Note: This article is part of the ‘Principles Project,’ a list of principles, axioms, and beliefs that undergird a Christian view of economics, liberty, and virtue. Click here to read the introduction and other posts in this series.
The Principle: #14G — To alleviate and eliminate poverty, we need to identify and measure it correctly.
Consumption — The use of goods and services by households.
Poverty — The condition of not having sufficient resources to meet basic needs including food, clothing, and shelter.
Poverty rate — A statistical measure to determine the prevalence of poverty within a specific demographic or geographic location.
Resources — Things of value we can use when we need them to accomplish an activity.
What if told you that between 90-100 percent of Americans are living in “healthcare poverty.” You would probably object and say that while the country certainly has a healthcare crisis, my numbers are surely inflated. After all, most people in the U.S. have access to healthcare.
In reply, I explain that while it’s true most people are able to consume healthcare services, they are still in poverty since those services are paid for at least partially by the government or private insurance. You would probably respond that I seem very confused on this issue. And you’d be right.
Yet when we hear reports that between 14 and 16 percent of Americans are living in poverty, few people bother to ask, “Are they talking about consumption or income?”
The reason it matters is the same reason that most Americans are not in “healthcare poverty”: they are able to consume more goods and services than they are able to pay for with their income.
The official definition of poverty for the United States is based on income and uses dollar amounts called poverty thresholds that vary by family size and the members’ ages. Families with incomes below their respective thresholds are considered to be in poverty. Based on this official definition of poverty, in 2017 approximately 39.7 million people, or 12.3 percent of the population, had incomes below the thresholds.
Currently, there are 48 poverty thresholds that vary by family size and composition. As the Congressional Research Service explains, if a person lives with other people to whom he or she is related by birth, marriage, or adoption, the money income from all family members is used to determine his or her poverty status. If a person does not live with any family members, his or her own income is used. Only money income before taxes is used in calculating the official poverty measure, meaning this measure does not treat in-kind benefits such as the Supplemental Nutritional Assistance Program (SNAP, formerly known as food stamps), housing subsidies, or employer-provided benefits as income.
By excluding in-kind benefits (i.e., a significant type of resources), the official poverty rate doesn’t really tell us whether an individual or family is unable to meet their basic needs. That is why poverty statistics should include consumption, rather than just income.
As James X. Sullivan, an economics professor at Notre Dame, has explained:
“A different measure of poverty that’s based on consumption, rather than income, would not only measure poverty more accurately, but would lead to a better understanding of the effects of policy and would help lawmakers craft policies to better serve the nation’s poorest,” according to Sullivan, whose research examines the consumption, saving and borrowing behavior of poor households in the U.S., and how welfare and tax policy affects the well-being of the poor. The Census poverty measure ignores the effects of some of the most critical anti-poverty weapons, most notably the Earned Income Tax Credit, Medicaid, food stamps, and housing subsidies.
“Income received from food stamps, for example, grew by more than $14 billion in 2009. By excluding these benefits in measuring poverty, the Census figures fail to recognize that the food stamps program lifts many people out of actual poverty,” Sullivan says. “If these programs are cut back in the future, actual poverty will rise even more.”
Using income-based numbers only also overlooks the struggles of many Americans who are tightening their belts – those who are worried about losing their jobs or facing foreclosure, or those who devote a large chunk of their paychecks to paying off medical bills. The standard of living for these people is lower than their income would suggest.
Another paper by Sullivan and co-author Bruce D. Meyer of the University of Chicago, argues that consumption offers a more robust measurement of poverty than income. When measured correctly, poverty has declined over time. From the abstract:
This paper examines changes in the extent of material deprivation in the United States from the early 1960s to 2009. We investigate how both income and consumption based poverty have changed over time and explore how these trends differ across family types. Estimates of changes in poverty over the past five decades are very sensitive to how resources are measured. A poverty measure that incorporates taxes falls noticeably more than a pre-tax income measure. Sharp differences are also evident between the patterns for income and consumption based poverty. Income poverty falls more sharply than consumption poverty during the 1960s. The reverse is true for the 2000s, although in 2009 consumption poverty rises more than income poverty . . . Income based poverty gaps have been rising over the last two decades while consumption based gaps have fallen. We show that how poverty is measured affects the composition of the poor, and that the consumption poor appear to be worse off than the income poor.
As Robert VerBruggen notes, “This [consumption-based] approach doesn’t always create low estimates; in the early 1970s, it sits right between the two other measures. But it shows dramatic improvement and a low poverty rate today. Even when the other rates are spiking, consumption poverty remains basically steady.”
Indeed, it doesn’t make sense to propose solutions for poverty and then exclude those very solutions from being considered when measuring the poverty rate, especially when the poverty-fighting initiatives have been effective.
Such criticisms of the official measure have led to the development of the Supplemental Poverty Measure (SPM).
As we noted above, the official poverty rate only includes money income before taxes (includes 18 private and government sources of income, including Social Security, cash assistance, and other sources of cash income). In contrast, the SPM uses money income (both private and government sources) after taxes minus work expenses, child care expenses, child support paid, out-of-pocket medical expenses, plus tax credits (such as the Child Tax Credit and the Earned Income Tax Credit) and the value of in-kind benefits (such as food and housing subsidies).
By using the SPM we can get a more nuanced gauge of poverty in America. For example, with the geographically-adjusted thresholds, the poverty rate in 2017 was lower under the SPM than under the official measure for the Midwest (10.7 percent compared with 11.4 percent), while it was higher than the official measure for the Northeast (14.2 percent compared with 11.4 percent), the West (15.1 percent compared with 11.8 percent), and the South (14.8 percent compared with 13.6percent).
Compared with the official measure, poverty rates under the SPM were lower for children (15.6 percent compared with 17.5 percent) and higher for working-age adults (13.2 percent compared with 11.2 percent) and the population age 65 and older (14.1 percent compared with 9.2percent).
If we’re serious about helping the poor, we must consider their level of consumption—not just the numbers on their paycheck. Using additional measures other than the “official” poverty rate can help us to better identify and measure poverty.