Tuesday, July 29, 2014

Holey poverty, Batman!

One interesting ramification of the Paul Ryan poverty plan is that you see liberals attacking the notion that social workers can help people out of poverty. In days gone by, this was the sort of thing conservatives did, but it's a strange world we live in.

Matt Bruenig, writing for the website Demos, has an interesting blog post attacking the idea that paternalism can reduce poverty. His argument is that because poverty is "structural," changing people's behavior won't reduce poverty rates. Bruenig explains the "structural" theory of poverty thus:
The right-wing view is that poverty is an individual phenomenon. On this view, people are in poverty because they are lazy, uneducated, ignorant, or otherwise inferior in some manner. If this theory were true, it would follow that impoverished people are basically the same people every year. And if that were true, we could whip poverty by helping that particular 15% of the population to figure things out and climb out of poverty... 
The left-wing view is that poverty is a structural phenomenon. On this view, people are in poverty because they find themselves in holes in the economic system that deliver them inadequate income. Because individual lives are dynamic, people don't sit in those holes forever. One year they are in a low-income hole, but the next year they've found a job or gotten a promotion, and aren't anymore. But that hole that they were in last year doesn't go away. Others inevitably find themselves in that hole because it is a persistent defect in the economic structure. It follows from this that impoverished people are not the same people every year. It follows further that the only way to reduce poverty is to alter the economic structure so as to reduce the number of low-income holes in it.
I myself have often wondered about topics like this. Personally, I heavily doubt that paternalistic behavioral interventions could eliminate most poverty. But still, I have some problems with Bruenig's analysis. Here are my issues, in no particular order:

1. Note that Bruenig's two explanations are not mutually exclusive. It could be part one and part the other. For example, take cancer risk. Cancer risk has a well-known behavioral component - if you smoke, you're much more likely to get cancer. Cancer also has a well-known "structural" component - if you live near a toxic waste dump, you're more likely to get cancer. Cancer also has a random component, which is a theory of poverty that Bruenig did not mention. All of these stories about cancer risk are simultaneously true.

Bruenig, in his blog post, claims to demonstrate some structural reasons for poverty. Assuming that he succeeds in demonstrating this, why does that mean that individual behavior does not factor in poverty at all? That would be like saying that because toxic waste dumps cause cancer, that smoking does not. Which would make no sense. Bruenig does not show that "structural" factors quantitatively explain all of poverty. The particular "structural" factor he discusses - namely, life-cycle effects - explains at most a fraction of poverty. What about the rest? 

2. Next, there's the question of how to differentiate "structural" factors from "individual" behavior on a mass scale. Suppose everyone, acting independently and on their own, just stopped doing any sort of work. The entire world would instantly fall into poverty. But would that poverty be "structural" or "individual"? Note that if you're the one person who wants to work in a society of people who do no work at all, you're not going to be very productive, because you can't specialize. So in the case where no one works, no individual's behavior can hoist him or her out of poverty. So that's "structural", right? But if you simultaneously persuaded a large fraction of people to work, then large numbers of people would climb out of poverty. So is the poverty "individual"? To be honest, I'm not sure, since I don't think Bruenig has defined the terms as generally as he might have.

This is a technical/philosophical issue, but it's an illustration of how the distinction between "structural" and "behavioral" poverty can get very slippery in these discussions.

3. It occurs to me that if poverty is entirely "structural," then depending on who gets assigned to the poverty "holes", we might not care about poverty at all! For example, suppose that income depends only on age - for some reason, you make less when you're young, more when you're middle-aged, and less when you're old, but everyone who is the same age makes the same amount. In other words, suppose that the structural factor identified by Bruenig were 100% of the poverty story. In that case, we wouldn't really care about poverty, since people could just borrow when they're young, save when they're middle-aged, and then consume their savings when they're old, thus smoothing their consumption over their lifetime. Income inequality might be high, but consumption inequality would be low, and everyone would have plenty to eat at all times. So no biggie.

