The poverty rate or poverty line in the U.S. is based on a system pioneered by Mollie Orshansky in 1963. In the 1960s, the average US family spend one third of its income on food. The poverty line was calculated by valuing an “emergency food” budget for a family, and then multiplying that number by 3. (Some more data here).
This results in a specific dollar amount that varies by family size but is the same across the U.S. (the amounts are adjusted for inflation annually). To determine who is poor, actual family income is then compared to these amounts. Obviously, if you’re under, you’re poor.
Amazingly, this system hasn’t changed a lot since the 1960s, yet it suffers from a series of measurement problems, resulting in either an over- or underestimation of the number of families living in poverty. The problems are situated both in the calculation of the poverty rates and in the calculation of the income that is subsequently compared to the rates:
- Obviously, the system should take regional differences in the cost of living, especially in housing, into account. It doesn’t.
- As already apparent from the image above, a family today spends relatively less on food and more on housing, health care and child care etc. yet the poverty line is still dollars for emergency food times 3. So the question is: should the system take today’s spending patterns into account? We would have to know which it is: 1) Either the increased spending on non-food items has occurred because people can now afford to spend more on such items. 2) Or the increased spending on non-food items has occurred because these items got disproportionately more expensive (housing for instance) or because there wasn’t really any need to buy those items in the old days. Only if 2) is the case should that have an influence on the poverty line. And I think that to some extent it is the case. Child care for instance has become a necessity. In the 1960s, many mothers didn’t go out and work. Now they do, and therefore they have to pay for child care. Those payments should be deducted from income when measuring disposable income and comparing it to the poverty line. The same is true for cars or phones. Today you can’t really have a job without them so they’re no longer luxuries. A society would show very little ambition if it continued to designate the poor as those who have to wash by hand, read with candlelight, and shit in a hole in the floor. In fact, what I’m advocating here is some kind of relative concept of poverty. I’ll come back to that later. All I can tell you now is that this isn’t without complications either.
- The current poverty measurement doesn’t take into account disproportionate price rises (it merely adjusts for general inflation) and changing needs. An obvious improvement of the U.S. measurement system would be to adjust for exceptional price evolutions (such as for housing) and also to revisit the definitions of basic needs and luxuries. Hence, a better poverty measurement should subtract from income some work-related expenses, child care expenses, and perhaps also some health expenses to the extent that these have become disproportionately more expensive. But that’s not easy:
There is considerable disagreement on the best way to incorporate medical care in a measure of poverty, even though medical costs have great implications for poverty rates. But costs differ greatly depending upon personal health, preferences, and age, and family costs may be very different from year to year, making it hard to determine what exactly should be counted. Subtracting out-of-pocket costs from income is one imperfect approach, but if someone’s expenses are low because they are denied care, then they would usually be considered worse off, not better off. (source)
- Another problem: the current poverty rate doesn’t take all welfare benefits into account. Income from cash welfare programs counts, but the value of non-cash benefits such as food stamps, school lunches and public housing doesn’t (because such benefits weren’t very common in the 1960s). Those benefits successfully raise the standard of living for poverty stricken individuals. There’s a bit of circular reasoning going on here, because the poverty rate is used, i.a., to decide who gets benefits, so benefits should not be included. But if you want to know how many people are actually poor, you should consider benefits as well because benefits lift many out of poverty.
- The poverty measure doesn’t include some forms of interests on savings or property such as housing.
- The poverty measure doesn’t take taxes into account, largely because they didn’t affect the poor very much in the 1960s. Income is counted before subtracting payroll, income, and other taxes, overstating income for some families. On the other hand, the federal Earned Income Tax Credit isn’t counted either, underestimating income for other families.
- And there’s also a problem counting the effects of cohabitation and co-residency, overestimating poverty because overestimating expenses.
Because the poverty measurement disregards non-cash benefits and certain tax credits, it fails to serve its purpose. Poverty measurement is done in order to measure progress and to look at the effects of anti-poverty policies. Two of those policies – non-cash benefits and certain tax credits – aren’t counted, even though they reduce poverty. So we have a poverty statistic that can’t measure the impact of anti-poverty policy… That’s like measuring road safety without looking at the number of accidents avoided by government investment in safety. Since the 1970s, the U.S. government implemented a number of policies that increased spending for the poor, but the effects of this spending were invisible in the poverty statistics.
This had a perverse effect: certain politicians now found it easy to claim that spending on the poor was ineffective and a waste of money. It’s no coincidence that trickle down economics became so popular in the 1980s. The poverty measurement, rather than helping the government become more effective in its struggle against poverty, has led to policies that reduced benefits. Of course, I’m not saying that poverty reduction is just a matter of government benefits, or that benefits can’t have adverse effects. Read more here.
Fortunately, the US Census Bureau has taking these criticism to heart and has been working on an alternative measure that counts food stamps and other government support as income, while also accounting for child-care costs, geographic difference etc. First results show that the number of poor is higher according to the new measurement system (it adds about 3 million people). For some reason, I think the old system has still some life in it.
Some details of the new measurement:
when you account for the Earned Income Tax Credit the poverty rate goes down by two points. Accounting for SNAP (food stamps) lowers the poverty rate about 1.5 points. … when you account for the rise in Medical Out of Pocket costs, the poverty rate goes up by more than three points. (source)
More posts about problems with poverty measurement are here.