What’s the Best Way to Measure Poverty: Income or Consumption?

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Yesterday we learned that 15.1% of Americans were living in poverty in 2010, the highest level since 1993, and up nearly 1 percentage point from 2009, when it was 14.3%. That data is based on an income measurement which shows that in 2010, 46.2 million Americans were living below the poverty line, defined as $22,314 a year for a family of four.

But income is just one way to measure poverty, and a particularly tricky (and narrow) way at that – so says Notre Dame economist and National Poverty Center research affiliate, James Sullivan, who believes that to measure poverty strictly by income fails to accurately reflect people’s true economic circumstances. Income alone ignores the effects of things like the Earned Income Tax Credit, Medicaid, food stamps, and housing subsidies. From a Notre Dame press release on Sullivan’s recent poverty research:

“Income received from food stamps, for example, grew by more than $14 billion in 2009. By excluding these benefits in measuring poverty, the Census figures fail to recognize that the food stamps program lifts many people out of actual poverty,” Sullivan says. “If these programs are cut back in the future, actual poverty will rise even more.”

Using income-based numbers only also overlooks the struggles of many Americans who are tightening their belts – those who are worried about losing their jobs or facing foreclosure, or those who devote a large chunk of their paychecks to paying off medical bills. The standard of living for these people is lower than their income would suggest.

In a recent paper, Sullivan and co-author Bruce D. Meyer of the University of Chicago, argue that consumption offers a more robust measurement of poverty than income. Their key point is that poverty, when measured correctly, has declined over time, which is contrary to official measurements. Here’s the full version of their paper. From the abstract:

This paper examines changes in the extent of material deprivation in the United States from the early 1960s to 2009. We investigate how both income and consumption based poverty have changed over time and explore how these trends differ across family types. Estimates of changes in poverty over the past five decades are very sensitive to how resources are measured. A poverty measure that incorporates taxes falls noticeably more than a pre-tax income measure. Sharp differences are also evident between the patterns for income and consumption based poverty. Income poverty falls more sharply than consumption poverty during the 1960s. The reverse is true for the 2000s, although in 2009 consumption poverty rises more than income poverty… Income based poverty gaps have been rising over the last two decades while consumption based gaps have fallen. We show that how poverty is measured affects the composition of the poor, and that the consumption poor appear to be worse off than the income poor.

Some quick highlights:

  • Income and consumption measures of the poverty gap have generally moved in opposite directions in the last two decades, with income based poverty gaps rising, but consumption based poverty gaps falling.
  • Sullivan and Meyer show that upward bias in the Consumer Price Index (CPI-U) has a large effect on changes in poverty over long periods of time. For example, between the early 1960s and 2009, an income poverty measure that corrects for this bias declines by 13.5 percentage points more than a comparable measure based on the CPI-U.
  • Compared to the income poor, the consumption poor are less educated, less likely to own a home, more likely to live in married parent families, and much less likely to be single individuals or elderly. The fraction of the consumption poor living in married parent families is 80% higher than the fraction of the income poor living in such families in recent years.

Here are three graphs from their paper demonstrating the differences between income-based measurements of poverty, and consumption based measurements over time:

 

 

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  1. Impossibly Stupid says:

    Hidden due to low comment rating. Click here to see.

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  2. Joshua Northey says:

    This makes a lot of sense to me. I have friends who just recently began food stamps and other assistance (and are expecting another child *rollseyes*), they seem to feel better off though their “incomes” have been declining.

    Hot debate. What do you think? Thumb up 16 Thumb down 13
  3. David Leppik says:

    But if the government measured poverty to include poverty-fighting measures such as food stamps, it would create a paradox whereby anyone getting food stamps would be ineligible for food stamps.

    We don’t have third world style poverty, with the famine and disease that it entails, and I like it like that.

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    • John B says:

      Remember, food stamps are given based on income–not assets, so many people getting food stamps are wealthier than people working who don’t qualify. (The famous Michigan lottery winner who took the lump sum, and then because he had no “income”, he still collected food stamps).

      And as many other programs make anyone who is on food stamps automatically eligible, the measurement is even more skewed against reality.

      The author is right–the current measures of poverty are outrageously wrong.

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      • Owen says:

        I would like someone to do a study of poverty in which people in each quintile are surveyed and asked what income should be the poverty line.

        I make 8,000 dollars a year more than my friends that own a car but have the same income. Who is richer and who is poorer?

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      • Joshua Northey says:

        In my early 20s I was working on and off for 10-15$/hr. My yearly income was maybe in the $15,000-$20,000 range. Yet I had a nice 2 bedroom apartment I didn’t share in Saint Paul for $850/month, a car, and lived a very high quality life.

