James Faulkner’s musings on poverty and inequality

The nonsense pedalled by much of the left-wing press (not to mention some in the Conservative Party who ought to know better) regarding poverty has long been a bugbear of mine. Accustomed to unprecedented levels of wealth and prosperity, our concept of poverty has become so warped of late that we regard people unable to afford Sky TV as ‘deprived’. We seem to have lost all sense of perspective.

The root of the problem lies in how we measure poverty. According to the Government, poverty is defined as “a household income below 60% of median income”. Of course, what we are talking about here is relative poverty as opposed to absolute poverty; the former can never be eliminated, so long as society exhibits variations in wealth and income, whereas the latter can be.

In the UK, which plays host to a modern welfare state, giving even the poorest in society access to food, housing and healthcare, it is very hard indeed to argue that anyone lives in absolute poverty. Indeed, even a leading poverty organisation admits that “The view that there is no absolute poverty in the UK is a perfectly valid position to take”. In the UK then, the argument has shifted silently away from absolute poverty to relative poverty.

I’m sure that most people can agree that we as a society have a responsibility to prevent anyone from falling into absolute poverty. But the question of whether or not that responsibility extends to taking measures to decrease relative poverty is another matter entirely, because it moves beyond the basic necessities of life to a subjective threshold of material comfort.

The problem with using relative definitions of poverty is that one person’s poverty is another person’s prosperity – clearly, most of us feel relatively ‘poor’ when compared to, say, a Russian oligarch. What’s more, as this excellent study points out, concentrating on relative poverty levels can obscure very real improvements in underlying living standards:

“Compared to the 1960s, China today has higher income inequality, but also incomparably lower levels of material poverty. By [David] Brady’s definition, China was less impoverished in the near-starvation years of the 1960s than it is as an economic superpower today. According to the OECD, during the last three decades the share of Chinese living in absolute poverty dramatically declined from eight in ten to one in ten (Garroway and de Laiglesia 2011). During the same period, relative poverty, measured exactly as Brady measures it, roughly doubled. Although inequality and relative poverty are not irrelevant for measuring the well-being of a society, we should be apprehensive about a measure of poverty that is incapable of detecting the largest decline in material poverty in human history.”

However, it does not follow that high levels of relative poverty are not a problem.

History teaches us that vastly disparate societies are prone to political upheaval and revolution. So whether or not you have any sympathy for those marching in the name of the ‘99%’, it would be churlish to ignore the fact that wealth and income inequality are on the rise. It is therefore somewhat perplexing to note that inequality tends to rise when economic performance is strong – as it has done in China since the 1960s, and as it did in the UK from the 1980s onwards.

Peter Mandelson famously quipped that the Labour Party was “intensely relaxed about people getting filthy rich”, which suggests that rising levels of inequality need only be seen as a problem at a time when the living standards of the vast majority of citizens are falling or stagnating, as they have been in the UK in recent years. We know that populist, redistributive measures aimed at penalising the rich are generally counterproductive in the long term, so it stands to reason that rather than searching for ways to narrow the gap by making the rich less rich, policymakers ought to instead be searching for ways to make the poor less poor. Alarmingly then, official policy seems to be having the opposite effect.

Did it ever occur to the left and centre that their beloved elastic (fiat) money system could be one of the chief causes of inequality?

It strikes me that the well-to-do are much more likely to own a significant amount of real assets than the average Joe Bloggs, whose savings (if he has any at all) are mostly in cash deposits. As we well know, cash deposits are at risk from the authorities’ policies of debasement, ostensibly enacted in the interests of society at large, and are prone to underperform every other major asset class over the long term. Successive bouts of inflationary activity serve to reallocate wealth from moneyholders (including the poor) to real-asset holders (mainly the rich). This asymmetrical relationship could easily be avoided through a return to honest money backed by gold, an environment that would foster secular deflation rather than inflation.

Contrary to popular opinion, a secular deflationary environment of this kind would not be the disaster the policymakers would like us to believe (Detlev Schlichter comprehensively dismantles this myth in the section of this article entitled ‘That old deflation chestnut again!’). Moneyholders could rest assured that the purchasing power of their holdings would rise rather than fall over time, whereas the prices of real assets would rise at a much more sedate pace than would be the case under a constantly expanding fiat money supply.

Of course, abolishing fiat money would mean renouncing a great deal of political leverage, and it is unlikely to be seriously considered in the absence of a catastrophic collapse in the confidence of paper money (although I note the latter has occurred from time to time).