Incentives, economic inequality and poverty

Welcome to Finance and Fury. Last week’s episode laid the ground work for how incentives work in relation to economic decision making – this week we will be looking at one aspect to expand on this topic – that is how our incentives to help others can be used against us – in the form of governmental policies around an equitable society – we will be looking at the current solutions to the problems of economic inequality and poverty and then some alternatives – this won’t be a popular episode with some – but it lays out an alternative – try to keep an open mind – how society currently functions is engrained into us – as it is all that we know so it can make it hard to contextualise alternatives

Economic inequality and poverty are two separate things – often conflated – but in Australia they are two separate statistical measures

1. When you hear the term ‘poverty’ in Aus – There is a large chance that it is referring to those who are below the poverty line – we don’t have extreme poverty – Centrelink payments like Age pension – close to $76 per day for single or $114 for a combined couple
   1. Australian Relative poverty rate – hovers around 14% of population (after taxes and transfers) – comes close to 26% prior to taxes and transfers
   2. Poverty line – measured by 50% of the median income – so take the middle-income and then halving it – as an example take the numbers 1 – 5: middle point (median) 3
      1. Halve 1.5 – so 1.5 would be the poverty measure
   3. What is the line in Australia? – disposable income of less than $445 per week for a single adult as of 2020 – $23,166 p.a. – equivalent of working 21 hours a week at minimum wage
      1. Does this income make you poor? If you are a student working part time earning less – may be considered below the poverty line – but it doesn’t mean that you will always be
      2. there is a difference between being considered poor statistically and actually being poor
   4. These groups are not static – a starting salary is of a 21 yo entering an industry is going to be lower than someone who is in their 60s with 40 years of experience
2. Inequality is measures by the Gini coefficient – 0 has complete equality in incomes – 1 has complete inequality.
3. Aus (disposable household income) – Gini Today – 0.352 – After redistributions – 0.22 – that is very equal
   1. Some are Concerned that this is Increasing – the Gini coefficient in 1980 was 0.2 – 0.309 in 1995, 0.334 in 2010 –
   2. What else is increasing – Overall wealth! Absolute poverty has dropped
   3. Again, These groups are not static – and with freedom of choice, there can never be equality
4. The current Solution to these statistical measurements is Income distribution – Is this solving the problem? Or simply equalising incomes to make the statistics look better? Because the ways these are measures, you will always have people below the poverty line or income inequality – the average incomes could be $1m, and say the median is $800k – then the poverty line would be $400k, anyone below this would be considered in need by governmental policy – even if the welfare payments were $390k p.a.

Instead of simply looking at income redistribution – what is an alternative – the works of Dr Phil Bartle – trained in economics, sociology and anthropology – writes about the big 5

