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Monday, November 20, 2006

How Should Poverty Be Measured?

There are both income and consumption based measures of poverty, and they give different pictures of how much poverty exists and how it is changing over time. Which measure is better? The Minneapolis Fed takes a look at this question:

Poor by what standard?, by Ronald A. Wirtz, Editor, Fedgazette: ...Official poverty guidelines were first developed in 1963 by economist Mollie Orshansky (working at the Social Security Administration) and formally adopted two years later ... for President Lyndon Johnson's War on Poverty. Although changes have been made, in essence today's poverty yardstick still reflects Orshansky's original definition of poverty based mostly on household food consumption and minimally adequate diets.

Most economists, sociologists and other researchers agree that this definition -- called the “money-income” approach ...-- is far too simplistic a measure... Numerous alternative methodologies have been drawn up... Many studies indicate that poverty is higher than official estimates; others say it's lower.

A growing body of research ... argues that a better, more direct way to assess household need and hardship is to look at consumption rather than income. Unlike most alternative measures of poverty, ... consumption-based research suggests that poverty has lessened.

Income calculator on the fritz First, a quick word about the shortcomings of the official poverty measure. Simply stated, it fails to rigorously measure either household need or income.

From the standpoint of need, the official poverty measure includes no consideration ...[that] housing and health care ... costs have been rising. Neither does it factor in certain work-based expenses like day care and transportation... On the flip side, the current definition also grossly overstates the necessary food budget...

When it comes to income, the current ... poverty income thresholds do not capture government efforts to support poor households, including near-cash transfer programs (like food stamps and housing subsidies) or direct-cash programs like the Earned Income Credit, each of which can add thousands of dollars to annual family income and technically push many out of poverty. ... Although the EIC lifts millions of people above the poverty line every year, all of them are nonetheless officially counted as poor.

Existing income measures also fail to gauge private transfers—informal contributions, personal loans, gifts or cost-sharing efforts a household might undertake to help make ends meet. ...

Researchers have long acknowledged these and other shortcomings of the official poverty measure. ... Dissatisfaction with the current poverty measure has spurred a cottage industry in alternative measures—some that define basic needs differently, others that measure income more comprehensively, others doing both....

Those that adjust for different types of expenditures (like health care and work and child-care expenses, all of which lower discretionary income) generally show higher poverty rates. Other studies that adjust for a more sophisticated definition of income typically (but not always) show a lower poverty rate (see chart). ...

A 1995 report by the National Academy of Sciences was widely believed to have developed more rigorous income and basic-need thresholds that resulted in higher poverty rates than the official measure (see chart). But NAS recommendations were never implemented...

That's reportedly because many parties have a major stake in the existing definition; small changes can mean big swings in who is and is not considered poor, all of which is tied to tens of billions of dollars in public spending. This brings a multitude of interest groups—both political and nonpolitical—to the lawmaking table, many of them pulling in opposite directions.

You are what you buy There's an even more fundamental problem with an income-based poverty measure. ...[I]f we're worried about families' ability to obtain the necessities of life—food, clothing, shelter, health care—then income is a mere proxy for that; we can only assume that with a certain amount of money those needs get met.

Many believe consumption- or expenditure-based measures offer a truer gauge of poverty, because measuring consumption gets closer to the matter of whether families do satisfy their basic needs. ...

Yes, income is important, but it overlooks alternative financial resources—government assistance, private transfers—as well as tight budgeting and other thrift efforts that families use to make ends meet. The utility of a consumption approach becomes more obvious when we see that poor families regularly consume more—sometimes much more—in terms of food and material and nonmaterial goods than their income would suggest is possible...

How can this be? There are several possible explanations. As has been pointed out, income measures leave a lot to be desired; both wage and nonwage resources are likely underreported, and considerable government assistance is not included. Households might also be spending beyond their means, tapping home equity, credit cards or other resources.

Wherever the resources come from, we know that the comfort level and living standards for poor households have been improving. ... This is due, in part, to government programs targeting those most at risk for hunger—like free and reduced-price school lunches for children, not to mention an increasing number of breakfast and weekend food programs for school-age kids. These financial resources aren't counted in household income statistics.

Rising consumption is also apparent in the material possessions of low-income households. ... Other reports universally show the same consumption trend: Poor households own more stuff and utilize more services than ever before.

Not foolproof Add it all up, and a different pattern emerges regarding poverty. A 2003 Census report on material well-being noted, “As many (studies) show, the levels of poverty and inequality tend to decrease using consumption-based figures, in comparison with income-based measures.” Recent studies have reinforced that notion. ... (see chart). ...

