Breaking the poverty trap

It’s expensive to be poor…

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This blog was inspired by a recent piece in the Dominion Post featuring work by Sam Orchard and other artists.  They had collected stories, initially among themselves, and then from 200+ welfare beneficiaries, about their experiences.  They added artwork, then presented them at Christmas as a report to Members of Parliament, along with recommendations for improvement.  The three illustrations in this blog are from their report, and you can read more on their Facebook and Twitter pages.

The DomPost article focussed on one aspect of the report, the “high cost of poverty”.  This blog expands on that aspect, finishing with some of the solutions that are in plain sight.

There are still some in New Zealand who believe that people who are not in full-time paid work, and receive some sort of assistance from the State, are “bludgers” – people who live an easy life at the expense of others.  Of course there will always be some who game the system – who manage to make a comfortable lifestyle from State support plus income from other sources.

But the vast majority of people who receive State support are desperately struggling financially – as are many in low paid or occasional work near or just above benefits thresholds.

And one cause of their struggles is that it is expensive to be poor.  Some of the reasons highlighted in the article are:

  • Housing costs go up much faster than benefit levels;
  • Rental insurance, and moving between rental accommodations, add costs;
  • Poor quality housing leads to health issues and costs;
  • Short term borrowing is very expensive, and penalty fees are also frequent, eg for late payments;
  • Discounts available to the cash rich, such as bulk-buying of food and prompt payment of power bills, are not available to the cash poor;
  • Any additional income is likely to be subject to very high marginal tax (or benefit reduction) rates, meaning a lot of work is needed to bring in very little supplementary income;
  • Transport costs can be higher, from living in more remote, less desirable areas.

An underlying lesson is that the wealthier you are, the better access you have to cheaper goods and services.  Cheaper money, bulk discounts, power to negotiate lower prices – these are real benefits not available to the poor.

The “poverty trap” is usually described as being about the difficulty of increasing income: “a situation in which an increase in someone’s income is offset by a consequent loss of state benefits, leaving them no better off.”  .  But the trap is more than that, as illustrated above – it is also a situation in which the poor have less access to goods and services, because it is expensive to be poor…

…and there are few safety nets

Income and expenses are only one side of the story.  The other is wealth.  Or, to be precise, lack of wealth.  Having little in savings or other financial resources, the poor are far more at risk when unexpected costs arise.  If they can find emergency funds, these are usually expensive, and simply compound the long term lack of financial resources.  They lack financial resilience.

The Treasury made much of the fact that, during the Global Financial Crisis, the top two income deciles in New Zealand lost a greater proportion of their wealth than the lower deciles.  What this meant was that they lost their holiday homes, or their yachts, or part of the value of their share portfolios.

The poor lost little because they had little to lose – unless they had been lucky enough to gain some equity in a home.  In this case, many of them lost everything.  In the United States, over 3 million families lost their homes to foreclosure as a result of the Crisis.  New Zealand was less affected, but mortgagee home sales more than trebled in its aftermath.

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As illustrated above, in our affluent world, poverty means having to wear 15 year-old underwear, not just missing out on the daily latte.  It means struggling with the State bureaucracy to access resources for emergencies, not having to forgo your annual overseas holiday.  It means poorer physical and mental health, often reducing or even excluding you from normal social engagement, not having to take time off work to recover from a sports injury.

Wealth creates wealth.  If you have savings, they grow.  If you are in work, and contributing to KiwiSaver, the government will supplement your savings.

And great wealth creates even greater wealth, as Thomas Piketty vividly illustrates in “Capital in the 21st Century” .  He shows how wealth accumulates in higher proportions for the already wealthy.  According to Oxfam’s latest (2018) report, 82% of new wealth created in 2017 went to the top 1% while nothing went to the bottom 50%.   This new wealth would have been “enough to end extreme poverty seven times over”.

If you’re poor, you have no financial safety nets.  You have no capacity to invest and generate wealth.  You must break out in other ways.

And our economy is designed precisely to make this hard for you.  Lower skilled (and increasingly, middle-skilled) paid work is becoming a privilege, not a right, as more and more work is automated.  Wages continue to reduce relative to productivity, as work is offshored to lower cost countries.  Social safety nets continue to erode, as taxes and the public sector downsize.

The true “poverty trap” is the fact that our system is designed to funnel income and wealth up to the already wealthy, not down to the relatively poor.

But there are solutions in plain sight

As hinted above, major structural issues need to be addressed if we are to break the poverty trap.  But there are plenty of short term workarounds too – all in play at some levels in some communities.  And both the short term and the long term solutions are in plain sight.

Community-led coping

One of the myths of our current system is that the poor can’t be trusted to look after themselves.  We wise ones in the government must design solutions and contract others to deliver them.  The reality is that the best solutions are driven by those in the communities experiencing the issues.  They are well equipped to develop solutions, as they understand the complex underlying issues, and can address them in ways which fit the situation.  Time and again, cut and paste central solutions fail.

