The Politics of Envy:
An International Phenomenon
by Helen Hughes
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The ÔPolitics of EnvyÕ in the Winter 2001 issue of Policy,1 together with work by Kayoko Tsumori, Peter Saunders and Helen Hughes,2 questioned the validity of estimates that showed some 12% of Australians living in poverty (rather than the 5% I estimated), and the claim that poverty was increasing. The CIS work led to a vigorous and informative public debate about the meaning, extent of and trends in poverty in Australia. Three newspapersÑThe Australian, The Age and The Canberra TimesÑand many participants in the debate agreed with our critique, concurring that exaggerating the extent of poverty made it more difficult to help the poor people still present in our society.

One of our principal arguments against the high estimates of poverty was the use of ABS income surveys to measure poverty. Following Graeme DorranceÕs paper on estimates of income and expenditure distribution,3 we argued that the lowest quintile of the income survey data was understated. Income receipts were not recorded accurately. I noted, in particular, that the income survey data suggested that many people were not accessing their welfare entitlements and that this was not borne out by welfare distribution data. Income survey data did not include a number of income sources, including severance and similar payments, and gravely understated Ôblack economyÕ income. These omissions were corroborated by a comparison of income with expenditure surveys, although the latter was also understated (for example, for alcohol, tobacco and gambling where household expenditures can be checked against tax receipts). Such comparisons suggest that the expenditure-based work of Garry Barrett, Thomas Crossley and Christopher Worswick,4 which concluded that inequality did not increase at least to the early 1990s, is preferable to poverty trends based on faulty income surveys.

The movement of households into and out of poverty, revealed in longitudinal studies, is of course another reason why the low income survey data are inaccurate and expenditure data are greatly to be preferred.

The Australian Bureau of Statistics (ABS) has been busy since last WinterÕs issue of Policy. Dennis Trewin, the Commonwealth Statistician writes in Measuring AustraliaÕs Progress (page 40), with reference to new estimates of disposable income trends:

The headline indicator presented here focuses on changes in the average disposable (after tax) income of households close to the bottom of the income distribution (namely, the 20% of households in the second and third lowest income deciles). The lowest 10% have been excluded from the measure because of concerns with the fact that the extremely low incomes (close to nil and sometimes negative) recorded for some households in this group do not accurately reflect their living standards.5

Notes on page 52 add

The value of goods and services consumed by such households (sometimes supported by borrowings or the sale of assets) is often as high, or higher than that of households in slightly higher income groups. If households with very low recorded incomes had been included this would have substantially lowered the average income values in a way that gave a misleading impression of the economic wellbeing of the most disadvantaged households.

Trewin concludes:

The close to uniform changes in the equivalised disposable income of households with low, middle and high incomes suggests that there has been little change in the income gaps between households.

Income distribution issues have been taken further by the ABS in Australian Economic Indicators (April 2002).6 On page 7, the ABS notes that:

It has been identified that the 1998-1999 HES income results understate the measurement of welfare income in the two lowest income quintiles . . . it is estimated that the combined impact of the corrections will result in the mean income of the lowest quintile being revised upwards by about 11%.

The ABS gives an additional reason why the data suggesting that there has been an increase in poverty are unreliable. Its Australian Economic Indicators (March 2002) reports on page 4:

Commencing with the 1994-1995 Survey of Income and Housing Costs (SIHC), survey field procedures were changed from those that had applied in the 1980s. An unintended consequence of these changes was the discontinuation of written advice to relevant households to have on hand, for their income distribution survey interview, all relevant documents (tax returns, pay slips etc) both to simplify and speed up interviews and to improve the accuracy of answers about income values. The use of records to support households in answering interview questions declined, and consequently the quality of responses declined. Commencing with the 2002-2003 SIHC, prior written advice is once again being supplied to all households selected for SIHC interviews so that they can be prepared with the appropriate documentation at interview.

In other words, a deterioration of relative income for the bottom quintile in the 1990s is likely to be the result of the deterioration of income survey practices.

The ABS corrections thus far still do not account for unreported income such as leave and redundancy entitlements and Ôblack incomeÕ, but more corrections are in train. Analysts, in any case, are better advised to use expenditure that reflects consumption levels than income data, though expenditure data are also underestimated.

