The Poverty Measure: Why It's Outdated, and Why It's Important
"The poor quality of our official poverty statistics should be a matter of pressing national concern. America deserves better and I think in this time of economic crisis urgently needs better." -- Henry Eberstadt from the American Enterprise Institute speaking at a Brookings Institution panel on September 16 about the newly released Census data on poverty and income in 2009
On September 16, the day that the Census Bureau released its 2009 statistics on poverty and income claiming that 43.6 million Americans live below the poverty line, I attended a Brookings Institution panel on how to interpret this newly released data. The heated discussion kept on coming back to measurement, and why how we measure poverty is crucial to our understanding of economic depravity in America and the policies we enact to reduce it. Then, why, I asked, is our official poverty measure so outdated?
To answer this question, we must first ask:
What's so wrong with our official poverty measure?
Our current poverty measure's outdated way of defining the poverty threshold and incomprehensive definition of resources are the source of its major flaws. Over the past several decades, the way that our official measure defined these two components has not changed, yet the reasons that people are poor, and the way that the poor are using their resources has changed significantly. The poverty threshold is defined solely around one necessity that a family must provide for: food. However, the measure ignores all of the other expenses that a family must meet. When this threshold was established in 1964 based on the cost of a subsistence food package, Americans, on average, were spending one-third of their income on food. Today, food takes up approximately one-eighth of a family's income. This is mostly because food prices have fallen over time relative to other family expenses, such as housing costs, which have generally risen over time. This change is also a reflection of an increased number of other expenses that the poor face such as increased medical care costs, transportation etc.
Secondly, for the current official poverty measure, pre-tax cash income is calculated in order to see if an individual or a family is below the poverty threshold. This is the only factor taken into account in its resource measure. When the measurement was developed, the poor were not nearly taxed at the rate they are today. Also, credit cards and their associated debt were non-existent. Evident by these changes, an after-tax income measurement of resources would be a more accurate measurement of the resources available to a given individual or family. One that takes into account non-income based resources such as food stamps, medical-care benefits, and childcare subsidies.
It is important to also note that the current measure makes no adjustments for geographic location. Certain areas of our nation are much more expensive to live in than others, but the official poverty measure does not recognize this reality.
What are some alternatives?
While the official poverty measure does provide useful information about cash income, using multiple measures of poverty would give our government and our nation a much more comprehensive view of economic deprivation in America. As we speak, a proposal for the Census Bureau to run a Supplemental Poverty Measure (SPM) is waiting for Congress as part of the 2011 budget proposal. The SPM will calculate income in a much more comprehensive way by taking into account taxes, in-kind benefits, work expenses (such as transportation), and out-of-pocket medical expenses. It will also calculate the poverty threshold based on average expenditures on food, shelter, utilities, and clothing.
If the proposed SPM is successful, we will see, for the first time in the U.S., a form of a relative poverty measure ingrained in an absolute measure. This is where the most heated controversy around this proposal lies. The existing official poverty measure uses absolute purchasing power to set the poverty threshold. The Obama administration has proposed the use of a comparative purchasing power measure, which is a measure of how much one can buy relative to other people, in determining ones' resources. As a result, poverty would only be able to be reduced if incomes of the poor rise faster than the incomes of everyone else. Some, such as Robert Rector at The Heritage Foundation, argue that with this type of measure, economic growth has no impact on poverty because the wages of those at the bottom of the income distribution will rarely rise faster than the incomes of those in the middle. Instead, with a comparative purchasing power measure, one is measuring income inequality and not poverty; and many Americans fail to care about income inequality.
Others, such as Henry Eberstadt and other economists at the American Enterprise Institute, argue that even the SPM is completely missing the point. It is measuring the wrong thing. Instead of income, we should be looking at consumption. If we care about economic deprivation, reflected in one's living standards, then, we should really be measuring living standards, or how much we consume. Since 40 percent of Americans spend more than they earn (according to the Consumer Expenditure Survey), "If we really want to know about plenty and poverty in America, we should be monitoring consumption, spending patterns, and the like," claimed Henry Eberstadt. In fact, in 2009, expenditures for the lowest quintile of American households were over twice as high as their reported pre-tax income. By solely measuring income, we overlook the immense debt that much of our country is in.
Regardless of the approach(s) to poverty measurement you favor, it is clear that our government's official approach to poverty measurement and the poverty rate figures that it generates are not only incomprehensive, but also seriously flawed and misleading. This year alone our government will spend $900 billion on aid to low-income families. If it can't even measure poverty properly; how will it know how to most efficiently distribute our money, how will we ever make strides in combating economic deprivation in America?