        Granted the car had been purchased for under $2,000 a few years earlier so it wasn’t nice (a 15 year old Honda). I biked anywhere less than 10 miles away. I also had no cable and used my broadband connection for entertainment. I was careful not to get anyone pregnant, and to eat inexpensive foods like rice vegetables and chicken, didn’t go out drinking, didn’t take vacations or buy consumer goods other than what I absolutely needed.

        You can live an inexpensive high quality life if you need to. Now I make more than twice as much and have a wife who works full -time, but my austere habits mean we will be debt free before we hit 35 and we both come from very modest backgrounds.

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      • BSK says:

        Yea, but you were single, without kids and I’m guessing that was at least 10 years ago. Imagine making basically that same amount, between you and your wife, in today’s dollars with two kids.

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      • Joshua Northey says:

        I wouldn’t have two kids if I made that amount. Problem solved.

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      • Denise says:

        While it would be helpful for more people to take this attitude (it would be great if more people waited to have kids), it applies to everyone, or even the majority. To begin with, I live in LA County, and $850 for a two-bedroom apartment is not going to get you something “nice” anywhere near me, and plenty of other large metro areas are the same way. People can’t simply move somewhere cheaper without a job. With the higher cost of living, people find it more difficult to build a savings. You must also recognize the element of luck. What if, two years after determining you were financially able to have a child, you were laid off and couldn’t find a job that pays even 75% of what you had been making? What if, when you were in your twenties and working that way, you were diagnosed with leukemia? What if you were in an accident that kept you from working for awhile? What if your child had a major health issue and you didn’t know how to care for him without either your wife or you being home part, if not full, time? Many families that are struggling have had something awful happen to throw everything off. Combine that with the higher cost of living, and you have people who did what they could to have financial stability only to end up broke.

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      • Jane says:

        Food stamp eligibility is based on assets as well as income- you can see for yourself here: http://www.fns.usda.gov/snap/applicant_recipients/eligibility.htm.
        You cannot own certain assets or have more than $2,000 in the bank in order to qualify for food stamps (unless the state has it’s own separate rules from the feds). If someone received food stamps and had many assets it is the fault of the public eligibility worker and not the person who applied. Please get the facts before spreading false information…..

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  4. Sam_L says:

    Analysis of poverty should also have some baseline measurement of quality of life. Access to telecommunications, proximity and access to schools, proximity and access to health services, caloric and nutrient intake, entertainment opportunities, living space, etc.

    There seem to be two important issues – inequality in access to capital and income generating opportunities (still a problem in the US) and significant suffering caused by lack of financial resources (mostly resolved in the US).

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  5. Stephany Sofos says:

    I totally agree with this study. As a retail and real estate anaylsis I see this everyday. More and more families are bunched up together and pooling their monies to survive. I see them buying more spam then hamburger. There are a lot of very angry people out there. All this is causing more social stress and discord and I am concerned things are going to get a lot worst.

    Thumb up 6 Thumb down 3
    • iluvmint says:

      I believe you misunderstand. The author is arguing the opposite of what you’ve written. Having an outside agency(such as the government) give you some of the things (such as prepaid cards to buy food) that you used to have to purchase allows you to buy other stuff, increasing consumption.

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    • Dave114 says:

      Not quite the core of your argument, but isn’t spam more expensive than ground beef?

      Thumb up 4 Thumb down 1
  6. M.M. says:

    We’re basically talking about “treated” vs. “untreated” poverty. As if it were a disease. Measure based on income, you have a good idea of what the actual problem is. Measure based on consumption, you have a good idea of how well the remedies are working.

    You need both sets of data in order to get the full picture. And, frankly, to use ONLY consumption would seem very strange to most Americans, because we view poverty-treatment measures like food stamps as something that SHOULD be temporary fixes until people get back on their feet again. Again, to use a medical example, we feel that such measures are treatments for an ACUTE illness, not life-long palliative care for a CHRONIC, incurable one. So to measure only consumption would be like saying that diabetes is not really that big of a health problem, because lots of people are on lifelong insulin regimens. Treating a disease does not make it not exist in the first place.

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    • Mike B says:

      As a measure of the economy you are correct, but as a measure of our society measuring consumption shows the net result of supporting the poor. What’s amazing is looking at the charts and seeing how high both measures of poverty were back in the 1960′s. People wondering how we passed all that Great Society legislation back in the 1960′s and to see that 25% of the population were consumption poor compared with less than 10% today shows both the impetus and the effect of those programs. Woe to the political party that dares to enact policies that cause those two lines to better match eachother.

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  7. Nathan says:

    But doesn’t this, almost by definition, mean that there’s a problem happening? If a family consumes more than it earns, it isn’t acting “less poor,” it is acting “more in debt.” Perhaps a better method of measuring poverty than either income or consumption is in investment/savings.

