Monday, December 25, 2006

Poverty and the Poverty Rate
A key criticism coming from socialists and those strongly leaning that way (Democrats) is that the overwhelming economic growth this country has experienced in the last few decades has not benefited the poor. Trickle down? Rising tide raising all ships? Hardly, they say. Why look at the poverty rate: Since 1973, the "War on Poverty" does not appear to be going well. Poverty rates increased from just over 10% to nearly 13% in 2003. However, a very well researched paper, "The Mismeasure of Poverty" by Nicholas Eberstadt, presents a different picture. It is well worth reading, but I will summarize its main points. As you read, please do not misconstrue these data and arguments to be unsympathetic toward the poor. Eberstadt does not argue that our progress in fighting poverty has been satisfactory. Rather, that because antipoverty spending is largely based on the poverty rate, we need a better measure for determining the real problem and for evaluating programs that address the problem.

The poverty rate was first established in 1965 and was intended to establish the income level at which it would be difficult to buy enough food considering life's other expenses. The rate is still calculated in the exact same way as in 1965 and is updated only to reflect changes in the Consumer Price Index. Note that this is a measure of absolute poverty and does not take into account improvements in living standards as a relative measure might.

An increasing poverty rate over the last 30 years despite great gains in per capita GDP seems to indicate an abject failure in the social policies meant to address poverty and promotes Marxist criticisms of capitalist economies. However, Eberstadt points out that those on the bottom are much better off than they were 30 years ago. The bottom quintile have lower unemployment, higher per capita income, higher levels of education, better healthcare, bigger homes, and spend more money than their 70's counterparts. Improvement in these areas actually predicts (is positively correlated) with increasing poverty rates. This is absurd! The numbers from the bottom quintile for the last 30 years:

  • Household expenditures have increased 43% per capita
  • Percentage of children who are underweight decreased by 33% (obesity is a much bigger problem)
  • In 1970, 27% of poverty-level households were "overcrowded" (averaging over one person per room) compared to 6% in 2001
  • In 1972 only 40% had a car. In 2003, 75% owned an automobile
  • Infant mortality (overall) fell by two thirds
All things considered, those in poverty now have a similar quality of living to the middle class in the 1960's. A possible explanation for some of the discrepancies between standard of living and poverty rate is a more mobile society. There is much more transition, more people are spending a few months technically in poverty but do not stay there. When someone changes jobs they may spend a month or more earning a poverty level income, thus increasing the poverty rate. In 1996-99, 34% spent two or more months below the poverty line. However, only 2% spent all 48 months below the poverty line. Their spending (living standard) reflects their expected earnings over a longer period of time, not their month to month earnings. Also, expenditures from the lowest quintile are consistently much higher than reported income. Their net worth is not declining, so they are not simply borrowing more. This indicates that poverty surveys do not accurately measure actual income.

The poverty rate is clearly a near worthless measure of the economic well-being of those on the bottom. We need more accurate information to address this country's poverty problem. The poverty rate no longer gives valuable insight into the needs of our neighbors and clouds our judgment about economic and social policy.

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