‘Poverty’ Calls For Precision

Commentary, Poverty, Frontier Centre

Any anti-poverty initiative, systematic or not, is a worthy one. For individuals to be deprived of the basic necessities of life is tragic, especially in a land as prosperous as ours. Further, that the young – the future generation – are subjected to the effects of poverty is especially tragic.

Mike Sharp plays the clarinet on King Square North in November, 2009. He said that welfare covers his rent, but he needs to play to earn money for anything else. The question of how to define poverty is one that has dogged policymakers.

What is needed in the study and debate of poverty, however, is some perspective and precision. The term poverty evokes poignant images in our minds. I spent a week in Juarez, Mexico in 2004, at times visiting some of the most impoverished areas of the city. Poverty was clear, with the "homes" of some families constructed of chicken wire, cardboard, and tin. I was impacted by what I saw there, in turn finding myself more thankful for the provision and opportunities here at home.

While it’s true that deprivation exists throughout the world, some clear thinking on this emotional issue is required.

Any program or initiative must have a clearly defined problem it intends to solve. Anything less risks squandering scarce resources, including those of people’s time, interests and energy.

The Economic and Social Inclusion Corporation, created by the provincial government to reduce poverty in the province, states, "No matter how poverty is defined, it can be agreed that it is an issue that requires everyone’s attention." To downplay the importance of precisely defining the problem indicates analysis of the issue may be lacking.

The problem with estimates of poverty in Canada is that the measures most frequently used fail to exclusively capture those who truly live in poverty. They also capture those whose income lags the average income by a predetermined degree. Statistics Canada’s Low Income Cut-off (LICO), which it insists was not designed to measure poverty, is one measure often used.

Proponents of LICO as a measure of poverty consider those who spend a minimum 70 per cent of after-tax income on clothing, food, and shelter to be living in poverty (linked to the average of 50 per cent). A variation of this approach considers individuals and families with incomes below one-half of the average income to be living in poverty.

The main problem with using such methodologies is that increases in income are detached from changes in costs of purchasing necessary goods and services. As a result, individuals could remain "impoverished" despite an income that exceeds what is required to cover the increased cost of necessities. In looking at the statistics cited in the government documentation, and given my familiarity with the literature on poverty, it’s safe to say that government estimates of poverty are based one of these types of measures.

Against the backdrop of the 2003 to 2007 period – during which the median annual income in New Brunswick increased by 20 per cent, from $20,300 to $24,270, and cost of living in the province as measured by the consumer price index (CPI) increased by 7.6 per cent – the flaw in the methodology is exposed.

Using the Low Income Cut-off, consider two individuals – one representing average after-tax income of $28,500 and one with $20,000. Assuming annual food, clothing, and shelter costs of $14,250 at the start of this period, individual one spends 50 per cent of after-tax income on necessities; individual two spends 71 per cent, and is thereby considered to be living in poverty.

If individual one’s after-tax income rises by $7,000 and individual two’s by $4,000, the 20-per-cent gap is intact. Individual one now spends 43 per cent of after-tax income on necessities and individual two spends 64 per cent. Individual two remains "in poverty," despite the fact that he has an additional $4,000 to spend on basic needs, which have increased by only $1,083 (the 7.6 per cent increase in CPI).

It is difficult to accept that as a credible measure of poverty.

The poverty initiative is also called into question by its use of the minimum wage. The initiative includes a significant increase in the minimum wage as a tool to fight poverty. The current minimum wage in New Brunswick is $8.50 per hour, equivalent to annual earnings of $15,470 for a full-time worker. Under the current tax structure, however, this worker pays $303 in income tax, or 2 per cent of gross earnings. Increasing that minimum wage to $9 hour (set to occur September 2010), although increasing after-tax income, also increases the tax bill for the worker to $673, or 4.1 per cent of the new gross earnings of $16,380. How does government reconcile that those earning minimum wage must pay tax? Paradoxes such as this provide a weak foundation for policy action. Eliminating the tax burden for these individuals would be a more sensible step toward poverty reduction.

A more credible gauge of poverty is the ability of individuals and families to pay for goods and services without which they would truly be impoverished. I was fortunate to have the opportunity to contribute as a research assistant to Dr. Christopher Sarlo’s study Measuring Poverty in Canada (which can be found at www.fraserinstitute.org). The study is a comprehensive, pan-Canadian study of poverty that itemizes the costs of necessities such as clothing, shelter, food, public transportation, health care, and other personal needs.

Poverty lines by province and by family size were established for the year 2000, and can easily be made current using the CPI. Those with after-tax incomes below the costs of basic necessities are considered to be living in poverty.

Enlarging government – by creating a Crown corporation – to solve the problem of poverty is questionable. Poverty in Canada, using the basic needs measure, had decreased from around 40 per cent in the early 1950s to below 10 per cent by the 1980s. Most of the decline occurred prior to the big increases in government social spending. Looking internationally, in The End of Poverty, Jeffrey Sachs outlines how what he terms extreme poverty has reduced significantly in east and south Asian economies in the last 30 years as these economies have embraced freer markets and globalization.

New Brunswick can learn from the poverty-alleviating potential in smaller government.

The corporation has set out to reduce poverty by 25 per cent by 2015. Achieving that goal would be tremendous – provided it knows precisely what it is measuring.