How we measure poverty is key to knowing who is poor

How we measure poverty is key to knowing who is poor
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The irony of the release date of the U.S. government’s annual poverty report, which is always in mid-September, is that it coincides with the annual product launch of Apple.

So, for ten years now, Americans have been hearing that average household incomes are stagnant, followed by news of the latest iPhone innovations. How is it that we are losing the war on poverty when almost everyone I see on the street has a pocket computer that is wirelessly connected to the internet? That’s not just irony, that’s crazy. 

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According the Census Bureau, median household income rose to $59,039 in 2016 which was a nice 3-percent jump from the previous year and also the highest level on record. Yet, real incomes (meaning incomes adjusted for inflation) have been basically flat for the past three decades. How is that?

 

As Ben Casselman of ‪FiveThirtyEight.com wrote in 2014, “The Middle Class Hasn’t Gotten a Raise in 15 Years.” Cassselman explained that the stagnation theory is technically true, but it has so many caveats that it can be misleading.

Mix in the fact that the size of households has shrunk dramatically over the decades, that the workforce has aged substantially and that there exist different opinions on how to measure inflation, and you find that the stagnation story is overwrought.

Take the poverty rate, which Census says is now 12.7 percent, meaning that one of eight Americans is in poverty. That always sounded horrible to me before I learned how poverty is defined: “If a family’s total money income is less than the applicable threshold, then that family and every individual in it are considered in poverty.” 

Money income does not include tax credits, welfare payments, charity and other forms of wealth transfer. Thus, essentially, everything the government does to alleviate poverty doesn’t count as alleviating poverty.

Maybe that’s why the poverty rate in 2016 is basically identical to 2006, 1996 and so on. The government could institute a program to guarantee every American a basic income — a concept I believe holds great merit — but the poverty rate wouldn’t budge. That’s silly.

The dirty secret with measuring income is that we economists do an imperfect job defining real value in terms of income. The iPhone is a case in point. Smart phones were invented by Apple, which first introduced the original iPhone in 2007.

Yet, here we are 10 years later, and the incredible power of the PC revolution, the internet revolution, the digital revolution, the miniaturization revolution and, oh yeah, wireless internet, are almost entirely neglected. At some point, we have to accept that rapid technological change is making us ridiculously enriched in ways that income cannot measure.

Income also is incapable of measuring environmental quality, children’s decreased mortality rates and cured diseases. Saying that the poverty measure is flawed can be easily caricatured by politicians as an aloof viewpoint. I get it: Crisis and empathy earn votes, not honesty.

But if your family has a cancer survivor, you cannot honestly say that you are no richer than a family in the 1960s (when poverty measures got started). 

In fact, economists James Sullivan, Thomas McDonagh (scholars at Notre Dame) and Bruce Meyer (University of Chicago) have developed an alternative consumption-based measure of poverty which is far superior to the income-based approach.

Starting this year, their inaugural Consumption Poverty Report showed that poverty has declined dramatically since 1960. 

None of this is to say that American’s don’t face challenges. Rather, we should think more carefully about why poverty persists in a country that has gotten radically richer since the television was invented in the 1950s.

One of the answers is that poor Americans are often trapped in poverty by poorly-designed government programs. Things like disability and unemployment insurance have anti-work incentives (Google "Poverty Trap"!), and that has to change. 

Tim Kane is the JP Conte fellow in Immigration Studies at the Hoover Institution at Stanford University. Kane, Ph.D., served twice as a senior economist at the Joint Economic Committee of the U.S. Congress.