Locally and lately, I have seen from the edges amazing work being done by local communities in such areas as P-addiction, debt-reduction, and food self-sufficiency.  And there are hundreds of similar projects being undertaken in similar communities round New Zealand, all on shoe-strings.

What the centre can do best is provide support in forms that fit the needs of the communities – this might include financial and communications support, and access to specific skills on demand, for example.  Our Ministry of Social Development is just starting a nation-wide initiative called “The Generator”, which appears to understand this to some extent, but also appears to have some elements of the “we know best” curse about it.  Hopefully it will build into a proper support system for true community-led coping, and even for informing the centre on how to be more effective.

Income equalisation

Or, more accurately, income re-equalisation.  Forty years ago, New Zealand had one of the most equal income systems in the world.  There was little unemployment, blue collar and white collar workers all earned a living wage at least, and the income steps up the ladder of seniority were relatively small.  There were anomalies (for example, male-dominated professions earned more than female-dominated), but overall there was a high degree of income equality.

The changes of the last forty years have brought higher unemployment, rapid reductions in real wages at lower levels, and higher and higher salary levels at the top.  In New Zealand, average real wages fell by 40% compared to productivity increases over thirty years from the mid-1980s, and similar patterns were seen across the OECD.  Meanwhile, top-earners’ incomes increased, and top tax rates fell.  Lower income earners started to struggle, while the income gap to higher income earners widened.

The structural requirements are to set a minimum living wage for ALL adult citizens (such as a “Universal Basic Income” – UBI), to radically restrengthen the bargaining powers of workers, and to re-introduce more progressive tax regimes for higher earners, to make it them rather than the poor who profit only minimally from salary increases.

A true Universal Basic Income would ensure that all had enough income to survive, and eliminate the stigma and complexity of the “beneficiaries” system.  Just as Universal Superannuation has to all intents eliminated aged poverty in New Zealand, a UBI would go a long way to eliminating all poverty.  It is now being trialled in various parts of the world, and at least talked about in New Zealand by the current Government.

Stronger unions and workers’ rights would see wage workers again taking a higher proportion of productivity gains.  Longer term, replacing the current corporate models with cooperative systems of production would accelerate this re-equalisation of income.

(As an aside, the way paid work is currently allocated, organised and rewarded is insane, and needs radical redesign – more on this in a future blog.)

Wealth redistribution

Wealth is created by community endeavour.  The current myth, that it is created by the individual genius of those who have accumulated it, flies in the face of two obvious facts.  First, each contributor is standing on the shoulders of those before and around them, and makes only an incremental contribution; and second, most personal wealth has been not created but stolen from the common pool through gaming the system (for example through rent-seeking or financial gaming) or through inheritance.

Wealth belongs to the community as a whole, not to the small and decreasing number of people who currently hold it.  According to the Oxfam report, just 42 people now have as much wealth as the bottom 50% combined (3.6 billion people).  Wealth needs to be redistributed.

To do this, tax systems which have been gutted in the affluent world over the last thirty years need to be radically restrengthened.  More progressive income taxes, taxes on wealth and on income through capital gains, and substantial inheritance taxes – all are obvious and equitable ways to redistribute wealth through the common pool.

Most moves being made internationally at the moment are to ensure that the wealthy (and particularly corporations) pay their fair share of taxes due on the current basis, by eliminating tax havens and other tax avoidance schemes.  This, if successful, will certainly return more wealth to the common pool.  But it will not reverse the erosion of public wealth and income which has happened over the last thirty years.

(As another aside, the speculative nature of the housing market has severely eroded the fundamental human right of adequate housing in favour of gambling for capital gains, and also needs radical redesign – more on this in a future blog.)

Are these solutions all just fantasies?

No, they are a matter of mass pressure and political courage.  We are now being regularly reminded that the current power structures have fragilities that can be exploited.  Corporations live in fear of consumer boycotts, politicians live in fear of mass resistance – and powerful men are finally living in fear of being called out for abuses of power in relation to exploitation of women.  There is no reason that any or all of the above solutions shouldn’t be forced through, and in fairly short spaces of time.  We just need the courage to join together and act.

The current capitalist system is well past its use-by date – the abuses of people and the environment it has fostered now far outweigh any benefits of commoditisation or efficiency that it has provided.  It has become, inevitably, a system primarily focussed on passing wealth upwards.  This has driven increased numbers of people in the affluent world into poverty, causing them harm, and also damaging their potential to contribute.

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The main cause of poverty in the current system is wealth (or more precisely, its distribution).  And the poverty trap can easily be broken by our acknowledging this simple fact, joining together, and acting on it.


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