Tuesday, July 20, 2010

When discussing poverty in the United States, there are actually a couple of different measures, a relative measure commonly used for cross-country comparisons, and a slightly more complicated one that is detailed in a 2006 piece on poverty measurements in the New Yorker:
From 1945 to 1958, [Mollie Orshansky] worked in the Department of Agriculture’s Bureau of Human Nutrition and Home Economics, where she worked on a series of diets designed to provide poor American families with adequate nutrition at minimal cost. In painstaking detail, the food plans laid out the amount of meat, bread, potatoes, and other staples that families needed in order to eat healthily. These were “by no means subsistence diets,” Orshansky later wrote. “But they do assume that the housewife will be a careful shopper, a skillful cook, and a good manager who will prepare all the family’s meals at home.”

In 1958, Orshansky joined the research department of the Social Security Administration, and decided to try to estimate the incidence of child poverty. “Poor people are everywhere; yet they are invisible,” she told a reporter for the Dallas Morning News in 1999. “I wanted them to be seen clearly by those who make decisions about their lives.” Building on pioneering research on diet and poverty conducted in York at the turn of the twentieth century by Seebohm Rowntree, a British social reformer, Orshansky used her food plans to calculate a subsistence budget for families of various sizes. For a mother and father with two children, she estimated the expense of a “low cost” plan at $3.60 a day, and of an even more frugal “economy plan” at $2.80 a day. Rather than trying to calculate the price of other items in the family budget, such as rent, heat, and clothing, Orshansky relied on a survey by the Agriculture Department, which showed that the typical American family spent about a third of its income on food. Thus, to determine the minimum income a family needed in order to survive, she simply multiplied the annual cost of the food plans by three. Families on the low-cost plan needed to earn at least $3,955 a year; families on the economy plan needed to earn $3,165.

Orshansky compared these figures with the Census Bureau’s records on pre-tax family incomes and concluded that twenty-six per cent of families with children earned less than the upper poverty threshold and eighteen per cent earned less than the lower poverty threshold. In total, she estimated that between fifteen million and twenty-two million children were living in poverty, a disproportionate number of them in single-parent households and minority neighborhoods...

[I]n 1969 the White House adopted a slightly modified version of Orshansky’s lower threshold—the one based on the economy food plan—as the official poverty line.

The persistence of endemic poverty raises questions about how poverty is measured. In the past ten years or so, significant changes have been made in the way that inflation, gross domestic product, and other economic statistics are derived, but the poverty rate is still calculated using the technique that Orshansky invented. (Every twelve months, the Census Bureau raises the income cutoffs slightly to take inflation into account.)

This approach has some obvious shortcomings. To begin with, the poverty thresholds are based on pre-tax income, which means that they don’t take into account tax payments and income from anti-poverty programs, such as food stamps, housing subsidies, the Earned Income Tax Credit, and Medicaid, which cost taxpayers hundreds of billions of dollars a year. In addition, families’ financial burdens have changed considerably since Orshansky conducted her research. In the late fifties, most mothers didn’t have jobs outside the home, and they cooked their families’ meals. Now that most mothers work full time and pay people to help them take care of their kids, child care and commuting consume more of a typical family budget.

Another problem is that the poverty thresholds are set at the same level all across the country. Last year, the pre-tax-income cutoff for a couple with two children was $19,806. This might be enough to support a family of four in rural Arkansas or Tennessee, but not in San Francisco, Boston, or New York, where the real-estate boom has created a shortage of affordable housing. According to Jared Bernstein and Lawrence Mishel, economists at the liberal Economic Policy Institute, in Washington, D.C., the average rent in working-class neighborhoods of Boston is about a thousand dollars a month, which for a family of four with a poverty-level income leaves just six hundred and fifty dollars a month for food, clothing, heat, and everything else.

While these examples cut one way (that the poverty rate may be under-estimated), it may cut the other. A lot of measured poverty is in rural areas, where cost of living is lower. Similarly, considering the the poverty rate is largely defined by the cost of food in 1969 and adjusted for inflation, the inflation rate doesn't actually measure the cost of food. In fact, the cost of food has been increasing at a slower rate than the overall level of inflation. The New Yorker continues:
Such considerations suggest that the official measures understate the extent of poverty, but the opposite argument can also be made. The poverty figures fail to distinguish between temporary spells of hardship, like those caused by a job loss or a divorce, and long-term deprivation. Surveys show that as many as forty per cent of people who qualify as poor in any given year no longer do so the following year. Middle-class families that suffer a temporary loss of income can spend their savings, or take out a loan, to maintain their living standard, and they don’t belong in the same category as the chronically impoverished. One way to remedy this problem is to consider how much households spend, rather than how much they earn. If in the course of a year a household spends less than some designated amount, it is classified as poor. Daniel T. Slesnick, an economist at the University of Texas, has tested this approach using figures that he obtained from the Department of Labor’s Consumer Expenditure Survey, which tracks the buying habits of thousands of American families. Slesnick calculated that the “consumption poverty rate” for 1995—that is, the percentage of families whose spending was less than the povertyincome threshold—was 9.5 per cent, which is 4.3 per cent less than the official poverty rate. Subsequent studies have confirmed Slesnick’s findings.

In 1995, a panel of experts assembled by the National Academy of Science concluded that the Census Bureau measure “no longer provides an accurate picture of the differences in the extent of economic poverty among population groups or geographic areas of the country, nor an accurate picture of trends over time.”

h/t: Steve Krause via MR
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