I’m confused how this squares with Lant Pritchett’s observation that variation in headcount poverty rates across nations, regardless of where you set the poverty line, is completely accounted for by variation in the median of the distribution of consumption expenditures.
Pritchett’s argument is about the correlation between average income and poverty rates. My argument is about the welfare that people experience from any given level of growth. I’m claiming that conventional evaluations of growth overestimate the value of growth because they weight income growth of middle-income and rich people too heavily. Once you adjust for that, the population welfare from economic growth is now driven mostly by increase in incomes for poor people, and it is much lower than before (90% lower)
If you wanted to value growth solely based on its ability to reduce poverty, an isoelastic utility function does that as well. In the spreadsheet calculations I did, the isoelastic utility penalizes inequality less
(24% vs 36%) because the bottom 50%’s income growth of 50% is almost as good on its own as the whole population income growing 90%.
Separately, I don’t interpret Pritchett’s observation as meaning “and therefore the best way to minimize poverty is to maximize median consumption”. That doesn’t follow at all from a cross-country correlation. For one thing, correlation is not causation and this correlation does not prove that increasing median consumption will decrease poverty. For another thing, we have to consider the costs as well: increasing median consumption through growth could be much more expensive than giving all that money to poor people directly.
While it is true that correlation is not causation, the fact that high median income is empirically necessary and sufficient for eliminating poverty on any poverty line is extremely strong evidence that increasing median income is a cause of eliminating poverty at any poverty line. There’s also a fairly obvious causal explanation i.e. growth increases everyone’s income. What else could be going on that explains the connection?
You say that “increasing median consumption through growth could be much more expensive than giving all that money to poor people directly.” This is very implausible. Globally, around $180bn is spent on aid per year—roughly $500 million per day. There are 500 million people who are extremely poor. Assuming that all the extreme poor have $1 per day already, we could double their income with the entire global aid budget. But, on any reasonable definition of poverty people with $2 per day are still extremely poor. The only thing that has ever pulled extremely poor people above more humane high bar poverty lines is economic growth.
I agree that your (excellent) analysis shows that the welfare increase is dominated by lifting the bottom half of the income distribution. I agree that this welfare effect is what we want. Pritchett’s argument is linked to yours because he claims the only (and therefore best) way to cause this effect is national development. He writes: “all plausible, general, measures of the basics of human material wellbeing [including headcount poverty] will have a strong, non-linear, empirically sufficient and empirically necessary relationship to GDPPC.” (Here non-linear refers to a stronger elasticity of these wellbeing metrics at lower than higher levels of GDPPC).
Of course as you point out national development can’t really be the only thing that decreases poverty—redistribution would too. But every single data point we have of countries shows that the rich got rich through development, not redistribution. And every single data point we have of rich countries shows that the bottom half of their income distributions is doing very well, relative to LMICs. So yes, redistribution would cause great welfare gains for a bit, but it’s not going to turn a $5000 GDPPC nation to a $50000 one. And the welfare gains from that nation’s decreased poverty headcount are going to dwarf the redistribution-caused welfare gains, even given your adjustments. (This isn’t an argument against redistribution as EA cause area, which could still be great; it’s an argument that redistribution’s efficacy isn’t really a point against the greater importance of the search for growth).
Regarding the correlation/causation, I’d be more sympathetic to your point if it was a nice and average correlation. Pritchett: “The simple correlation between the actual $3.20/day or $5.50/day headcount poverty rate and headcount poverty as predicted using only the median of the country distribution is .994 and for $1.90 it is .991. These are about as high a correlation as real world data can produce.” It’s very implausible that this incredibly strong relationship would break with some new intervention that increases median consumption. Not a single policy in the history of the world that changed a country’s median consumption has broken it.
To your final point that the cost of increasing median consumption might be way too high (relative to redistribution) - first of all, as Hillebrandt/Halstead pointed out, evaluating that claim should be a much larger priority in EA than it is right now. But development economics seems to have worked in the past, with just the expenses associated with a normal academic field! I’m sorry but I’m going to quote Pritchett again:
There are a number of countries (e.g. China, India, Vietnam, Indonesia) that said (1) “Based on our reading of the existing evidence (including from economists) we are going to shift from policy stance X to policy stance Y in order to accelerate growth”, (2) these countries did in fact shift from policy stance X to Y and (3) the countries did in fact have a large (to massive) accelerations of growth relative to [business as usual] as measured by standard methods (Pritchett et al 2016).
One had to be particularly stubborn and clever to make the argument: “Politicians changed policies to promote growth based on evidence and then there was growth but (a) this was just dumb luck, the policy shift did not actually cause the shift in growth something else did or (b) (more subtly) the adopted policies did work but that was just dumb luck as there was not enough evidence the policies would work for this to count as a win for ‘evidence’ changing policy.
TL;DR: Increasing productivity still beats redistribution in the long-term given reasonable assumptions about costs.
