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View related content: Poverty
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indicator for all our antipoverty policies–is an outdated and badly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
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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