Schansberg: How We Measure ‘Poverty’

January 13, 2014

(For the use of the membership only)

by Eric Schansberg, Ph.D.

This year marks the 50th anniversary of the beginning of the “war on poverty.” That is true, at least in terms of its enacting legislation, with spending expanded a bit under Lyndon Johnson and especially under Richard Nixon.

One of the first observations to make is that progress against measured poverty stopped once the war on poverty began. (The poverty rate has fluctuated between 11 and 15 percent over the last 50 years.) With economic growth, poverty was decreasing rapidly post 1945. A rising tide was, not surprisingly, lifting most boats. Once the war on poverty began, however, progress stopped. Why?

If we use lame statistics and analysis, the war on poverty stands easily condemned. Poverty falls; the war begins; poverty quits falling; thus the war is a failure. If we move to more sophisticated analysis, though, the answers are more complex, interesting — and realistic.

Why did measured poverty quit falling when the war began? These are the primary reasons:

The bigger issues are with the government’s measurement of income. First, the government is only picking up reported “income” by each “household.” Unreported income is likely — when one is engaged in illegal activity or getting paid under the table to avoid taxes or welfare-benefit reduction. And if people are shacking up, they might live like a household with a bigger income, but be measured as if they’re in two separate households with smaller incomes.

Second, the government is only measuring “cash” income. So, cash benefits paid by the government are counted (e.g., Social Security) while non-cash and in-kind benefits are ignored. We could give every poor household $50,000 in food stamps, and they would still be counted as poor by the government. In this, the poverty rate is much more of a measure of dependence on government than a measure of those living in poverty. Putting it more bluntly, unless they’re refusing assistance, no one lives in material poverty in the U.S. as measured by the government’s poverty standards.

Third, the government ignores wealth, focusing exclusively on annual income. One might have considerable wealth but modest income and be measured as poor. This explains the impressive data about the poor in terms of home ownership and other consumer goods.

Similarly and finally, the government’s measure of income is only a snapshot — the statistics of one year rather than the dynamics of many years. Thus, it says nothing about the larger question of how “poor people” are doing five and 10 years into the future. As an example, I had a number of colleagues in grad school who were “poor.” Likewise, the country’s highest poverty rates are found in college towns.

Is there poverty? Sure. Using static analysis, has government increased the living standards of many poor people? Sure. Using dynamic analysis, has government increased poverty by subsidizing it? Sure. The first two questions are obvious and not all that interesting. The third question is complex and difficult to measure. But any layman concerned about poverty should know the basic point — that the statistics used to measure poverty are lousy.

Eric Schansberg, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, is professor of economics at Indiana University Southeast.

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