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Tuesday, October 13, 2015

Angus Deaton's Letter from America: How to Measure Poverty?

This is a good example of the type of research that interests Angus Deaton (here, though, he is mostly describing the work of others, though his own work paved the way for this type of research):

Letter from America: It's a big country and how to measure it, RES Newsletter, October, 2014t: In this Letter from America, Angus describes recent efforts to record the significant differences in regional price levels across the USA. The task is technically complex and also raises political sensitivities.

One of the first things visitors from Europe confront when they come to America is just how enormous the place is, an enormity that is somehow enhanced by the fact that, after many hours in an airplane, you get off and discover that almost everything looks the same as where you got on, something that is rare in Europe. There may be mountains, palm trees, or a temperature difference that tells you that something has changed, but one thing that you will not find, at least in the official numbers and until very recently, is any difference in the price level. In consequence, the federal poverty line is the same everywhere, independent of the local cost of living, which does not prevent it from feeding into a range of federal and state welfare policies.

The need for regional price indices In 1995, a panel of the National Academy of Sciences thought hard about how poverty ought to be measured; I was fortunate enough to be a member of the group... One of the group’s recommendations was that the poverty line should be adjusted for differences in price levels in different places, something that was not possible in 1995, because the statistical system did not produce such price indices. Contrast this with Eurostat...

There was then, as now, some reluctance, including from the Bureau of Labor Statistics — the agency that produces consumer price indices — to calculate geographical price indices. The then Commissioner was concerned about political pressure from legislators to alter price indices in their favor — to entitle their constituents to greater federal benefits — just as the census counts —which are used for drawing boundaries of congressional districts — have, in the past, been politically contested and were for many years mired in the courts. For whatever reason, no policy change or new data collection took place for many years. ... The BLS produces regional price indices, but those are all indexed to 100 in the base year, and so can only be used to compare rates of inflation, not price levels.

Change came, as it often does, through a combination of analysis, personality, and the passage of time, which allows people to become more senior and more influential. ... Census, under the leadership of David S Johnson, developed a Supplemental Poverty Measure based in large part on the recommendations of the Academy Report. Incorporated into this new measure — which is not the official poverty measure — are spatial price indices...

‘Regional price parities’ now available...

...

...but the official poverty measure remains The Supplemental Poverty Measure has not been adopted as the official poverty line, and indeed, its greater complexity would make it difficult to use for testing for individual eligibility. Yet this means that the official poverty measure, with all its flaws — including the failure to take local prices into account, and its blindness to taxes and official benefits — continues to be used, something that is unlikely to change in the current climate in Washington. Even so, the new measure is widely used in analysis including in official documents, particularly to assess the effects of the Great Recession of which it gave a much superior account than the official measure — not because of spatial price indices — but because the official measure ignored the substantial effects of the safety net on supplementing incomes of the poor. A bad measure can survive for a long time even when its deficiencies are well understood, though perhaps the recent crisis has helped make those deficiencies even more starkly and widely apparent, and may create some of the political momentum that will eventually lead to change.

    Posted by on Tuesday, October 13, 2015 at 02:37 PM in Economics | Permalink  Comments (5)


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