Arnold Kling

Measuring Poverty

Arnold Kling, Great Questions of Economics
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Nicholas Eberstadt argues that the official poverty index overstates the extent of poverty in the United States.

The U.S. poverty rate, however, is based exclusively on income data. Income numbers can only hint at actual consumption patterns...

For the bottom fifth of households sampled, expenditures typically exceed income by more than 100 percent. In the latest survey, for every dollar of reported pre-tax income, the poorest fifth of American households reported spending $2.31!

A more extensive discussion of this issue is given by W. Michael Cox and Richard Alm in their book Myths of Rich & Poor. They cite a study by economist Daniel Slesnick that measures the poverty rate based on consumer spending rather than income. By that measure, the poverty rate at the end of the 1980's was down to 2 percent, compared with an official measure of 11 percent.

Consumption tends to be high relative to income among people with low incomes, for various reasons.

  1. People who are retired may have low incomes, but they have savings.
  2. Income tends to vary from year to year. People who have low incomes one year often have had higher incomes in the past and/or expect higher incomes in the future. This allows them to draw down assets or borrow against future income.
  3. Unreported income earned informally in the so-called "underground economy."
  4. Government transfer payments, such as food stamps.
  5. Support from parents, children, and other relatives.

Discussion Question. How does your assessment of the official poverty measure depend on which factor accounts for the ability of low-income households to consume more than their reported income? If government transfers and family support were the main factors, would the official poverty measure be more reasonable than if the other factors were predominant?

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