Or alternatively, suppose that income is completely random, but changes at a high frequency? Suppose that everyone is assigned to a random spot on the (fixed, structural) income distribution every year, but that your income one year doesn't affect your chances next year. In this case, people could just buy insurance from each other, and this would solve almost all of the entire problem, since people could then smooth their consumption over the years. Consumption inequality across the broad economy would be very low, and everyone would have plenty to eat. Again, no biggie.

So just showing that poverty is "structural" doesn't imply that we need government to plug the poverty "holes". In fact, it might imply the opposite. Bruenig's post sort of seems to suggest that poverty just a temporary phase of life, in which we all do our time and then escape. I think there's clear evidence that that's not the case, but if it were, it would seriously undermine liberals' case that poverty in America is a big problem.

In other words, I worry that Bruenig, in his zeal to strike down Paul Ryan's paternalistic ideas, might throw out the entire case for poverty reduction in the first place. 

4. Bruenig draws a general inference about the "structural-ness" of poverty that I believe is invalid. He asserts that since the set of poor people is always changing, and since individual behavior is fixed, poverty cannot be due to individual behavior. But the poverty line is just an arbitrary line. A family of 4 making $18,000 $24,000 in 2014 is not "poor" by the U.S. government's definition, but that sure doesn't sound like a lot of money. If random shocks (unemployment, health issues, family issues, etc.) push a bunch of people back and forth over this line, that will show up as a change in the set of poor people each year, but it won't necessarily make a difference in who is materially deprived.

When you ignore the line and look at the more general picture, you see that persistent, long-term inequality has increased in America. That is worrisome. The trend might be due to "structural" changes, and it might be due to large-scale changes in individual behavior. So although personally I predict that "structural" changes - especially globalization - have played a much bigger role than behavioral changes (i.e. family breakdown among uneducated Americans) in the recent increase in poverty, this cannot be proven just by observing that many people cross over the poverty line each year.

5. Bruenig also draws an inference about age and poverty that I believe is invalid. He notes that younger workers consistently get paid less than older ones, and assumes that this is a structural reason, unrelated to individual behavior. But what if workers simply learn as they work, increasing their productivity with experience? And suppose there were some interventions the government could do, early on, to give workers a skills boost before they even started? That paternalistic modification of individual behavior (on a mass scale) would compress the age-based income distribution, and allow young workers to get a head start.

We might even call such an intervention "public school."

In conclusion: I think Bruenig's heart is in the right place, and he raises some important issues. I agree partially with his conclusion (that behavioral interventions won't eliminate poverty), but not entirely (because I suspect they could do some real good, based on the example of public schools). And I think the evidence about "structural" vs. "individual" explanations is not so easily assessed as Bruenig asserts. It's not an open-and-shut case.


Bruenig responds at his blog. A couple points:
[Quantifying the structural causes of poverty] isn’t difficult for someone who is good with numbers, like Smith is. You can track certain categories like age (which nobody has control over) and see the same patterns year after year and country after country. Young adulthood, childhood, and old age show persistent market poverty spikes in every year and every country. Disability is the same way. Unemployment is the same as well, but people want to quibble over whether this is voluntary sometimes for whatever reason.
Actually, being good with numbers (actually I have software for that, but I appreciate the compliment) doesn't help one identify all the possible "structural" causes of poverty. Age won't account for all of poverty, as Bruenig's own graphs demonstrate. Observe:

As you can see from the y-axis, age doesn't explain the whole thing. (This is one of those graphs where the x-intercept is not set at zero.) Actually, this graph represents an upper bound on the amount of poverty that structural age-related factors can explain, since age may also be correlated with individual behavioral choices; when I was 23, I recall being distinctly interested in partying and trying new...experiences, and distinctly uninterested in doing any more work than I had to do in order to get by...

