NCPA - National Center for Policy Analysis


January 20, 2009

The current poverty standard was developed in the 1960s by Mollie Orshansky, an economist with the Social Security Administration.  Orshansky relied on 1955 U.S. Department of Agriculture research that concluded families spent approximately one-third of their budget on food.  Borrowing the U.S.D.A.'s estimated cost for a basic diet (called the Thrifty Food Plan), she tripled it to arrive at the federal poverty threshold -- theoretically, the amount of money an average four-person family needs for food, clothing and shelter.  The threshold is adjusted annually for inflation. 

A country's poverty rate should decline as real incomes rise and living standards increase, but the U.S. poverty rate has remained stagnant, says D. Sean Shurtleff, a policy analyst with the National Center for Policy Analysis.  For example, Census Bureau household data show:

  • In 1968, the official poverty rate was 12.8 percent, meaning 25.4 million people were considered poor.
  • In 2007, the poverty rate was 12.5 percent, and 37.3 million people were considered poor.

However, household consumption indicates that basic living standards have improved significantly, says Shurtleff.  For instance:

  • In 1970, only 36 percent of the entire U.S. population had air conditioning, compared to nearly 80 percent of poor households in 2005, according to a 2007 Heritage Foundation study.
  • In 1980, only 27 percent of the poor had microwave ovens compared to 85 percent in 2005, according to University of Chicago Prof. Bruce D. Meyer.

This increased consumption shows that the living standards of low-income families have improved, explains Shurtleff.  In fact, according to the U.S. Department of Labor, the poor actually consume about $2 for every $1 dollar of reported income.  How is that possible?  The discrepancy is due to unreported or underreported income, savings, credit and welfare benefits.

The current poverty standard only measures families' gross income, which includes before-tax wages, but not capital gains.  Gross income also includes cash welfare assistance, but excludes more valuable noncash benefits, such as Medicaid and public housing.  According to Cato Institute scholar Michael Tanner, the federal government spent an estimated $12,892 per poor person on antipoverty programs in 2005.  The Heritage Foundation estimates that the federal government spent $8.29 trillion on antipoverty programs from 1965 to 2000, mostly in the form of noncash benefits.  These benefits raise the living standards of millions of low-income people, but do not count as income; therefore, they do not reduce measured poverty.  This is the main reason the poverty rate has remained stagnant, says Shurtleff.

Source: D. Sean Shurtleff, "Reforming the U.S. Poverty Standard," National Center for Policy Analysis, Brief Analysis #640, January 20, 2009.

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