Home > #OWS, modeling, statistics > Defining poverty #OWS

## Defining poverty #OWS

April 7, 2014

I am always amazed by my Occupy group, and yesterday’s meeting was no exception. We decided to look into redefining the poverty line, and although the conversation took a moving and deeply philosophical turn, I’ll probably only have time to talk about the nuts and bolts of formulas this morning.

The poverty line, or technically speaking the “poverty threshold,” is the same as it was in 1964 when it was invented except for being adjusted for inflation via the CPI.

In the early 1960’s, it was noted that poor families spent about a third of their money on food. To build an “objective” measure of poverty, then, they decided to measure the cost of an “economic food budget” for a family of that size and then multiply that cost by 3.

Does that make sense anymore?

Well, no. Food has gotten a lot cheaper since 1964, and other stuff hasn’t. According to the following chart, which I got from The Atlantic, poor families now spend about one sixth of their money on food:

Rich people spend even less on food.

Now if you think about it, the formula should be more like “economic food budget” * 6, which would effectively double all the numbers.

Does this matter? Well, yes. Various programs like Medicare and Medicaid determine eligibility based on poverty. Also, the U.S. census measures poverty in our country using this yardstick. If we double those numbers we will be seeing a huge surge in the official numbers.

Not that we’d be capturing everyone even then. The truth is, in some locations, like New York, rent is so high that the formula would likely be needing even more adjustment. Although food is expensive too, so maybe the base “economic food budget” would simply need adjusting.

As usual the key questions are, what are we accomplishing with such a formula, and who is “we”?

Categories: #OWS, modeling, statistics
1. April 7, 2014 at 8:32 am

Cathy,

I teach economics, public policy, and econometrics at a school of social work and we discuss this issue a lot. There are other problems in addition to the ones you pointed out. One is should the poverty line be “absolute” or “relative.” We now have an absolute one so whether someone is poor is based on whether they fall below some income threshold which supposedly captures what their basic needs are. But some have said poverty is more about how someone compares to the average person or household in their society. Seen this way the poverty threshold should be some fraction (perhaps .50 or .60) of the median income in a society.

Another issue is what counts as income to determine if someone is poor. “In kind” benefits like Medicaid don’t count as income and there is a big debate about whether such benefits should count as such.

A third issue is the fact that the official poverty line only considers gross income in determining whether one is poor but arguably what really matters is net income.

There is a Supplemental Poverty Measure (see here http://www.census.gov/hhes/povmeas/methodology/supplemental/overview.html) which takes some of these and other things into account but my understanding is that it hasn’t replaced the official measure and is only used for research purposes.

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• April 7, 2014 at 11:24 am

Michael, thanks so much. I’m wondering if you had thoughts about setting up the definition so it is maximally useful – and thoughtful – in understanding policy effects. Or am I being naive about the goal?

Cathy

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• April 7, 2014 at 4:26 pm

I actually think the Supplemental Poverty Measure is a good start. It tries to use a better measure of income by considering what’s left over after certain expenses (medical, taxes, and work expenses), it includes in-kind benefits that can be used to purchase food, shelter, and other “necessary” goods as income, and it tries to take into account geographical differences focusing on such differences in housing costs. It’s not perfect but I think it addresses some of the serious shortcomings of the official measure. I think relative measures can make sense too but probably only in relatively well off countries. Use of a relative measure in a poor country with a low median income might result in the strange outcome of concluding that people starving on the streets are not poor because they have incomes above .5 or .6 times the median income in that society. Your question about whether you’re being naive did make me think that, unlike measurement in much of the sciences, measurement of poverty is caught up in political and economic ideological battles about the proper role of government, the proper place of the “free market,” etc. I suspect it’ll continue to be difficult to do a “science” of poverty measurement that’s separate from these matters.

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2. April 7, 2014 at 9:28 am

Blanket statements are never great… “Food has gotten a lot cheaper since 1964, and other stuff hasn’t” certainly leaves you exposed. Long-distance phone calls are cheaper, and video-calls like Skype and Facetime, well, go ahead and put a cost on unimaginable. OK, just picking nits to your larger point.

The really important point which you make but should be even more central (since it likely warps all the averages) is that even in the US regional differences vary greatly, and federal formulas really should adjust based on state, or even better, MSA.