1. spent a year living with poor people in dozens of countries in Africa (Ghana) and Asia
   1. dedicated his life to development – learned that much of our aid contributed to poverty, making recipients dependent upon handouts, and encouraging government officials to become corrupt
   2. He helped develop an “Empowerment Methodology”
   3. transfer of funds – even if it is to the victims of poverty, will not eradicate or reduce poverty
   4. merely alleviate the symptoms of poverty in the short run but not a durable solution
   5. Long term solution is the removal of the big five factors of poverty.
2. Lack of Knowledge: Lack of this creates lack of skills – education is very important – but the right education and training
   1. This is one of the leading causes as the only way out of poverty is earning an income
3. Disease: When a community has a high disease rate, absenteeism is high, productivity is low, and less wealth is created. Access to safe and clean drinking water, separation of sanitation from the water supply, knowledge of hygiene and disease prevention ─
   1. Not just clinics, doctors and drugs – costly solutions rather than prevention against disease
   2. healthy population contributes to the eradication of poverty – prevention is more important long term than treating symptoms
4. Apathy: people do not care, or feel so powerless that they do not try to change things or to improve conditions
   1. What the narrative that people are in poverty due to being oppressed/someone taking things from them is dangerous. Keeps people from trying – no point in trying if the deck is stacked against you
5. Corruption/Authoritarianism: resources are diverted into the private pockets of someone in a position of power or the government has an increased level of central planning
   1. amount stolen from the public, that is received and enjoyed by the individual, is far less than the decrease in wealth that was intended for the public
   2. The amount of money that is extorted or embezzled is not the amount of lowering of wealth to the community.
   3. Economists tell of the “multiplier effect.” Where new wealth is invested, the positive effect on the economy is more than the amount created.
      1. Example – When a Government official takes a 100-dollar bribe, social investment is decreased by as much as a 400 dollar decrease in the wealth of the society
   4. Not just official’s theft – Taxation as well to fund the political class
   5. Diverts resources away from productive side into reimbursements for their costs and non-productive salaries
   6. The more that is extracted from the population, the more does not contribute to the multiplier effect as it doesn’t go directly back into the economy – ‘investing’ in lower productivity – measurement of output per $
6. Dependency: Dependency results from receiving welfare – short run, as after a disaster, that charity may be essential for survival.
   1. long run that charity can contribute to the possibility of ongoing poverty.
   2. Having welfare shifts the Attitude – shared belief is the biggest self-justifying factor to create the situation of self or group depending on outside help
      1. Dr Phil Bartle – ‘All too often, when a project is aimed at promoting self reliance, the recipients, until their awareness is raised, expect, assume and hope that the project is coming just to provide resources for installing a facility or service in the community.’ – Once they know what they need to do and can do it, they can get out
   3. Empowerment of the people is an alternative to giving charity (which weakens)
   4. provides assistance, capital and training aimed at low income communities identifying their own resources and taking control of their own development –becoming empowered.
   5. If dependent on welfare – then you will always be in poverty – creates reliance on system – Welfare keeps people around the poverty line – with the way it is measured
   6. Doesn’t empower – need a system to help people help themselves

The incentive of society is to not have people struggle – nobody wants to see people in need and not have assistance – but welfare is seen as a solution – so at the policy level, what is the alternative?

1. I will admit that this is not a popular thing to say –in its current state, especially in Australia, welfare is at the cost of the working class to those of the non-working class – through a shift of taxation revenues – breeds a system of dependency on both sides
   1. This entitlement I believe has changed the national mentality over the last 100 years – age pension was introduced in 1900 – but the eligibility was almost the same as today, at 65 years old – and set at 23 pounds per year – in 2023 dollars, this is the equivalent of $3,652 p.a. – instead the actual pension is around $28k for an individual
      1. with no entitlements, people had to save for their own futures – just look at other nations around the world – Australia has one of the most generous welfare schemes in the world – the mentality in many other nations is not only to have lower expectations on their means in retirement, but also realise that there is no real retirement and that they may have to continue working to generate an income – this all influences how individuals behave
   2. If it is there – people will use it – costs have increased over the years – who can blame them
2. Looking at some numbers
   1. $160bn in spending in 2023 FY – increasing to over $180bn by 2026 FY
   2. Total tax revenues are $680bn across all levels of government – over the past decade this has also increased
      5. $414bn to $680bn in just under 10 years – annual growth rate of 5.7% – outpacing GDP growth
      6. $550bn of that is the Federal government – Income tax is around $242bn – so just looking at income tax, social security payments equate to around 66% of income tax collected
   3. Imagine a world where income tax is 66% lower – you have additional options – The average salary in Australia is around $90k – with around $21,500 of tax paid – $68,500 net. Instead, say that the tax paid fell to $7k per year – you have an additional $14,400 per year to put towards your own retirement goals
   4. Will everyone do this? No, but it is a choice – and one people would be more incentivised to take if there was no safety net in retirement – superannuation helps with this – but rather than promote, governments keep limiting the benefits of this system
3. Looking further at the Welfare state – Imagine at a world without social security – or Centrelink payments –
   1. Without any government support – What is your retirement plan – either save for yourself, or your kids would take care of you
   2. What does this do to incentives – parents want their kids to stay in the house – be on good terms and to take good care of their kids
   3. Unemployment – Social services – or disability – local community or religious groups would take care of those in need
      1. Donations to church and religious organisations to help those in need – This wasn’t a blanket handout – the fundamental reason that religions received a taxed exempt status, dating back hundreds of years was due to the charitable works that they did
      2. Society has found a way to solve its own problems for hundreds of years – but when a higher power comes in, it skews the natural incentives of people – through providing the alternative at the costs of the working class to fund their own retirements or give back to the community through higher taxation