An international dimension

These overestimations of poverty are not unique to Australia. Income survey-based poverty estimates developed on an international basis by a consortium named the Luxembourg Income Study (LIS) have become subject to considerable criticism in the United Kingdom, Canada and the United States as well as in Australia. The LIS data base now covers 27 countries and has involved substantial public funding. (Its website, www.lisproject. org, provides a range of indicators, all income survey-based, of household, child and old age poverty). Not only Australia, but also Canada, the United Kingdom and the United States are said to have much higher poverty levels than France, Germany and Sweden according to these mean and median based poverty rates.7

Canadian professor Christopher Sarlo has shown that income survey-based poverty and income distribution estimates for Canada are unreliable, and has also made detailed and painstaking Ôbottoms upÕ absolute poverty estimates, arriving at a figure of about 5% of the population in poverty.8 These estimates contrast starkly with the 15% mean and 11.9% median international Luxembourg study poverty estimate for Canada for 1997.

Professor SarloÕs absolute poverty estimate is the same as the one I made for Australia by adjusting the low ABS survey incomes for excluded data.9 Given the broad similarity of the Canadian and Australian economies, this is hardly surprising.

American professor Nicholas EberstadtÕs critique of poverty and income distribution estimates for the United States rejects official absolute poverty and income distribution estimates. He argues that between 1973 and 2000 per capita income jumped by almost 60%, social spending nearly tripled between 1973 and 1998 and unemployment fell sharply. He thus finds the contention untenable that a higher proportion of Americans lived in poverty in 2000 than in 1973. (The Luxembourg data also show rising poverty trends). Professor Eberstadt continues:

The jarring mismatch between income and consumption is highlighted annually in the Bureau of Labor StatisticsÕ Consumer Expenditure Survey. For the bottom fifth of household expenditures sampled, expenditures typically exceed income by more than 100 per cent. In the latest survey, for every dollar of reported pre-tax income, the poorest fifth of American households reported spending $2.31!10

David Green, Director of the London institute Civitas, has cast doubt on income survey-based poverty estimates in the United Kingdom.11 He includes references to similar problems with Netherlands poverty estimates and a Eurostat (Statistical Office of the European Communities) study which already in 1990 referred to problems created by the under-reporting of income for low income groups, leading to the overestimation of poverty.

Canadian, English and United States income-based poverty estimates thus also seem to be overstated by the LIS methodology. Replicating SarloÕs approach, country by country, is the only way that the proportion of people living in poverty can be accurately determined. It is clear that expenditure data, though also imperfect, would be a better source of information on relative standards of living than income data for the LIS study. In the meantime, income survey-based poverty estimates should at the very least only be published with strong warnings about their likely overstatement of poverty.

Endnotes

1 H. Hughes, ÔThe Politics of Envy: Poverty and Income DistributionÕ, Policy 17: 4 (Winter 2001), 13-18.
2 K. Tsumori, P. Saunders and H. Hughes, Poor Arguments: A Response to the Smith Family Report on Poverty in Australia Issue Analysis No. 21 (Sydney: The Centre for Independent Studies, January 2002).
3 G. S. Dorrance, ÔEstimates of Income and Expenditure Distribution in AustraliaÕ (July 2001), mimeo.
4 G. F. Barrett, T. F. Crossley and C. Worswick, ÔConsumption and Income Inequality in AustraliaÕ, The Economic Record 76: 233 (2000), 116-138.
5 ABS, Measuring AustraliaÕs Progress, ABS Cat. No. 1370.0 (Canberra: ABS, April 2002), 40.
6 ABS, Australian Economic Indicators, ABS Cat. No. 1350 (Canberra: ABS, April 2002).
7 P. Saunders and T. Smeeding, ÔBeware the MeanÕ, SPRC Newsletter No. 81 (Sydney: Social Policy Research Centre, The University of New South Wales, May 2002), pp. 1, 4, 5.
8 Christopher A. Sarlo, ÔMeasuring Poverty in CanadaÕ, Critical Issues Bulletin (Vancouver: The Fraser Institute, 2001).
9 H. Hughes, ÔThe Politics of EnvyÕ.
10 N. Eberstadt, ÔA Misleading Measure of PovertyÕ, summarised in The Washington Post (15 February 2002) and forthcoming in The American Enterprise.
11 D. G. Green, ÔPoverty InflationÕ, in Benefit Dependency: How Welfare Undermines Independence (London: The Institute of Economic Affairs, 1998).

Author
Helen Hughes is Senior Fellow at The Centre for Independent Studies and Professor Emeritus, The Australian National University.

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