000 a year (i.e. 1 percent) has the same social value as $200 given to (or taken from) a person on $200,000 a year. Sen proposes an alternative measure of ‘real national income’ which allows for this. His approach implies that it is less socially costly to transfer from the rich to the poor than the well-off would like you to believe, Applied to New Zealand (here), it suggests we are not doing as well as the GDP per capita measure suggests because more of the additional income is going to the rich than the poor.

New Zeaalnd’s MWI is part of an international comparison in an EU study. (Australia, Canada, ,Japan and the US have not joined in.) It turns out we are tenth among the 28 countries involved, ranking behind the Scandinavians, the Netherlands, Austria and Spain and above – among others – Britain, Belgium, Italy, France and Germany. It is an intriguing result, because the mentioned latter are ranked higher by GDP per capita than New Zealand, again warning that per capita GDP is not nearly as compelling a measure of wellbeing as its popular use assumes.

While New Zealand ranks well on average, it does poorly on deprivation among children. (This is because our provision for the retired is generous compared to most EU countries where we rank 5/28.) Only Germany among the rich EU, ranks (just) below us. Yet another confirmation that we treat children badly in economic terms.

A second major limitation of the current analysis is that it tends to look at poverty at a point in time and does not explore longer-term consequences. A further dynamic complication is that while the total number of poor at any point in time is known, for a given poverty level, the incomes of individual households move above and below the threshold over time.

The, alas discontinued, SoFIE (longitudinal Survey of Family Income and Employment, and some other things too) found that the longer a family was below the threshold, the more severe was its material deprivation.

There is a lot of evidence of poverty being associated with poor health at the point in time, but another study gives us insights into the long-term impact of poverty on health. The Wellington School of Medicine Health Inequalities Research Programme matched individual mortality with census characteristics to measure life expectancy. It found that in 2001 non-Maori females could expect an additional 4.1 years if they had ‘higher’ incomes than ‘lower’ incomes; the male figure was 5.7 years. (Maori differences were 5.3 years for females and 7.1 years for males.) So poverty does not just result in poor health – it kills.

I have seen no similar longitudinal work for the impact on education. Teachers, often with tears in their eyes, will tell you of bright students from poor backgrounds who never had the opportunity to flower. But we do not know how many suffer nor by how much (nor what are the related costs of such lower national productivity). Even so, the anecdotes prod us to investigate such issues – we don’t.

The burden of the research is carried by Bryan Perry of the MSD. There are more insights in the report which can be mined but that requires intensive work. Had we the resources, the experienced researcher could identify some potentially revealing extensions of the work. There are probably other  (longitudinal) data bases which could be integrated into the story. But, sadly, available funding is restricted and, with a few noble exceptions, academics have not generally been very interested in pursuing the intriguing questions. The quality of the resulting public discussion suffers; our poor – especially our children – suffer more.