Mismeasuring Poverty

Economist's View has a post on the following article:

http://prospect.org/article/mismeasuring-poverty

Mark Levinson June 25, 2012

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Our government’s own count of the poor, while not denying their existence, also minimizes their number—not by undercounting them (though that’s a factor, too) but by setting the poverty bar so low that tens of millions of poor Americans are not accounted for. This miscategorization not only paints a picture of a more prosperous America than in fact exists. It also excludes large numbers of the poor from assistance that they need and might otherwise obtain.

In fact, the poor are with us today in greater numbers than we have seen since we started keeping track over half a century ago. If we counted them by the standards that most other industrialized democracies employ, their numbers would increase by half*—from 46 million to roughly 69 million. To understand how that can be, it is important to grasp the way we define poverty and what that definition has to do with economic hardship.

The United States measures poverty by a standard developed almost 50 years ago by Mollie Orshansky, a Social Security Administration official. At that time, the typical family spent about one-third of its income on food. Orshansky calculated the costs of an emergency food budget, which would provide adequate nutrition for only a short time, and also a low-cost budget, which would provide adequate nutrition for the entire year. She then multiplied the cost of each budget by three to arrive at two poverty thresholds.

Orshansky wanted to use the low-cost food budget to compute poverty thresholds. It made sense to base the poverty line on a food budget that would allow adequate nutrition for an entire year. However, President Lyndon Johnson and his Council of Economic Advisers decided to use a figure close to the emergency food budget to set poverty-level income. Since then, the figure has been updated annually for inflation.

The problems with the official measure have long been recognized. Not only are the original thresholds too low but they are based on outdated assumptions about family expenditures. Food now makes up about one-eighth of an average family’s expenditure. At the same time, the costs of housing, child care, and health care have grown. Thus the official poverty level no longer reflects the true expense of supporting a family at the minimally adequate level. In addition, the current poverty measure is a national standard that does not adjust for variations in the cost of living from state to state and among urban, suburban, and rural areas.

The official poverty standard also fails to accurately tally family resources. When determining whether a family is poor, income is counted before subtracting taxes, resulting in an overestimation of how much families have to spend on basic needs. On the other hand, the method understates the resources of families who receive some types of government assistance, because the federal Earned Income Tax Credit (EITC) is not counted, nor are in-kind government benefits such as food stamps and housing assistance.

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All of these efforts show that families must have an average income of at least twice the current poverty level to cover basic expenses. More than one-third of Americans—more than 100 million—live beneath that more realistic threshold. These family budgets include only the most essential living expenses and are based on modest assumptions about costs. For example, the budgets assume that family members have access to employer-sponsored health coverage when not covered by public insurance, even though the majority of low-wage workers don’t have employer coverage. The budgets do not include money to purchase life or disability insurance or to create a rainy-day fund that would help a family withstand a job loss or other financial crisis. Nor do they allow for investments in a family’s future financial success, such as savings to buy a home or to fund a child’s education. In short, these budgets indicate what it takes for a family to cover their most fundamental living expenses—enough to get by but not enough to get ahead.

..... [If a family member has a serious health problem, this budget would not cover their most fundamental living expenses.]