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What do we Mean by Poverty? Or
HRDC Reduces our Obligations to Poor Children

Introduction

Before deciding how we will measure poverty perhaps we should be clear on why we would bother measuring it. We measure poverty, it seems to me, to gauge the extent to which we are fulfilling our obligations of fellow citizens. To consider this there needs to be a clear statement of our presumed social obligations.

The two main approaches to poverty assessment are based on relative or market basket concepts. The relative approach compares low-income children to the rest of society and explicitly defines an acceptable living standard compared to the norm. A market basket approach implies a fixed standard of living which is set without an explicit reference to societal norms - doesn't change over time. Market basket approach are sometimes called absolute but that is really a misnomer, for what is in the basket will vary by location and time.

Clearly these approaches to poverty measurement represent two different sets of social values and implied obligations. Most would agree that our obligations to children include enough money for the food, clothing and shelter needed to survive - a subsistence income. Some, but not all, argue that our obligations to children go further than subsistence to include social inclusion - full participation in society. To encompass inclusion, funds would be needed for a wider range of goods school field trips, clothing which not only keeps you warm but doesn't attract ridicule, access to education based on ability not income.

The three poverty approaches discussed below span the compassion spectrum from the Fraser Institute's Basic Needs Line, to HRDC's Market Basket Measure (MBM), to the Low-Income Cut-off (LICO) published by Statistics Canada.

Fraser Institute Basic Necessities Line

The most minimal subsistence measure of poverty has been advocated by the Fraser Institute - their "basic needs" measure. It estimates the funds sufficient to purchase enough food, shelter and clothing to keep the family alive - its limited to physical necessities. They go so far as to exclude books, toys and school supplies because they are not physical necessities. Their enthusiasm for a minimal subsistence is illustrated by their budget for food; less than $23 per week for an elderly women.

This costing exercise must be familiar to a prison warden - "how much does it cost to feed, cloth and house these people?". Even our prisons though provide items which the Fraser Institute excludes - toys, books and other reading materials.

HRDC's Market Basket Approach

The MBM measure developed by HRDC officials signals a change in our social obligations to children because it replaces an explicitly relative measure of poverty - the LICO - with an market basket measure. HRDC officials did this under instructions from politicians; to construct a measure "related to changes in the cost of consumption rather changes in income. (HRDC, March 1998)"

Implicit in the market basket approach being suggested by HRDC officials is that or obligations to low-income children consist of a particular basket of goods not a share of Canada's wealth.

HRDC officials suggest a more generous basket than the Fraser Institute but are still defining our social obligations as a fixed basket. They acknowledge that many children will be socially excluded and isolated but not, by their measure, poor.

Statistics Canada's Low-Income Cut-Offs

The distinguishing feature of LICO's is that they are explicitly relative. Their poverty level is set relative to a contemporary Canadian norm. This has lead some to the false impression that poverty measured by the LICO cannot be reduced. That is false, but it does imply that income redistribution is needed to reduce poverty as measured by the LICO. Because LICO's assess inequality, it is not a poverty measure to those who embrace a market basket approach.

We are told that LICO's have been rejected by the political elite because they are just - too high - too generous. One might question though the qualifications of the Ministers of Social Services, with incomes of $100,000 plus, debating whether $23,000 for a lone-mother with two children is sufficient.

International Comparisons

The United Nations ranked Canada #1 based on average income and life expectancy but has chastised Canada for high levels of inequality. The European Union measures poverty on a relative basis, as does the United States.

HRDC through its MBM is now advocating the market basket approach, indexed to inflation only. The United States has used this approach for a number of years and is having second thoughts. The following comments from the National Research Council's "Panel on Poverty and Family Assistance" concern the US approach:

"Our major conclusion is that the current measure no longer provides an accurate picture of the trends over time. The current measure has remained virtually unchanged over the past 30 years."

" changes in the standard of living call into question the merits of continuing to use the values of the original thresholds updated only for inflation."

Regardless, HRDC has been directed by politicians to design a poverty measure with just this type of indexation - inflation only.

Effect of Indexing to Price Only

Over the years, LICO's have adjusted to reflect both price increases and the typical living standard. What would the effect have been if the same decision had been made 20 years ago to adjust for price only? Like the United States, poverty lines in Canada would increase to reflect inflation only.

