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Monday, September 12, 2005

Poverty Poorly Understood

The official poverty rate has been creeping up since Bush took office after dropping a bit during the Clinton years. This fact has, of course, provided yet more ammunition to bash those eeeeevil republicans. I've started looking into what it means to be in poverty in the United States and this post describes some of what I've found so far.

The first thing that's interesting, is that the poverty rate has remained in a fairly narrow band since 1969 (before that yearly figures are unavailable). According to the Census Bureau, the poverty rate for people in the United States was 12.1% in 1969 and in 2004 it was 12.7%. The low of (11.1%) occurred in 1973 under Nixon (I never realized he was such a champion for the poor) and the high (15.2%) occurred in 1983 under Reagan, culminating an upward trend that began under Carter. Thirty five years of technological advancement, the GDP per capita almost doubling, periods of both republican and democratic majorities, and yet the poverty rate stays more or less the same. Pretty amazing, isn't it?

Let's examine how it's determined that a person is in poverty. The Census Bureau "uses a set of money income thresholds that vary by family size and composition to determine who is in poverty. If a family's total income is less than the family's threshold, then that family and every individual in it is considered in poverty. The official poverty thresholds do not vary geographically, but they are updated for inflation using Consumer Price Index (CPI-U)."

That last sentence contains an interesting point. The poverty thresholds are updated by the Consumer Price Index. Many economists think that the CPI is significantly overstated (and I strongly agree). For example, an International Monetary Fund report states that:
In a recent study, the US Advisory Commission to Study the Consumer Price Index (more commonly known as the Boskin Commission, whose chairman was Michael Boskin, former chief of the US Council of Economic Advisers) estimated that the US CPI overstated inflation by 1.1 percentage point in 1996 and by slightly more in each of the previous 20 years. Thus, although the official rate of inflation for 1996 was 2.9 percent, the true rate may have been in the neighborhood of 1.8 percent. This upward bias arises because the CPI methodology does not adequately capture shifts in consumer purchases when relative prices move, the effects of changes in the quality of goods and services, the introduction of new products, or the growing number of discount stores. While some experts have disputed that the upward bias is as large as has been suggested by the Commission, there is a growing consensus that there may indeed be significant bias.
If the CPI should've been set 1.1% lower per year (which I believe is a reasonable estimate), then the poverty levels relative to 1969 are nearly 50% too high (which means that the poverty levels should be about 67% of what they are). Since the number of people in 2004 below 50% of the poverty level is 5.4% of the total population, we can conclude that if the CPI had not had the upward bias described above, the poverty level would be somewhere between 12.7% and 5.4%. A linear interpolation between the two percentages yields 7.9%.

Under this scenario using the lower, possibly more realistic CPI, the poverty rate would have declined gradually from 12.1% to 7.9% during the last 35 years. And it turns out that there is other evidence to support the concept that the poverty rate is overstated relative to the past. Consider the following excerpt from an article in the New York Times:
In 1972-73, for example, just 42 percent of the bottom fifth of American households owned a car; in 2003, almost three-quarters of "poverty households" had one. By 2001, only 6 percent of "poverty households" lived in "crowded" homes (more than one person per room) - down from 26 percent in 1970. By 2003, the fraction of poverty households with central air-conditioning (45 percent) was much higher than the 1980 level for the non-poor (29 percent).

Besides these living trends, there are what we might call the "dying trends": that is to say, America's health and mortality patterns. All strata of America - including the disadvantaged - are markedly healthier today than three decades ago. Though the officially calculated poverty rate for children was higher in 2004 than 1974 (17.8 percent versus 15.4 percent), the infant mortality rate - that most telling measure of wellbeing - fell by almost three-fifths over those same years, to 6.7 per 1,000 births from 16.7 per 1,000.

In other words, in very measurable ways, those in poverty are, on average, significantly better off than they were 30 years ago. Again, I believe this to be an artifact of overstating the CPI.

Since poverty levels are based on income, it's important to consider what counts as income. The Census Bureau's definition includes "earnings, unemployment compensation, workers' compensation, Social Security, Supplemental Security Income, public assistance, veterans' payments, survivor benefits, pension or retirement income, interest, dividends, rents, royalties, income from estates, trusts, educational assistance, alimony, child support, assistance from outside the household, and other miscellaneous sources" before taxes.

The definition specifically excludes "[n]oncash benefits (such as food stamps and housing subsidies)" and, more importantly, "capital gains or losses". This means that if I have $100 million in assets, and all of those assets are stocks that don't pay dividends, and I choose not to work, and I just sell some of my stock each year to live, I would be considered to be living in poverty. While this example is meant to be a non-realistic exaggeration to catch your attention, there is no doubt that many people who have significant assets (to the tune of hundreds of thousands of dollars), who have been unemployed long enough for their unemployment benefits to run out, but haven't yet found their next job are being classified as poor. Yet it's difficult for me to really think of someone with substantial assets as being poor.

Instead of considering how much someone makes, another way to think about economic well being is to consider how much someone can spend. Switching to the "outflows" point of view would help to distinguish between those that are really poor and those that are identified by a flawed measure of poverty. Continuing with the New York Times article identified above, we see that the ratio of outflows to income has increased substantially over the past few decades:
In the Labor Department's latest Consumer Expenditure Survey (2003), the average reported income for the bottom fifth of households was $8,201, while reported outlays came to $18,492 - well over twice that amount. Over the past generation, that discrepancy widened significantly: back in the early 1970's, the poorfifthsth's reported spending exceeded income by 40 percent.
This is evidence that many of those in poverty today have access to adequate resources (some combination of assets or credit or other resources) to significantly reduce the burden of their time in poverty.

Basically, no matter how I look poverty in the United States, it looks like the classification of the poor is based on highly inaccurate measures and that the poor are actually slowly becoming better off in an absolute sense.

1 comment:

Hey Skipper said...


Excellent article -- in one fell swoop you at least quadrupled my knowledge on the subject.

About the only quibble I have is that the ability of truly poor people to avoid inflation is probably more limited than the rest of us. They don't get to take advantage of the benefits of a new car, and probably have limited shopping choices.

Even if true, though, that doesn't in the least affect the point you so cogently made.