Unemployment is a biggie, and Bruenig is right that it's not clear how much is structural and how much is behavior-related. As in all these cases, the two can be intertwined (consider the case of youthful choices that screw you over later in life). But even without unemployment, there are a lot of people who just don't make much money, ever - whether or not they're above the official "poverty line". The paper I cited above on "persistent inequality" shows that pretty clearly.

Later, Bruenig catches a mistake of mine:
[$18,000] is actually [below the poverty line]. Well below the poverty line for a family of four, in fact.
Quite true; I was looking at the wrong number. The poverty line is $23,850 for a family of four in 2014. I have updated this in my post above. But the general point I was making is just as valid - you don't have to be below the poverty line to experience material deprivation.

More substantively, here's Bruenig talking about income fluctuations:
We care about poverty because having very little income is hard on you in the episodes where that is the case. It literally scrambles young children’s brains, for instance, fucking them up for the rest of their lives. One in four children in this country are born into it, and this is attributable to the structural problems families have in market systems (including that adding a child increases income needs but the market does not respond and that people make the least amount of money right at the same time they have kids). The existence of structural child poverty is not excused because, when children get to be middle-aged adults, they generally are not in poverty. You don’t eat food across the life-course. You eat it every day.
I think there's a problem here. It's not very little income that's hard on you, it's very little consumption. To understand the difference with a couple of examples, observe that A) many comfortably retired people have low income, but consume the principal of their retirement savings, and B) many children of rich families have zero income, but consume what their parents give them.

The more general point is that, theoretically, you can borrow to smooth consumption. In lean years, borrow money. In good years, save money. Then income fluctuations will not bother you much, and you will eat plenty of food every day! Of course in the real world, there are limits to how much you can borrow, how much you can save, and how much you can predict your future income - but economists find that "consumption smoothing", though not universal, is still very widespread across the economy.

So my main problem with Bruenig's argument is still that he seems to equate structural poverty with transitory poverty. Transitory poverty is not a big deal, because people can smooth their consumption. Intuitively, most liberals realize this - we worry about the poor people for whom poverty is not just a short-lived phase. We worry about the people who are mired in poverty. We don't worry about the entry-level worker who is just starting to climb the ladder. We don't worry about the well-off elderly couple who are spending their nest egg. If government poverty statistics call these people "poor", that's a problem with the government statistics, not with the structure of society. The people we want to help are the people who never (or almost never) manage to get ahead. I think Bruenig, in his zeal to demonstrate his idea, is in danger of forgetting that.


  1. Anonymous4:01 PM

    Not that it changes your argument, but I believe the poverty rate for a family of 4 is just under $24K.

  2. Yeah, that Bruenig post was borderline incoherent.

    When people worry about poverty, they are mostly not worried about some temporary low income spell caused by something like temporary unemployment. People can pretty much weather those by drawing on savings, family, credit, charities, even unemployment benefits or food stamps.

    Many of the "poverty" problems that really upset people most often don't even have much to do with consumption--they involve patterns of family instability, substance abuse, crime, mental illness, "bad" schools, etc.

    1. Anonymous2:35 PM

      Is there evidence to support your claims?

  3. "In this case, people could just buy insurance from each other, and this would solve almost all of the entire problem, since people could then smooth their consumption over the years."

    To me, this sounds like how firms work. I typically see the existence of firms explained in terms of increasing returns (not sure why this couldn't be done with freelance contracts) or reduced transaction costs (which I agree are important). But isn't the main advantage of working for someone else the steady paycheck? If workers are risk averse, they'd be willing to earn wages slightly less than the average freelance wage in order to reduce volatility, which leaves extra profit to be pocketed by the firm in exchange for absorbing the risk. With many employees in many specialized areas, the firm is somewhat diversified.

    Basically, firms are exactly the insurance you describe here.

  4. Anonymous7:06 PM

    Noah, I see you didn't link to your own article at Bloomberg, covering much the same topic. Oversight, or market segmentation?