Over the last 20 years LICO's have been increased by about 190% to reflect inflation but the adjustment to reflect increasing wealth has also been important - it added and additional 46%.

Table 1 presents an analysis of the impact if LICO's had been indexed over the past 20 years to price only. The LICO for a family of three in a large town is currently $23,213 (1997); without an adjustment to reflect Canada's growing wealth since 1976 it would be $15,864.

The drop in the poverty line of about 46%, because of indexing to price only, clearly would also affect the poverty rates over time. If LICO's had only been indexed to price over the last 20 years then current poverty rates would be about half of published values. The drop of course would vary by family types.

Most significant is the drop for seniors from a poverty rate of about 47% to 7% for single seniors, and from about 6% to 0.4% for senior couples.

HRDC admits that its MBM compared to LICO's reduces poverty immediately by 33%. This is only the starting point because the spread between MBM and LICO poverty will increase over time as real incomes growth is reflected in relative poverty measures but not the MBM. In fact, the analysis above suggests that the disclosed reduction in the poverty rate of 33% caused immediately be moving to the MBM is small compared to the long run impact of indexing to price only and ignoring income.

Table 1

1997 LICO's for a City sized 100,000 to 500,000

Family Size LICO in 1997 LICO with Inflation Protection Only
1 $14,931 $10,204
2 $18,664 $12,755
3 $23,21 $15,86
4 $28,098 $19,202
5 $31,409 $21,465
6 $34,720 $23,727
7+ $38,032 $25,991

The 1976 LICO indexed to Inflation Only for 1976-1997.

Indexation

As indicated above the U.S. expert panel now recommends indexing their poverty line to increases in consumption rather than prices. Is there any economic or methodological reason for not indexing the MBM to consumption or income? No, the real justification is political.

Indexation has proven to be a very effective tool for political slight of hand. The income tax system has not been indexed to inflation since 1986 building in preordained regressive tax increases which attract little public attention or understanding. This enables Ministers to point to budgets which have "no tax increases" despite real increases in tax revenue.

In a similar way, the real value of the Child Benefit erodes in value relative to inflation, freeing up funds for mythical pre-election "increases in support for poor children" most of which simply replaces the support eroded by inflation.

Indexation could now do for the poverty debate what it already has achieved for the Child Benefit and in the Income Tax system - the illusion of progress, where proclamations of progress drown out the slow erosion in support based on inflation.

HRDC officials were instructed by their political masters that their measure could only be indexed to prices. This political instruction, by itself, ensures that children living at this poverty line would, over time, fall farther behind the Canadian norm increasing their sense of exclusion and ensuring the intergenerational propagation of poverty.

Consequences of Poverty

The poverty rate has no intrinsic value; it is just a tool to assess more complex conditions. We care, it seems to me, about the number of poor children not because of that vague label but because we care about the number of children we are failing. To some, failure is limited to children with inadequate food, clothing and shelter. To others, the failure would include children without a creditable standard of living. To those who advocate equality of opportunity and social inclusion, failure will include those children will little chance to fully participate in Canada's society and economy and benefit from Canada's wealth.

Inequality matters; it affects health. Consider the following from the Canadian Institute for Advanced Research "rising average incomes can be associated with declining health, if the resulting wealth becomes concentrated in fewer pockets".

If the consequences of poverty which we claim to be concerned about - health and educational problems, hindered psychological and social development - are a consequence of income inequality and social exclusion rather than problems of nutrition and warmth, then the MBM may well document a declining poverty rate in the midst of increasing inequality, social exclusion and their consequences.

Conclusion

By following the political instruction to index the MBM to prices only HRDC ensures that increasing numbers of children will be excluded from the norm of Canadian society without being considered poor.

The poverty line you prefer will depend on your social goals for Canada. Those who seek equality of opportunity for children will prefer a relative measure of poverty - the MBM will be preferred by those who accept increasing income inequalities and disparities of life chances so long as the children don't suffer too much.

A country as wealthy as Canada is lowering its expectations not because we can't collectively afford social supports but because we wish to make increasing inequality acceptable. One can see the appeal of such a measure in an economy of increasing disparities.

As economic disparities increase, we are failing obligations. The solution offered by HRDC is to redefine poverty so that the implied obligations to children no longer include equality of opportunity - an ideal soon to be passé.

Richard Shillington
Jan. 15, 1999

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