All this is not to say that consumption wins the best-measuring-stick debate hands down, even among advocates. ...[F]or example, ... consumption surveys are much smaller in scale than income surveys, making it difficult to analyze local patterns because of sampling problems.

The consumption model has other blind spots. For example, it can only measure total costs; it has no ability to distinguish the quality of purchases or the utility of different types of purchases to a household. For example, a 2005 working paper by Thomas Deleire ... and Helen Levy ... found that higher expenditures among single-mother households during the 1990s “can be explained by a shift from food at home to food away from home.” While that is positive in some senses—less work cooking at home and more food “leisure”—an alternative explanation is that more meals were eaten outside the home out of necessity and at higher cost to the household budget, as more single mothers worked, either voluntarily or because of changes to the welfare system in the 1990s. Better off? Hard to say for sure.

Sullivan and others also point out that income poverty has simple longevity on its side. ... International comparisons are possible only through income because other measures like consumption are simply unavailable in most other countries.

Austin Nichols, a research associate at the Urban Institute, ... has authored several recent reports on poverty trends. “I think a lot of folks use the official poverty line for the sake of convenience and comparability,” Nichols said... That might sound like faint praise, but Nichols said that “convenience and comparability is not to be scoffed at.” Any new measure would not likely offer a view of poverty dating back to the 1960s and could have “equivalent or greater problems. ... At least the official poverty measure is understood by most people, as are some of its limitations.”

In the end, everything is relative. Not even researchers within the same organization agree on the best way to measure poverty. Gregory Acs is a senior research associate at the Urban Institute. ... Along with his counterpart Nichols, he has considerable experience with both poverty trends and the definition-measurement issue.

Acs and Austin tend to disagree over the utility of consumption-based poverty measures. ... This scholarly head butting illustrates the general difficulty of pinning down who is poor and who is not. Said Acs, “I think Austin and I agree that there are pros and cons to all the poverty approaches,” both income and consumption. The existing measure has stuck because “we have the most experience measuring income ... (and) researchers and policymakers are by now quite aware of its limitations,” according to Acs...

I think there might be another consideration. After the election, I was gently needling a Republican staffer who would lose her job due to the election outcome about taking unemployment insurance while looking for a new job. She was very emphatic that she was not about to take a government handout under any circumstances (I think that's probably not true, when people are in dire circumstances with no place to turn for help it looks very different, but it's the mindset I'm interested in). That made me recall the many, many times over the years I have heard government dole, and the people receiving it, described in less than generous terms.

I explained to the person that it was insurance, not welfare, and that she had already paid the premiums. That seemed to help a little, for a bit anyway, but in the end she was adamant about never taking welfare, social insurance, whatever. [Side note: I was very pleased to see Lawrence Lindsey argue today on the WSJ editorial page that lifting the cap on Social Security taxes would cause it "to become a welfare program" by "ending the linkage between contributions and benefits." I've heard Social Security program called a welfare program so often by conservatives, it's refreshing to hear a clear acknowledgement that it isn't. Notice, though, for present purposes the negative stigma attached to "welfare".]

She is not alone. Many people are stigmatized when they are not self-sufficient, when thy must rely on others to survive. It's socially embarrassing for them to take "welfare". Maybe that's societies fault for stigmatizing the unfortunate, maybe they shouldn't feel that way, but I am not going to judge how they should feel about receiving help. For this reason, it is not clear to me that people receiving assistance ought to be counted as necessarily better off (in a utility sense) when they receive food stamps, free lunch at school, hand-me down clothing, and so on. It's true that such programs alleviate their hunger, but is it fair to say they are better off, or even less impoverished?

For example, if a person is 100% dependent on the state for their livelihood, for every meal, piece of clothing, housing, etc., do we want to count that person as being out of poverty if their basic needs are met by the state? Yes, they are getting enough to eat, but aren't they also still poor? I would prefer a measure that looks at the degree to which people are self-sufficient, i.e. if we are going to measure how impoverished people are using consumption measures, stripping out the part that is government financed, financed by borrowing, or by liquidating assets would give a better measure of their self-reliance. This is the criticism of income measures, that they miss these things, but it depends upon what you are trying to measure. If it's simply whether people are getting their basic needs met somehow, that's one thing, but if it's a question of self-reliance and well-being, then the measure is different.

    Posted by on Monday, November 20, 2006 at 04:06 PM in Economics, Income Distribution, Policy, Social Security | Permalink  TrackBack (0)  Comments (27)


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