  5. Dualistic thinkers often overlook the interaction term, which in some cases is the largest.

  6. Anonymous9:04 PM

    I think there is a real difference between social workers helping people and social workers holding the powers of the purse for poor people. It changes the relationship when the plan that somebody works out with a social worker is simply the ticket to a check as opposed to a real heartfelt effort.

    1. Anonymous9:06 PM

      I'll add that social work isn't paternalism in the latter case but certainly is in the former.

  7. For you individual argument to hold you have to invoke some kind of RBC-type argument - a whole bunch of people all of a sudden decided to become very poor when the aggregate level of poverty changes.

    That's pretty weird.

    Also, when looking at policy directed at reducing poverty the individual view is pretty much useless. Oh, people just felt like being poor this year so there's nothing we can do about it.

    You can, believe it or not, implement a political/institutional structure that basically eliminates poverty, regardless of individual decisions, by reallocating purchasing power in order to condense the lower part income distribution (even if you are using a relative income measure of poverty). Matt has many posts exploring this.

    If that is the case, the individual argument falls down somewhat. It merely become 'conditional on the structure, individual choices might matter'. Which is pretty obvious but doesn't tell us anything about what those choices are or why they are made, or what the choice set is (which is, again, conditional on the structure).

    Lastly, the age-poverty graph does not represent an upper bound on the structural argument. Maybe think about that some more.

  8. Anonymous5:48 AM

    Noah, your main problem with Bruenig's argument seems to be the Voldemort theory. I don't think you've said much in this post at all besides a weird devil's advocate "why should we care about poverty" when even Bruenig makes clear that certain concerns like child poverty are present, so you really sound like callously dismissing child poverty for some reason. I don't know if you're waiting to summon Steve Sailer to say something like poverty does not actually have such a negative affect on individuals because various groups of individuals are the way they are in the first place. That the children of impovershed parents aren't so negatively affected by environmental conditions but look bad on metrics because they are genetically inferior, but again, that's the Voldemort theory.

  9. Good post. Surely different individuals respond differently to different circumstances--hence, outcomes inevitably stem from a mix of individual characteristics and circumstances. Moreover, if the same sort of characteristics that help advantaged people realize their potential also help disadvantaged individuals escape grinding poverty (e.g., entrepreneurship in the immigrant community), then so much the better for those characteristics. The argument for ignoring or even discouraging those characteristics would have to be either (1) they have the opposite sign among the disadvantaged, or (2) they are immutable. I haven't seen any compelling evidence for (1) as a general proposition, and (2) is pretty hard to establish. Any given intervention will succeed or fail to change behavior along one or two dimensions, but the qualities that underpin success are high-dimensional, so unless you're an a priori pessimist, you have to wonder whether, e.g., work effort can be increased even if IQ or other measures cannot.

    1. There is, of course, the argument that in crime-heavy neighborhoods, entrepreneurial ambition often translates into becoming part of a gang or something. Does anyone really believe, though, that encouraging hard work and pursuit of success would lead to more crime in such neighborhoods? Maybe, but I'd like to see the evidence.

  10. I find for "structural" poverty -- a.k.a. known in the real world as the lost-the-race-to-the-bottom American labor:

    If fast food prices were cut in half today, most people would not purchase any more burgers. How many can they (we) eat?

    We do not know how far below most people's "maximum buy line" burger prices have sunk during decades of down-drifting minimum wages -- plausibly meaning today's prices could rise 25% higher and people might buy just as many; 50% might cut into business. We DO know today's minimum wage is $3.50 an hour below what it was in 1968 -- we DO know per capita income has near doubled over the same time frame. It is perfectly plausible that fast food prices began dropping deeper and deeper below the "maximum buy line" decades ago!

    Look at Wal-Mart: 7% labor costs. DOUBLE Wal-Mart's average wages ($10 to $20 an hour) and ADD health benefits, paid vacations, etc., and prices might go up 10% (7% + 3%?). If Jimmy Hoffa's Teamsters were in there that would have occasioned long ago.