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    • iluvmint says:

      I believe you misunderstand the argument. The author is stating that income poorer families are eligible to receive more services (such as foodstamps, free/discount medical care) allowing them to purchase more stuff, while consumption poor families are likely making too much to qualify for these services, making them have to pay out of pocket for essentials (food/medical care), causing them to have to less ability to buy stuff.

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    • Enter your name... says:

      Also, your consumption may be based on other people’s income. For example, my “low-income housing” neighbor (a single mom with a steady but low-skill job) drives a $40,000 SUV. Her wealthy mother apparently bought it for her and is paying all its expenses. So this “low-income” person is consuming far more than her income, but she’s not going into debt to do so.

      Although this example is particularly extreme, it is not actually unusual for a parent to give (or lend) a used car to a struggling adult child, or for grandparents to pay for sports programs or music lessons that the family couldn’t afford, or to buy new clothes for all the kids. I have known two families who rented houses from relatives at dramatically below-market rates for years.

      Some low-income households have access to significant financial resources. Others don’t. The likelihood of relatives paying for luxuries is not part of the government poverty calculation, but it is a part of the consumption calculation.

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    • Tim says:

      The article was more concerned with consumption made possible through benefits that aren’t considered income.

      Quote: “ Income alone ignores the effects of things like the Earned Income Tax Credit, Medicaid, food stamps, and housing subsidies.”

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  8. 164 says:

    Clearly current measures of poverty that just look at cash income are flawed . For instance the majority of those considered to be living in poverty have luxuary items in their homes that even the rich would have envied a generation ago.

    Is a family living in poverty if the have in their home:

    1. Two Cars
    2 A Large Screen TV
    3 Expensive Electronic Gadgets
    4 DVD Players, TIVO, Blue Ray, and Satalite or Cable TV
    5 Smartphones

    Surveys have shown these items to be in most homes of families classified as living in poverty.

    Hot debate. What do you think? Thumb up 27 Thumb down 26
    • Deron says:

      Survey

      http://www.heritage.org/Research/Reports/2011/07/What-is-Poverty#_ftn3

      It’s a strange survey.

      First because it suggests that current poverty should be measured against a historical standard of living that’s 100 years old. That’s a helluva vision for the country.

      Second, because some durable goods probably cost society less if everyone has them – refrigerators for instance help avoid disease. I’d like for people to be employed, and a phone number seems to help people find work and employers find them.

      Third, having something says little about where it legal came from originally. Want to get rid of a television, printer, monitor, etc…? Put it on the curb. If an impoverished family takes it, are they lifted out of poverty? If they rent an apartment and it has a refrigerator is that a luxury?

      Finally, if their confident intervals are something to go by, I’m not sure I’d be too confident in their findings.

      The only things that might seem too luxurious are subscription items. Having a smartphone is easy, having a plan is expensive. Cable plans especially seem wasteful, at least a phone can be used to find a job.

      As for cable plans…

      “In 2010 the proportion of America’s population that pays for television dropped for the first time, with the losses apparently concentrated among the poorest customers.”
      http://www.economist.com/node/21526314

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      • KPres says:

        The cable plans are dropping because of things like Hulu and Netflix.

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      • Colin_D says:

        I agree, saying that a person isnt poor just because they have a telephone and a refrigerator doesn’t seem that different to me than taking 2 people who are only able to get food by hunting, giving one a stone spear and one a steel spear and telling the one with the steel spear that he is rich because 2000 years ago the steel spear would have been worth a king’s ransom.

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      • Nate says:

        You can’t take the tools out of context to compare them. Better, more efficient, technology lowers the price of everything. Try comparing someone alive during the stone age with someone alive during the iron age – At least the one wielding metal can cook his kill over a fire. He’s waaay better off

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      • Neil (SM) says:

        I agree with what you said, although the confidence intervals look fairly close to the results to me. Nothing that indicates the numbers are unreliable.

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    • James says:

      On the other hand, am I living in poverty because I choose not to have most of those things, even though I could easily afford them?

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    • twobeef says:

      And the poor of yesteryear had crazy things like access to public transportation, indoor toliets, maybe even electricity! Luxurious!

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    • Owen says:

      After all, everyone in America is rich that has running water.

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    • Denise says:

      Yeah, I hardly think having a fridge or air conditioning (notice that those with central air is below 50%) means a family is living well. And I don’t know where you get “large screen TV” and “Smartphone.” I see that people have TVs and cellphones, but nothing about the majority having big screens and iPhones. Cellphones are there for a simple reason–for someone in poverty, buying a pre-paid, month-to-month cell phone is easier than having a landline, so they have dropped the landline and have a cell phone that they pay as they go.
      As others have pointed out, we have no way of knowing how people got these items. If someone was better off and had two TVs, maybe someone gave them one, maybe they bought one at Goodwill, maybe they are financially irresponsible and not prioritizing well. While I’m sure that the last option is true for some of those families, I don’t see how you could know it is true for all or most of them.

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