Poor Statistics

With the economy in an ominous recession of uncertain depth and duration, the incidence of material hardship in America will surely spike in the year (or years) ahead. But amazingly, Washington lacks the statistical tools to assess--and thus address efficiently--the coming surge in need.

America's official poverty rate--for over four decades the main indicator for all our antipoverty policies--is an outdated and badly broken index. Its built-in defects make it incapable of providing accurate information about poverty trends. If the Obama Administration hopes to wage an effective fight against domestic poverty, it will need a much more reliable yardstick. The rate calculation dates back to 1965, during LBJ's war on poverty.

Essentially it matches a family's reported annual income against a "poverty threshold"--a hypothetical bare-bones budget, based on household size and composition, that is adjusted with the inflation rate. If a family's reported income falls below that given threshold, it is counted as poor. The poverty rate is the percentage of the population that is officially poor. The government's aim here is to track absolute poverty rather than relative poverty or inequality. If the least prosperous families are doing better, then the poverty rate should be going down, even though these families may remain as far behind the rest of us as they ever were. According to official figures, America's lowest poverty rate ever was in 1973, at 11.1 percent; in 2006, a prerecession year, America's official poverty rate was 12.3 percent. This is nonsense with decimal points. Does anyone seriously believe that a smaller fraction of Americans lived in absolute poverty in 1973 than today?

According to the Census Bureau, inflation-adjusted per capita income was well over 50 percent higher in 2006 than in 1973--and median family income (for smaller families today, remember) was over 20 percent higher. The unemployment rate--a key driver of poverty in all industrial societies—was lower in 2006 than in 1973 (4.6 percent versus 4.9 percent).

Does anyone seriously believe that a smaller fraction of Americans lived in absolute poverty in 1973 than do today?

Educational attainment (and thus productivity potential) for the adult population was also significantly higher in 2006, and yet means-tested spending on government antipoverty programs is now at least twice as high as in the Watergate era.

Only a misprogrammed computer would designate 1973--that Vietnam War and "stagflation era" year--as America's golden age of progress against poverty. Yet this is what the official rate asserts. This isn't the only fault in the statistics: They also miss the improvement in living standards among the officially poor. Consider: In 1973 over half the families in America's poorest fifth didn't own a car. By 2003 over 73 percent of them owned some sort of motor vehicle--and 14 percent had two cars or more. By the same token, about 27 percent of American children below the poverty line failed to see a doctor annually in 1985; 20 years later, the figure was 11 percent. Thus poor children nowadays are more likely to have an annual doctor visit than nonpoor kids a few years ago.

What is wrong with the official poverty rate? It measures the wrong thing--and always has. That thing is income. But poverty is a matter of consumption, and a huge gap has come to separate income and consumption at the lower strata of our income distribution. In 2006, according to the annual Bureau of Labor Statistics Consumer Expenditure Survey, reported purchases by the poorest fifth of American households were more than twice as high as reported incomes.

For reasons still only partly understood, the surfeit of spending over income among poorer U.S. households has increased dramatically since the 1970s--making income an ever less dependable predictor of living standards for the disadvantaged. Indeed, while the official poverty thresholds are meant to be constant over time, a whole host of data confirm the (welcome) fact that material conditions for our population in "poverty" have been steadily improving. The official statistic is incapable of documenting--or even recognizing--any changes in living standards among America's poor.

Now, more than ever, it is urgent for America to be capable of monitoring the material need in our midst. Our official poverty rate is ill-suited for that task and cannot be repaired by inventive tinkering. It is time to discard this broken compass and start over.

Nicholas Eberstadt is the Henry Wendt Scholar in Political Economy at AEI.
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