    Look at most of the Americans you meet working on less than specific training required jobs (like x-ray tech): they are embarrassed. They are earning $400-$500 a week. $500 is today's median wage.

    Look at the official federal poverty line: 3 X the price of an emergency diet (dried beans only please; no expensive canned) -- a formula from the mid-fifties = $20,000 poverty line for family of three ($400 a week). Realistic minimum needs line based on table 3-2, p. 44 (after adjusting for inflation) in the MS Foundation book Raise the Floor works out to more like $50,000 a year for family of three if it has to pay its own medical insurance ($1,000 a week!). HALF OF AMERICANS NOW WORK FOR HALF THAT POVERTY LINE OR LESS!

  11. Assume life is a casino (but one where the house subsidizes winnings, rather than taking a cut).

    The only way anyone makes money is by betting -- betting their time, their choices, their investments, etc. Smarter, more skillful, more knowledgeable players get somewhat more (they play blackjack and count cards instead of playing roulette).

    Now suppose two different odds setups -- A. one in which a few get bigger wins and the rest get not much, B. another in which winnings are more widespread.

    In the former system, for purely structural reasons, many have little.

    If one of those people makes a big win, that isn't the cause of others having less. That win, and others having less, are both just results of the structural setup.

    Likewise, someone climbing out of poverty doesn't cause others to fall in. But the structural setup guarantees that a certain percentage will fall in.

    If you want to reduce the number of people that fall into deep holes, change the odds setup to make the holes smaller and shallower.

  12. To add:

    If we assume that the distribution of winnings in blackjack is the same as in roulette, teaching people to count cards in blackjack will have no effect on the percent of people who fall into holes.

  13. FWIW, the "structural" vs. "individual" argument about poverty goes back more than 40 years (see Frances Fox Piven and Richard Cloward, Blaming the Victim for an example of a structuralist argument). In fact, I would argue that a consistent strand of conservative/libertarian writing about poverty is to place responsibility for being poor on the poor.

    The problem is, of course, that causation may not be solely structural or solely individual, that structural forces may lead to individual adaptations that reinforce the structural forces, and so on. (I'm *mostly* on the structural side of this debate, though.)

  14. I find it very weird that this whole discussion appears to find it natural to talk about behavioural versus structural components in persistent poverty in the US without mentioning racism. But maybe that's just because I'm not American. Is this normal?

    1. Anonymous2:46 AM

      The fact that you're not American and might not be a native English speaker excuses you for seeming like you can't read, can't even read a few dozen words in other comments.

      Noah might be willfully ignoring race as an issue here, but that is not true of everyone.

    2. There's no mention of racism as a structural factor in the prior comments AFAICS. Anyway, on reflection it's probably more of an economist perspective thing than specifically American.

    3. Adam Posen making the same point in the FT - http://www.ft.com/intl/cms/s/0/b46a586e-1be6-11e4-9db1-00144feabdc0.html#axzz39WKo2sQw

  15. It's definitely a problem when these two views are set up as diametrically opposed. Obviously, individual level differences have some impact as do structural factors.

    However, I do think it is correct to say that the actual level of poverty is set by structural forces, there is no reason to believe that the incidence of individual level traits varies highly between countries (or US states) yet the poverty rate varies a great deal. Structural factors seem to impact how many individuals with which traits (while I've never seen a study that looked at this, it seems likely that different policy regimes will have differing impacts on individuals with different sets of traits meaning that policy is determining not just the level of poverty but also which distinct sets of individuals are experiencing poverty). Thus, I think it is best for policy to focus on structural factors, though in thinking about these problems it is necessary to think about individual level traits as well. Once we get poverty to the levels experienced in the Scandinavian countries then thinking about individual level traits might make sense, but that's a much more difficult task and we're not even close to being there.

