Domestic Poverty, by the numbers

The government released its household income numbers a few days ago.  There was some wage growth due to increased hours employment, but there was also a rise in the uninsured.

Steven Pearlstein had some interesting analysis in the Post.  First he argued that really liberals should use the household income numbers after adjustment for taxation, food stamps, and the like.  I think there's some merit to that argument.  Trouble is, as Perlstein notes, those numbers don't get put out until March, so the latest numbers we have are for 2005 which is kinda stale.

If your curious how much of a difference this makes, here's the differences in household income based on method of calculation:

Anyhow, I'll try to work these numbers in the next time I do some primary source research on poverty.  For the moment though I'm going to focus on the rest of Pearlstein's argument.  He cites "The Persistence of Poverty," a book by his friend Charles "Buddy" Karelis, a professor at George Washington University.

The book argues against the idea that the marginal benefit of a $1 is highest for the poorest American households and steadily decreases as you rise in income.  This is a fairly unorthodox view, since that particularly economic rule makes a fair amount of sense.  After all, the more money you have, the smaller percentage a dollar is of your income.

But what if this iron law of economics is wrong? What if it doesn't apply at every point along the income scale? If you and everyone around you are desperately poor, maybe it's perfectly rational to think that an extra dollar or two won't make much of a difference in reducing your misery. Or that you won't be able to "study" your way out of the ghetto. Or that if you find a $100 bill on the street, maybe it's logical to blow it on one great night on the town rather than portion it out a dollar a day for 100 days.

On the other hand, maybe the point at which people are most willing to work hard, save and play by the rules isn't when they are very poor, or very rich, but in the neighborhoods on either side of the point you might call economic sufficiency -- a motivational sweet spot that, in statistical terms, might be defined as between 50 percent ($24,000) and 200 percent ($96,000) of median household income. And if that is so, then maybe the best way to break the cycle of poverty is to raise the hopes and expectations of the poor by putting them closer to the goal line.

Apparently Karelis just backs it up with anecdote and logic.  That's not necessarily a problem, this is a falsifiable theory.  One possible experiment would be to give an equivalent amount of money to people with varying incomes and then track how they spend it.  If the theory is right, then the money should be best used for long term ends by those in the lower-middle of the income spectrum.

I'm going to have to think if there's any ways to check if there's at least some correlation level support for this idea using existing statistics.  What I'd really need are some numbers that track income mobility over time.  That said, by the description by Tyler Cowen it sounds like the book gets a little deep into psychoanalyzing the poor without a lot of evidence to back it up.  There are a lot more differences than just attitude between lower income immigrants and equivalent income native born Americans.

Comments

[Charles Karelis]

Hi. I'm the author of the book Steven Pearlstein is talking about. I don't use anecdotes in my book to support my hypothesis that the marginal utility of consumption is increasing (not diminishing) when consumption is less than sufficient. I do use reminders of common experience. And so of course do all the introductory economic textbooks. (Remember all those examples involving hamburgers, sodas, movies, trips to Europe, etc.?) The difference is that I draw a clear distinction between relieving misery and generating positive experience. Once that distinction is drawn, my audiences generally concur with my appeals to introspection. By contrast the conventional hypothesis of DMU is generalized only from cases where consumption is bringing positive experience. (The roots of that overgeneralization are discussed in the book.)

Just as important, I don't rest my case completely on introspection in the first place. Rather I try to show that my hypothesis represents a simpler explanation of behavioral facts nobody disputes. Saddled with the law of diminishing marginal utility, conventional policy thinkers have to exaggerate the role of restricted opportunity and irrationality in accounting for nonsaving and nonwork. Survey data and other empirical data suggest that limited opportunity and irrationality are relatively minor factors in the economic behavior of poor people.

Finally my book shows how my hypothesis is supported by the "psycho-physical law" of Weber and Fechner, which is still taught, 180 years after it was discovered.

[Greg Sanders]

Professor Karelis:
Thank you for your response.

If you like, I'll gladly give it its own blog post verbatim for those not reading comments. I haven't yet read your book and so was going off the mostly positive recommendations you received, but all the better to hear directly from the source.

You're certainly correct about the use of examples in the introductory text books, there's nothing wrong with throwing anecdote in to back up other forms of data. I'm rather interested in the survey and empirical data you cite, so I'll have to read your book!

So please let me know if you'd want the full post. I'm still rather new to this software, so I'd probably just copy and paste your text into a blog post with block quotes. However, if you'd prefer to make a proper guest post, I'd be happy to set that up but not while I'm at work.

[charles karelis]

No need to post the comment separately. I hope you will read the book--and let me know your thoughts!

[Greg Sanders]

Will do.