Putting a New Spin on Poverty

The following article appeared on the editorial page of the Wall Street Journal on November 10, 2002, It’s title was “An Embarrassment of Riches”.

               “The poor got richer. It’s useful to recall this truth about America’s economic prosperity from time to time, especially these days when the headlines are screaming about the increasing division between haves and have-nots.

               The latest scares come courtesy of the latest Census figures on income, which include an inequality measure that has garnered much attention. But before anyone concludes that the U. S. is moving toward India’s caste system, we’d like to direct attention to a study that actually tells us something useful about wealth and poverty in today’s America: That when you follow actual poor people through their careers, they are moving up and out of poverty.

               Though this study-entitled “Moving Up? Earnings Mobility in California”- was released by the San Francisco-based Sphere Institute a few months back, it merits special mention today. For instead of comparing snapshots of abstract quintiles across different years, the Sphere Institute looked at flesh-and-blood workers, tracking the wages of more than 180,000 Californians from 1988 to 2000. The findings? Not only did people in all quintiles move up the economic ladder, the” real wage gains were greatest for those workers who started out at the lowest wages” (see chart).

               Even more shocking to the “poor-are-getting poorer” crowd has to be that all this uplift happened in California. By any standard measure of inequality, California ranks among the worst. Partly it’s because the state has lots of high-income earners. But it is mostly because the lower incomes at the bottom bracket have been exacerbated by the inclusion of large numbers of low-skilled immigrants, primarily from Mexico and Central America with little formal education and partial or no English.

               That more than 80% of workers in the bottom bracket moved up demonstrate that markets are more flexible and workers more intelligent than statisticians often assume. And the reason is simple: The opportunities for advancement are real. Instead of bewailing the Census findings of a statistically insignificant rise in inequality in what is a recession year, we really ought to be out celebrating the dynamism unearthed in California.

               A good part of the moving up was done simply by workers moving to jobs where there was more potential for better pay. “In almost every case, “ the study reports, “workers who switched industries had much larger wage gains than those who remain in their original industries, even though their initial earnings upon switching industries were lower.”

               We recognize that we’re never going to erase the scowls from the gloom-and-doomers who always see a full-scale class war just over the horizon. The Sphere Institute finds remind us that there’s a reason this war never breaks out: Because genuine opportunity is far more important to Americans – especially poor Americans – than any measure of inequality.”

This article tells us that poor people are doing ok in this country, a position that is frankly controversial in nature.  Is this true?  Let’s look at the article in detail. 

The writers of “An Embarrassment of Riches” begin by noting that they have read a study by the Sphere Insititute that “actually tells us something useful” in contrast to the “scares courtesy of the latest Census figures.” According to the article’s text,  what makes their quoted study better then the census data is that it follows “actual poor people.” The article further states that instead of “comparing abstract quintiles across different years”, the study looked at “flesh and blood workers” – 180,000 of them. The authors note the study compared the earning change between 1988 and 2000.

The Census figures that the authors characterize as “abstract quintiles across different years” cover a majority of workers in the US, since they have access to the entire country’s tax and payroll records of employees and employers. The Sphere study is praised for covering “actual poor people”.  Who do they think the Census figures cover? Presumably Census researchers too are looking at the records of American citizens, including “actual poor people”. If this study is superior for looking at “flesh and blood workers,” does this imply the Sphere specialists actually interviewed the people one on one rather than taking information from payroll or other records? It’s hard to believe that they did so – 180,000 people is a lot to interview. And even if so, does it mean that if they received the payroll numbers in a personal interview from a “flesh and blood” worker, that this is more accurate than the payroll and tax records reported for all workers by the US Census?  Frankly, the sampling of this study does not seem superior to using census data.

“An Embarrasment of Riches” furthermore not only criticizes the US Census as “snapshots of abstract quintiles” but also that these are used across “different years.” Yet the Sphere table itself is divided into quintiles and different years - the same structure the article criticizes when referring to Census information.  With these facts in mind, why is census data, done yearly, while Sphere only studies two years – 1988 and 2000, considered inferior?

Certainly the government’s numbers differ from Sphere’s. These differences are not the result of the years selected or the result of dividing the information into quintiles. One explanation of the differences could be because the government reports cover tens of millions of workers (in fact almost all workers) while the Sphere report covers 180,000 workers. In sampling terminology, the sample size of the Sphere report is somewhat less than 1% of that of the Census. The Journal does not tell us the random sampling selected by the Sphere analysts to select the 180,000, or even if it was random.

It is interesting to compare the distribution of wealth in the government reports with those of the Sphere report, the latter percentages easily computed from the salary numbers provided in the above table. This is summarized in the following chart:

There is a tremendous discrepancy between these two sets of numbers. The hard data, obtained by the census bureau, is probably the reason that “the headlines are screaming about the increasing division between haves and have-nots.”

The article suggests it is inappropriate to be caught “…..bewailing the Census findings of a statistically insignificant rise in inequality in what is a recession year,” The following table shows the changes in income distribution over several decades:    

Quite simply, a short examination of historic income data has given the lie to this newspaper editorial.  It is demonstrably false when compared with official government data of all workers.  One can only react to this dissemination of falsehood with anger or discouragement or both. The largest newspaper in the country - the one read by most executives and managers - in a brief editorial, completely misleads their readers.

Why is this denial of hardship for the poor so easy in America?  Why does this denial help to sell newspapers?  There does not seem to be much compassion in the management “caste” of our society for the underprivileged. It might be hoped that providing accurate information about the bottom wage earners to the top wage earners would give them insight about the realities of the world as experienced by the “lower castes”.  But when their favorite and supposedly reputable newspaper misleads them to such an extent, what is one to do? The editorial notes that “a full-scale class war” will never break out because “genuine opportunity is far more important to Americans than statistics.” Possibly it does not break out because poorer Americans do not yet accept the extent of the duplicity being fostered upon the public by such articles as this.

Would there be any difference if we lived in small communities rather than in large urban areas? We think so. Part of the reason is that if we lived in a decentralized manner, we would be less affected by giant institutions. But additionally, in a small community  differences in wealth are immediately perceivable. Those who are very wealthy would not only be living with those that are poor but observing the differences between their lives. Possibly some compassion would arise based on personal interactions and first hand information. In addition, the majority of people, the so-called middle class, who are not well off but who give what they can afford, would be observing the inequity between the rich and the poor. Might they possibly comment to the rich? Might they point out the tremendous suffering caused by the uneven distribu