    Regarding Paul Ryan's plan, the main thing it reminded me of was the old moral provisions in the AFDC program; rather than modern social workers. I remember in Losing Ground (not recommended other than for historical interest) Charles Murray wrote approvingly of AFDC's midnight raids. Unfortunately, a more accurate description of this is that these "moral" policies did far more to undermine family policy rather than reinforce it. After all, if welfare bureaucrats are raiding your house at midnight looking for a man, it is much harder to develop a stable cohabiting relationship with a partner. This sort of policy was likely a factor in normalizing single parent families with children from multiple fathers, the opposite of the intended effect. This is just one example, but given everything else I've read by Ryan I have no reason to think that his 21st century paternalism will be any better than that of the 1950s. This is not the same thing as modern social work; it's a major step back.

  16. Noah, I'd argue public schooling is a structural as opposed to behavioral fix. Attempting to invest equally in everyone regardless of their current level of poverty is structural.

    Targeted interventions for low achievers would be individual, and surprise, those sometimes can't overcome the other structural issues causing the poverty.

  17. When one is working in a job that pays barely above poverty level, one more than likely is in a dead-end job; flipping burgers, piece-meal work, or doing seasonal work. There is no uplift here and a single misstep can be abyss. And, this does not count those who are already below the poverty level.

    Noah, I propose that you do a financial model (in %ages if you like) taking your income (100%) and how your expenses are again in %ages. Now do a simple sensitivity analysis, like your medical expenses doubled; etc. The real fun begins when your income goes to zero and you have start depleting your resources and you start sliding downhill with abyss looming bigger and bigger. Now do the same modeling at poverty level of income...

    Much of the structural poverty is reinforced by poor diet, health and the worst is poor mental health.

    By the way, most of us who are making out OK will only talk about this and do nothing. Inflation in food, housing and transport is back breaking for the poor; while we only bitch about it.

  18. Does it really matter to what extent poverty is behavioral or structural? If the immiseration of a few makes everyone less secure then maybe it is everyones concern.

  19. Very smart post, your best in a while.

    * For many people in poverty, borrowing to smooth consumption is not available, restricted, or expensive, for one reason or another. People with low incomes have a higher income uncertainty, and income uncertainty is a key input into credit pricing. Borrowing to buy a for example car is expensive. So, if you lose your job, can't pay the mortgage, your credit score is damaged, and borrowing will be expensive. Credit scoring models tend to be backward looking as well, so lending standards themselves tend to be pro-cyclical. So, when unemployment is high, transitory poverty rises, and its much harder to borrow your way out. This also runs square into financial regulation and desires to crackdown on "subprime" lending.

    * Some "structural" factors are also "individual behavior" in the sense that they stem from deep seated cultural issues. This is sort of #2, but a little different. There is a strong subculture that distrusts banks, for example, leading to the widespread use of expensive pay-day lending. One person's "education" is another's "indoctrination," but it still should be recognized.

    * I think that structural changes - especially globalization - may have made US inequality worse, but that is not necessarily bad, because we have made global inequality better. The world is a safer place because China makes our IPads and IPhones. It has exposed cracks in our education system, because people cannot just drop out of school for the steel mill job anymore. We just need to do a better job getting people into 21st century jobs.

    1. How much does access to borrowing in order to smooth consumption really matter? Housing, about 35% of the consumption budget; transportation, about 15%; insurance etc, about another 10%. Given that people generally borrow money for cars, houses, and "insurance" is really a financing activity itself, 60% of the typical consumption budget is smoothed by borrowing. Then there is secondary education and health care.

      That's a lot of consumption that cannot be smoothed if your credit score declines due to transitory poverty (yes, credit score can determine insurance rates too).

  20. First, I do know why you spent so much time discussing a post by someone named Bruenig.

    Second, it is interesting that liberals like the Scandinavian model, except when it is adopted by conservatives. Both Sweden and Denmark assign social workers to work with the unemployed and I do not see why this cannot be extended to the poor in general. Rich folks often turn to "life coaches" for help. Poor folks cannot afford to do so, so I do not see what is paternalistic about showing some interest in their lives rather than handing them a stack of dollars and asking them to come back next month.