Humanity was born into poverty – looking at how we got out of it is important – not through redistribution

1. Go back 800 years (not that long ago) – Vast majority of people were in poverty
2. Go back 10,000 years – everyone was likely in poverty – especially with how we measure it today
3. Even 200 years ago – 1820 – 1.08bn people – 117m not in extreme poverty – 90% are
4. Extreme poverty $1.9USD p.d.p.p –
   2. 1950s: 2.5bn – 1.8bn in extreme poverty – 700m not
   3. 1970 – 3.7bn, 1.5bn not while 2.2bn are in extreme poverty
   4. Today – 7.5bn – 700m in extreme poverty – 6.8bn not – Over past 50 years extreme poverty levels dropped (as percentage of pop) by 85% –
5. What people think has happened – Surveys – believe extreme poverty has reduced,
   1. US, Canada – only 8%, UK 12%. Then 60% think poverty got worse
   2. Comes from the narrative that things aren’t as good as they are – due to inequality and relative poverty measurements
6. I don’t want to diminish those struggling – most people are dealt worse hands than others – but the current system is not a real solution – just one that masks the problem at the cost of the many
7. Government promises to solve a problem – people believe and give power at either their own detriment, or the detriment of others – this really does show the natural incentive for individuals to act in their own self interest – in a democracy, if the majority can vote for additional welfare payments from the working class, they are acting in their own self interest, at the detriment of the minority who are working – around 37% of Australia’s population are working full time, when including part time, this is around 50% – granted, that this includes children below the working age population, but it is an illustration of where democratic rule based around individual incentives that a government promises to provide can lead to – 30% are on social welfare payments
   1. Hard to attribute it all to government – as there is the human nature to be trusting to organisation we are conditioned to trust – and act in their own self interest based around what politicians promise

what a system should be built around to reduce poverty

1. Allows for the provision of infrastructure – mainly through legal protection – cooperation amongst citizens – ability
   1. lack of infrastructure – water, sanitation, roads, transportation, and communications
2. Cannot allow the population to become apathetic or dependent – teach reliance – encourage taking care of one another
3. Poverty has been solved from the individual with freedom of choice
   1. lack of decision-making ability – On freedom index – personal freedom = income inequality plus poverty
      1. dictatorships or any authoritarian government = Poverty
      2. Also relates to poor leadership, bad governance
   2. If governments didn’t forcefully collect tax for redistribution – working age people would have additional choices on how to prepare for retirement through additional disposable income
4. will never be reduced real poverty using the 50% of median income measure – unless everyone is in poverty
   1. To put this into context, those in poverty in Australia would be upper-middle class in Mexico.
   2. Stop measuring poverty and mucking with policies – Best system – shut up and get out of way

https://www.aihw.gov.au/reports/australias-welfare/income-support

https://www.abs.gov.au/statistics/economy/government/taxation-revenue-australia/latest-release

https://www.aph.gov.au/About_Parliament/Parliamentary_departments/Parliamentary_Library/pubs/rp/BudgetReviewOctober202223/SocialWelfare#:~:text=The%20total%20expenditure%20of%20%24159.1,in%20the%20budget%20papers)%2C%20the