The Mismeasure of Poverty

Nicholas Eberstadt declares victory in the War on Poverty. I would hope Michael Tanner might read this portion of Eberstadt’s 30-page paper:

One may note that most of the reported reduction in overall U.S. poverty, according to this federal poverty measure, occurred at the very beginning of the series – that is to say, during the first decade for which numbers are available. Between 1959 and 1968, the OPR for the total population of the United States fell from 22.4 percent to 12.8 percent, or by more than a point per year. In 2004, by contrast, the U.S. poverty rate was only imperceptibly lower than it had been in 1968 – and actually slightly higher than it had been back in 1969. Indeed, to judge by the official poverty rate, the United States has suffered a generation and more of stagnation – or even retrogression – in its quest to reduce poverty. Figure 1 illustrates the situation. For the entire U.S. population, the lowest OPR yet recorded was for the year 1973, when the index bottomed at 11.1 percent. Over the subsequent three decades, the OPR nationwide has remained steadily above 11.1 percent, often substantially; in 2004, the rate reported was 12.7 percent.

A combination of strong overall growth in the 1960’s and LBJ’s War on Poverty did lower the poverty rate. Since then, the poverty rate has experienced periods where it has increased – either because of recessions or because the government scaled back our anti-poverty efforts. We have also seen periods where the poverty rate has decreased because of increases in our anti-poverty efforts and economic growth.

Eberstadt, however, is saying that the changes in the official poverty rate is a poor measure of how success (or lack thereof) in reducing poverty. While much of his paper is of interest, this following strikes me as silly:

Curiously, the official poverty rate does not seem to exhibit the normal and customary relationship with any of these other poverty proxies. Table 1 illustrates the problem. It contrasts results for the years 1973 and 2001 for the official poverty rate and several other indicators widely recognized as bearing directly upon the risk of poverty in any modern urbanized society. (The choice of these two specific end-years is admittedly and deliberately selective – but it is a selection that highlights the underlying contradictions discussed below.) In the period between 1973 and 2001, for example, per capita income in the United States rose very significantly in real (inflation-adjusted) terms: by roughly 60 percent, according to estimates from the Census Bureau’s CPS series.

Increases in average income per capita would be expected to lower poverty if these gains were evenly spread across the population. But we know that most of these gains have gone to higher income groups. Eberstadt tosses in three other variables including the unemployment rate (more on this later), the percent of people with a high school education, and total non-medical means tested government spending.

While it is encouraging that 84% of the population had a high school degree in 2001, the fact that 16% of the population still does not strikes me as one explanation why the poverty rate has not dipped below 10%. If Eberstadt is using total non-medical means tested government spending (inflation adjusted) in his regressions – might I suggest that he use per capita spending instead especially since he writes:

Between Fiscal Year 1973 and Fiscal Year 2001, real spending on such programs more than tripled, leaping from $153 billion to $484 billion (in constant 2002 dollars), or by over 150 percent on a per capita inflation-adjusted basis. One can make arguments for excluding the health and medical care component from the measure of antipoverty program spending; doing the sums, nonhealth antipoverty spending would still rise in constant 2002 terms from $109 billion in 1973 to $231 billion in 2001, or by 57 percent per capita.

It would be interesting to track real spending per capita over time given the differences in attitudes of Administrations such as Reagan’s in the 1980’s and Clinton’s in the 1990’s. That health care spending has outpaced general inflation is no surprise given the fact that health care costs have generally increased by more than the overall CPI. Which brings us to what may be Eberstadt’s main point:

It embraces an inappropriate deflator for its inter-temporal adjustments in price levels.

OK, if the relative price of necessities such as food declines, using the overall consumer price index might be misleading. But the increase in the relative price of health care works in the opposite direction in terms of any alleged CPI bias. Eberstadt continues with some rather silly complaints:

It takes no account in “money income” of either personal taxes paid or capital gains reaped – quantities that have been on the rise over the past generation. It is biased because it makes no imputation for the implicit rental “income” homeowners enjoy through occupying their own properties.

How many poor people do you know that enjoy income from a portfolio of stocks and own a house?