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3. April 7, 2014 at 10:25 am

I think there is questionable merit to taking a standard arrived at in the 1960s and simply multiplying it by a scalar. I think it would be much better to repeat the same set of analyses done in the 1960s to come up with a new standard for the poverty line taking into consideration the changes to our society.
I used to be very uncomfortable with the idea of a flat tax, but the more I think about it, the more merit I think it has, if only to level the playing field with the rich and the ultra-rich being able to take a very large percentage of their earnings as capital gains. If I wanted to do something about poverty, that’s the first thing I would do- set a single flat rate income tax equal to the capital gains tax. In order to keep the tax system as progressive, rather than recessive, I’d allow the minimum taxable income level to vary with region and with the number of dependents. I don’t think that doing this would be a trivial task, because some fraction of a families costs are (relatively) fixed regardless of family size (within a certain scale) such as housing, heating, and connectivity costs (a single internet connection can be shared amongst an entire family quite easily) and clothing (at least theory it’s possible for clothes to be used multiple times as children age), while others (e.g. food) are not. I would also like to expand the negative income tax rate to bring people and families who are below the poverty line (set for their area) up to the poverty line. I wouldn’t give people food stamps, or any sort of nonsense like that, I’d give them cash and let them make the decisions on how to use it without meddling. Giving people food stamps instead of cash seems like an inefficient solution to the problem of empty stomachs that has more overhead and limits families abilities to adapt to their needs, rather than one someone thinks their needs should be.
Who are we? We are the people who think and care.

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• April 7, 2014 at 12:23 pm

There is an idea that should not be taken literally, but is not a bad start, which is that the value of a certain amount of money to someone is proportional to what they have. So \$10 is 1,000 times more valuable to someone with \$1,000 than it is to someone with \$1,000,000. On that basis a flat tax on wealth, not income, would be fair.

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• April 7, 2014 at 1:02 pm

I agree completely. I would expect that the value of each additional unit of currency probably follows something like 1/(x+1), since the fraction of each dollar that can be considered disposable is probably an increasing function x. If you only have y dollars, and y y, an increasing fraction of your money becomes available to you to do other things. Either re-invest in yourself to gain more training and education, or to allow yourself some creature comforts. Of course, any function would also have to take into consideration the intercept (basic costs of living) varies geographically, and that translating between different currencies and even within currencies between grossly geographically distinct regions (e.g. the US and say sub-saharan Africa) are likely to have different slopes and may be very dependent on local conditions (\$1 Canadian is probably far less useful to someone living in sub-Saharan africa than \$1 US, even though it’s worth ~ \$0.90 to an American, for example).

Along the same lines, when you give a person with a relatively small amount of money (x) an increase of z, it must have a greater economic multiplier than giving the same amount of money (either absolute or relative) to a rich person for the very same reasoning as above. A poor person has relatively limited abilities to save their money, and so the ‘residence time’ of money for a poor person is relatively low, so the dollar they they have and spend will cycle through the economy much more quickly than the same dollar given to a rich person. At least, that’s what I think. I may be totally wrong, as this basically assumes that poor people are much more efficient with making ‘investments’ per dollar than the rich are. Maybe that’s completely wrong. I guess here I’m partially betting on the law of averages here and the impact of very large sample sizes. With a relatively massive number of poor people and those people being extremely sensitive to poor investments that there is likely lower heterogeneity in their average ROI than for the rich, where the potential variance in ROI is likely to be much greater, and there is a much reduced ability for sample sizes to smooth out the variability.

At the sae time, I want to be careful that we don’t overly penalize the rich either. Some people are well off because they’ve chosen to work very hard at their profession, and they create a lot of societal value from that work. And the longer and harder they work, the greater value each additional hour of time they spend working has to become to them. I don’t want to disincentivize these super contributors either. But that’s also why I like the flat tax system too. those with substantial incomes from hard work won’t see themselves as being unfairly targeted relative to the poor. They’ll get exactly the same tax rate and minimum taxable income rate as the rest of us. And we’ll get a fairer tax system.

On the other hand, I’m just a biologist, so I could be completely off base here.

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• April 8, 2014 at 9:24 pm

You are not off base at all. Economists and game theorists call it Utility Theory.

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4. April 7, 2014 at 2:37 pm

For more exploratory research, consult the annual micro-data from the Consumer Expenditure Survey:http://www.bls.gov/cex/home.htm#forms. To address differential income and costs, there are data from a small number of metropolitan areas in each of the four geographical regions of the country. The CES site provides aggregated findings by various control variables: metro areas, household income, age of reference person, household composition, race, region, etc.

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1. April 8, 2014 at 4:42 pm