Income Inequality

Once again, it seems that Europeans have a slightly different view on politics/economics as us Americans. In this blog post, Daniel Hamermesh, an economist, outlines statistical differences in poverty lines, which arose "during a seminar in Germany last week." He states that the U.S. sets the poverty line at three times the income needed to maintain a healthy diet, while the EU sets the poverty line at half the median income. This means that our measure of poverty is absolute, while Europe's is relative.

This, he asserts, has some interesting implications. It means that in the U.S., income inequality is seen as less of a problem; there can be extreme gaps between the poor and rich, but if a relatively poor person has an income over a certain absolute value, then he or she is not counted as "poor."

Fixing the poverty line to the median income, on the other hand, is a relative measure of poverty. If the median income drops, so does the income that defines poverty. If the median income increases, so does the poverty line. Thus, if you make less than half of what the "normal" person makes in Europe, you are considered impoverished. Thus, this system inherently favors income equality.

Now let's take a look at economic growth's effects on poverty through these two differing lenses. In the USA, poverty can be eliminated through pure economic growth so long as everyone benefits. It doesn't matter how much more one person benefits than the other. The only thing that matters is that the poor start earning incomes that exceed three times the income needed for a basic nutritious diet. In Europe, however, poverty can only be eliminated by decreasing income inequality. Even if everyone starts earning more money, there can still be poverty because the median income has also increased.

Which method do you guys prefer? How important is income inequality to you? It seems that the studies we read in class suggest that our happiness in relation to income is relative, but do you think poverty is relative? What if someone who is considered "impoverished" in Europe earns fifty times more in purchasing power (meaning they can buy fifty times more goods, already adjusted for price differences) than the middle class of another country? Are they still impoverished because they are poorer in the context of their society?

(For your information, this link does not explicitly state that Daniel Hamermesh is an economist, but I did some research and found out that he is a professor of economics at the University of Texas, Austin. He has a PhD. in economics.)