But let’s talk about this alleged positive correlation between the poverty rate and the unemployment rate (I had to find some excuse for the above graph). As Eberstadt admits, his focus on the 1973 to 2001 period is “deliberately selective”. The correlation between these two series over the entire 1959 to 2005 is near zero. Does this mean the often heard claim – that economic booms tend to lower poverty and recessions tend to raise poverty – has been discredited? Not quite as one can trace much of the increases in the poverty rate to identified recessions and much of the decreases in the poverty rate to recoveries. It has been well recognized by macroeconomists that the natural rate of unemployment is not constant over time so a simple correlation between the poverty rate and the unemployment rate is not particularly useful evidence as to whether there is business cycle effect.

But let me close by focusing on Eberstadt’s statement:

And while the poverty threshold was devised to be measuring a fixed and unchanging degree of material deprivation (i.e., an “absolute” level of poverty) over time, an abundance of data on the actual living conditions of low-income families and “poverty households” contradicts that key presumption – demonstrating instead that the material circumstances of persons officially defined as poor have improved broadly and appreciably over the past four decades.

The poverty rate is indeed based on a proxy for absolute levels of income as opposed to relative income levels. The fact that the poverty rate today is approximately the same as it was when Richard Nixon become President suggests that relative income disparities have widened. As Eberstad argues that the measuring real income as nominal income divided by the CPI index understates one’s increase in well being, I am reminded of the fun that Max Sawicky had with an argument from Don Boudreaux as the latter wrote:

It reveals that real median household income has increased, with the expected blips and surges, over the past 38 years. But being 31 percent higher today than it was in 1967 is not very impressive. This fact means that real household income grew at an average annual rate since 1967 of much less than one percent. But I ask: would you prefer to live in 1967 with today’s real median household income ($46,326) or live today with 1967’s real median household income ($35,379)? (These figures are expressed in 2005 dollars, by the way.) Given these two options, I’d choose to live today with only 1967’s real median household income. The reason is that the economy today offers so very many more options than did the economy in 1967 – or even the economy of that halcyon year, 1973. Today I can buy cell-phone service; today I can buy cable television with hundreds of channels, including ones that specialize in sports, cooking, history, and science; today even the cheapest automobiles are safer and more reliable than were the finest cars for sale in 1967; today I can buy telephone answering machines (with caller-ID), microwave ovens, CDs, personal computers, Internet service, and MP3 players. Today I can watch movies in my own home – in color – whenever I want without having to wait for one of the three or four available television stations to telecast a movie for viewing on a black-and-white television. Today I can use GPS.

A fine car with GPS is not exactly something those with income below the official poverty rate are enjoying. So isn’t a reasonable proposition that correcting for this CPI bias would show that the relative income disparity has grown by even more than our conventional measures suggest?

Update: Even though Mark Thoma has a long Labor Day weekend drive, he had time to comment on some related spin from the editorial pages of the Wall Street Journal:

Why does the Wall Street Journal get an early look at government data? Maybe that’s standard, but I don’t see why they should receive special treatment with government generated statistics … But I can’t resist a few notes before I hit the road. First, are we surprised that when real wages of middle and low income workers fall, taxes fall? Or when the wealthy receive more income, they pay more taxes? Second, the graph confuses income and wealth. To me, that’s always a sign of sloppiness and I tend to discount the entire article when it is evident that nobody took the time to check things over carefully. The article only discusses income inequality, not wealth gaps. Third, the main point here is that inequality was also rising during the Clinton years, but it was largely ignored.

Mark documents that the rising gap in income was the topic of an interesting debate back in the 1990’s. We are having another debate on the distribution of income. Alas, this WSJ op-ed makes no contribution to it.

Update II: As our troll decides to attack yours truly, he once again proves he has nothing original to offer. Speaking of unwarranted attacks, the troll goes after Brad DeLong as he completely misses several points with:

We regretfully have to point out to the distinguished economist that one only makes valid comparisons by using same points in the business cycle. And when we do, we find that Mickey Kaus could have easily pointed to ‘good poverty news’.

It would be so easy to point out to this troll that he is contradicting himself (as in an economic recovery should have lowered the poverty rate by more than 0.1% OR BETTER – how troll uses some business cycle argument he also argues is nonsense – but COMPLETELY MISSES the fact that poverty fell dramatically during the late 1990’s), but the troll only allows team members to comment. I guess he has no members of his team as his comment box is always empty.

Memo to Donald Luskin – this year’s stupidest man alive contest will have some serious competition.