I’m not really interested in dismissing growth as a cause area. (I am annoyed at how little EAs mechanize it beyond “advocate for policies --> ??? --> growth”, but I’m going to write that up soon!) I wrote this because I think people who advocate for growth largely ignore inequality and should discount growth heavily because of inequality. If growth still beats targeted interventions after that heavy discounting, then so be it.
I’m confused how this squares with Lant Pritchett’s observation that variation in headcount poverty rates across nations, regardless of where you set the poverty line, is completely accounted for by variation in the median of the distribution of consumption expenditures.
Pritchett’s argument is about the correlation between average income and poverty rates. My argument is about the welfare that people experience from any given level of growth. I’m claiming that conventional evaluations of growth overestimate the value of growth because they weight income growth of middle-income and rich people too heavily. Once you adjust for that, the population welfare from economic growth is now driven mostly by increase in incomes for poor people, and it is much lower than before (90% lower)
If you wanted to value growth solely based on its ability to reduce poverty, an isoelastic utility function does that as well. In the spreadsheet calculations I did, the isoelastic utility penalizes inequality less (24% vs 36%) because the bottom 50%’s income growth of 50% is almost as good on its own as the whole population income growing 90%.
Separately, I don’t interpret Pritchett’s observation as meaning “and therefore the best way to minimize poverty is to maximize median consumption”. That doesn’t follow at all from a cross-country correlation. For one thing, correlation is not causation and this correlation does not prove that increasing median consumption will decrease poverty. For another thing, we have to consider the costs as well: increasing median consumption through growth could be much more expensive than giving all that money to poor people directly.
While it is true that correlation is not causation, the fact that high median income is empirically necessary and sufficient for eliminating poverty on any poverty line is extremely strong evidence that increasing median income is a cause of eliminating poverty at any poverty line. There’s also a fairly obvious causal explanation i.e. growth increases everyone’s income. What else could be going on that explains the connection?
You say that “increasing median consumption through growth could be much more expensive than giving all that money to poor people directly.” This is very implausible. Globally, around $180bn is spent on aid per year—roughly $500 million per day. There are 500 million people who are extremely poor. Assuming that all the extreme poor have $1 per day already, we could double their income with the entire global aid budget. But, on any reasonable definition of poverty people with $2 per day are still extremely poor. The only thing that has ever pulled extremely poor people above more humane high bar poverty lines is economic growth.
I agree that your (excellent) analysis shows that the welfare increase is dominated by lifting the bottom half of the income distribution. I agree that this welfare effect is what we want. Pritchett’s argument is linked to yours because he claims the only (and therefore best) way to cause this effect is national development. He writes: “all plausible, general, measures of the basics of human material wellbeing [including headcount poverty] will have a strong, non-linear, empirically sufficient and empirically necessary relationship to GDPPC.” (Here non-linear refers to a stronger elasticity of these wellbeing metrics at lower than higher levels of GDPPC).
Of course as you point out national development can’t really be the only thing that decreases poverty—redistribution would too. But every single data point we have of countries shows that the rich got rich through development, not redistribution. And every single data point we have of rich countries shows that the bottom half of their income distributions is doing very well, relative to LMICs. So yes, redistribution would cause great welfare gains for a bit, but it’s not going to turn a $5000 GDPPC nation to a $50000 one. And the welfare gains from that nation’s decreased poverty headcount are going to dwarf the redistribution-caused welfare gains, even given your adjustments. (This isn’t an argument against redistribution as EA cause area, which could still be great; it’s an argument that redistribution’s efficacy isn’t really a point against the greater importance of the search for growth).
Regarding the correlation/causation, I’d be more sympathetic to your point if it was a nice and average correlation. Pritchett: “The simple correlation between the actual $3.20/day or $5.50/day headcount poverty rate and headcount poverty as predicted using only the median of the country distribution is .994 and for $1.90 it is .991. These are about as high a correlation as real world data can produce.” It’s very implausible that this incredibly strong relationship would break with some new intervention that increases median consumption. Not a single policy in the history of the world that changed a country’s median consumption has broken it.
To your final point that the cost of increasing median consumption might be way too high (relative to redistribution) - first of all, as Hillebrandt/Halstead pointed out, evaluating that claim should be a much larger priority in EA than it is right now. But development economics seems to have worked in the past, with just the expenses associated with a normal academic field! I’m sorry but I’m going to quote Pritchett again:
TL;DR: Increasing productivity still beats redistribution in the long-term given reasonable assumptions about costs.
I’m not really interested in dismissing growth as a cause area. (I am annoyed at how little EAs mechanize it beyond “advocate for policies --> ??? --> growth”, but I’m going to write that up soon!) I wrote this because I think people who advocate for growth largely ignore inequality and should discount growth heavily because of inequality. If growth still beats targeted interventions after that heavy discounting, then so be it.
That makes sense! I was interpreting your post and comment as a bit more categorical than was probably intended. Looking forward to your post.