NCPA - National Center for Policy Analysis

The Notion of Poverty is Extremely Subjective

October 6, 2003

Some economists have suggested using consumption, rather than income, to measure poverty. They note than many of those officially classified as poor based on income actually live quite well, says Bruce Bartlett.

For example, many of the poor elderly own their homes free and clear. Others may just be poor temporarily and can draw down savings to tide them over. An analysis by economist Daniel Slesnick found that the official poverty rate of 13.8 percent in 1995 would actually have been 9.5 percent if based on consumption rather than income.

The Census Bureau itself acknowledges serious limitations to its calculations:

  • One problem is that it is required by law to use a measure of inflation that is known to overstate price increases.
  • Using a corrected inflation measure would have lowered the poverty rate from 12.1 percent to 10.8 percent last year.
  • The inclusion of income that is not now counted, such as noncash income transfers like food stamps, would lower the rate to just 7.5 percent.
  • Over half of all those classified as poor between 1996 and 1999 were so for less than 4 consecutive months.
  • Eighty percent were poor for less than a year.

This sort of income mobility means that our measures of income inequality are also overstated, according to a new Federal Reserve Bank of San Francisco study.

Source: Bruce Bartlett, "The Noting of Poverty is Extremely Subjective," National Center for Policy Analysis, October 6, 2003; see Mary Daly and Rob Valletta, "Earnings Inequality and Income Mobility in the United States," FRBSF Economic Letter, September 26, 2003, Federal Reserve Bank of San Francisco.

For Fed study

http://www.sf.frb.org/publications/economics/letter/2003/el2003-28.html

 

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