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. 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.
To see the stark difference it makes, look at this graph from the recent joint report by the new joint report from the (conservative) American Enterprise Institute and the (liberal) Brookings Institution:
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.
If we’re going to have an honest and serious debate in this country about how to help the poor, we must consider the level of consumption by the poor—not just the numbers on their paycheck.