Global Economic News Digest

The Unfinished Pursuit of a Better Poverty Measure

11 sep 2023
author: Peter Coy
source: The New York Times


On Tuesday the Census Bureau is scheduled to release income and poverty statistics for 2022. It’s safe to say that the report will be hard to interpret. Last year, the two poverty measures released by the bureau pointed in opposite directions. One showed that poverty increased slightly in 2021, while the other showed it declined markedly.

It’s widely agreed that the official poverty measure — the one that showed an uptick in poverty last year — is outdated and inaccurate. The supplemental poverty measure is better, but it has problems of its own. One is that it attempts to merge two fundamentally different approaches to measuring poverty: an absolute yardstick and a relative one. It’s sometimes described as a “quasi” relative measure, which makes me queasy.

An absolute measure of poverty sets a threshold for what constitutes poverty and sticks with it year after year, adjusting only for inflation. The problem with an absolute measure is that as living standards rise, people who are at an absolute threshold are left further and further behind. To put it differently, the luxuries of yesterday are the necessities of today. Take the internet. Years ago, it was optional. Today it is hard to be a full participant in the economy and society without internet access.

Adam Smith, the great Scottish economist, spotted the problem with absolute measures of living standards in “The Wealth of Nations” in 1776:

A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.

A relative measure sets the poverty threshold in relation to how other people live — for instance, as a percentage of the median income — so poverty tends to get redefined upward over time. That solves one problem, but creates others. For one thing, it rubs some people, especially conservatives, the wrong way that people whose income would have put them squarely in the middle class a generation ago are now defined as poor. A relative yardstick seems to ignore or even conceal rising living standards.

Also, weird things can happen in a recession. Let’s say the income of the poor falls, but the income of the middle class falls more. If poverty is measured on a relative basis, there would be fewer officially “poor” people even though the incomes at the bottom of the ladder declined. This actually happened in Ireland and Estonia between 2007 and 2010.

The official poverty measure is absolute in that it’s based on how much food a family needs to feed itself. It was developed in the 1960s by Mollie Orshansky, a staff economist at the Social Security Administration. It calculates the poverty threshold as three times the cost of a minimum food diet in 1963, updated for today’s prices, the idea being that food is about a third of poor people’s budgets. Aside from its absolutism, it doesn’t factor in families’ noncash benefits, such as food stamps and rent subsidies. On the other side, it also doesn’t account for things that reduce families’ spendable money such as taxes, medical expenses and commuting costs.

The (better) supplemental poverty measure, which the Census Bureau began reporting in 2011, is mostly a relative measure but has an absolute aspect. It’s relative in that it compares poor people’s spending on food, clothing, shelter, utilities, phone and internet with that of a median household. The poverty threshold is based on 83 percent of median spending on that “basic bundle.” The government takes whatever that number is and adds another 20 percent to cover everything else, such as household supplies and personal care.

What makes the supplemental poverty measure partly an absolute measure is that the basic bundle includes mostly necessities. The middle class and the rich spend a shrinking share of their total income on the necessities, leaving them more every year for fun stuff, savings and so on. The poverty threshold, tied as it is to spending mostly on the basics, tends to rise more slowly than incomes of the general population.

The quasi approach of mixing relative and absolute concepts makes it hard to interpret changes in the poverty rate. Bruce Meyer, an economist at the University of Chicago Harris School of Public Policy, favors tracking one purely absolute measure of poverty and another that’s purely relative, making it a measure of inequality.

A new report by the National Academies of Sciences, Engineering and Medicine — which was instrumental in creating the supplemental poverty measure — doesn’t agree with Meyer on splitting the supplemental measure in two. But it does propose some changes that make sense. One is to rely more on official administrative data on benefits, since people tend to underreport them in surveys.

Another is to add health insurance to the list of basic needs, while also adding it to the set of resources that people have. Doing so wouldn’t make lots more people appear poor, because health insurance would be added to both sides of the ledger: It’s something people need, and something (most) people have. An updated supplemental poverty measure should be renamed the principal poverty measure and crowned as the official indicator, the report says.

I interviewed Indi Dutta-Gupta, the executive director of the Center for Law and Social Policy, who worked on the National Academies report. He and his colleague, Elizabeth Lower-Basch, have a brief and positive take on the report. One thing Dutta-Gupta pointed out is that whatever the Census Bureau decides to call the poverty line has no direct impact on spending to fight poverty. That’s up to Congress.

Dutta-Gupta also said that in the debate over absolute versus relative measures of poverty, he’s in the relative camp.

“The whole concept of poverty is specific to a place and time,” he said. “Societies do have expectations and norms.”"