Exclusive Commentary

February 23, 2009: POOR MEASUREMENT Series: A Truly New Approach to Measuring Economic Inclusion, By Shawn Fremstad, Director of the Bridging the Gaps project at the Center for Economic and Policy Research

- Why and How We Should Change the Current Poverty Measure


The federal government bases its poverty measure on a formula that was established in the 1960s and has not been updated since. Many experts and elected officials alike have made repeated calls for the measure to be changed, especially in light of a changed economy that has altered substantially in the nearly half-century that has passed since the federal poverty measure was first set.

Spotlight on Poverty and Opportunity is pleased to announce a series of commentaries entitled “Poor Measurement” to discuss this issue. Over the next several months, Spotlight will bring together experts, advocates and policy makers to address how, why, and whether to update the federal poverty measure.

Rebecca M. Blank and Mark H. Greenberg previously introduced the series with the piece “Poor Measurement.”

We need a truly new approach to measuring poverty. Both the current measure and the most commonly touted alternative — developed in 1995 by an academic panel of the National Academy of Sciences (NAS) — have serious limitations.

 

A new approach should draw upon important recent developments in poverty measurement and existing public consensus about the resources families need to “get along” at a basic level. To develop a new measure, the Obama Administration should establish a public consultation process with the goal of announcing a preliminary alternative this year, and, after getting additional input, an official version next year.

 

A new measure should meet two fundamental criteria. First, it should represent the minimum income a family needs to “get along” or “make ends meet” at a basic level. Second, while retaining a focus on income deprivation, it should encompass other forms of deprivation, including hunger, substandard housing, and lack of health insurance. In doing so, it would cut across the various conceptual and issue “silos” that characterize anti-poverty policy and advocacy.

 

Meeting both goals may seem like a tall order. But we know it’s doable: both the United Kingdom and Ireland have recently adopted poverty measures that are consistent with these goals, measures that provide the best starting place for us. Before detailing what that measure should look like, I’ll say a bit about the two biggest problems with the current one, what I’ll call the “too-low” and “too-narrow” problems.

 

First, the poverty threshold — currently about $22,000 for a family of four — is far too low. How do we know? The most common answer draws on basic family budgets—budgets constructed by experts who make judgments about the goods and services a family needs to live at a basic level, and the income needed to purchase them. These budgets typically result in income thresholds between 150 and 250 percent of the current poverty line.

 

While the opinions of experts are important, I think we should give more weight than has commonly been the case to the views of another group with direct knowledge in the arts and sciences of making ends meet—the public.

 

Public-opinion researchers have frequently surveyed people about the minimum amount of income they think is needed to “get along” at a basic level. The typical response in these surveys amounts to between 50 and 60 percent of the median income for a family of four ($37,000 to $44,000 in 2006). Responses to this question have been consistent over time, rising at roughly the same rate as median income.

 

By comparison, the current poverty threshold is equal to only 28 percent of median income—less than half of what the public thinks is needed to get along at a basic level. It hasn’t always been this way. When the official measure was unveiled in the 1960s, it was closer to the public understanding of what it takes to make ends meet, but it has fallen steadily behind over time.

 

 

 

Source: Fremstad (2008).

 

Of course, the public isn’t always right. But in this case, public opinion and the basic budgets constructed by experts generally agree. Thus, we have the luxury of being both principled and politically pragmatic when constructing a new measure.

 

The second problem with the current measure is that it defines poverty in a way that is far too narrow when compared with historical and contemporary understandings of poverty, ones that view poverty as involving the deprivation of a range of basic needs or capabilities and not just income. 

 

If the goods and services needed to meet basic needs were broadly available for purchase at set dollar amounts — and if government efforts to help people meet them were limited to writing checks — an income-only measure would be sensible. But, of course, this isn’t the case.

 

As a consequence, an income-only poverty measure produces odd results. Consider two different children: one in a family with an income of $18,309 and public health insurance; the other in a family with $2 more in income, $18,311, but no health insurance. Under the current measure, the former is poor, the latter is not, even though, all else being equal, the latter is certainly worse off.

 

Does the NAS alternative to the official measure of poverty better address the too-low and too-narrow problems? For the most part, no, and it seems to create some new ones.

 

The NAS approach doesn’t address the too-low problem directly. As a result, in the vast majority of states, effective poverty thresholds and the number of people considered poor would change little or decline. It does address the problem in an indirect way for a few states by taking into account differences in housing costs across the country. As a result, poverty rates would increase substantially in a handful of high-rent states. 

 

However, simply looking at housing costs without addressing the too-low problem for all states also means that poverty thresholds will end up being effectively lower in a number of states, including several in Appalachia and the South. For example, as Census Bureau researchers have found, the poverty rate will increase by 5 points in California, but fall by as many in Arkansas.

 

As a matter of principle alone, we shouldn’t be too concerned about this kind of change if a new measure is really a more accurate one; if, that is, we can be confident that the current poverty measure undercounts poverty in California and over-counts it in Arkansas. (The politics of getting such a measure adopted are another matter).

 

I think, however, it is more likely that the current poverty measure undercounts poverty in both states, albeit by more in California than in Arkansas. We know from basic family budgets — which take a variety of geographic cost differences into account — that the percentages of California and Arkansas families living below basic budget thresholds is higher than the percentage living below the official poverty line in each state.

 

The NAS approach also doesn’t adequately address the too-limited problem.. The NAS approach improves on the current measure by taking certain work and health expenses into account. But it continues to measure poverty solely in terms of income.

 

Going back to our example, this means that the first child would still be counted as poor under the NAS measure (unless, possibly, she lived in one of the states that ended up with a lower poverty threshold), but the poverty status of the second child would depend on how much her parents spend on health care. If they avoided doctors and preventative care, they would continue to be counted as non-poor; if they paid for such services, they would likely be counted as poor. Having one’s poverty status depend on whether they spend or skimp on health care seems an odd result.

 

Why did the NAS panel develop a measure limited to income? In part, I think, due to timing. When the NAS panel developed its measure, relatively little quantitative research had been conducted on multidimensional measures of poverty, and no wealthy nation had adopted one.

 

A lot has changed since then. Growth in research on multidimensional measures has been exponential and both the United Kingdom and Ireland have adopted them. As a result, we’re now in a much better position to develop a broader measure.

 

All that said, as long as income remains central to our economy, it must remain central to understanding poverty. So we should add other relevant dimensions of poverty into a new measure, but income should continue to play the leading role.

 

Even if one doesn’t agree that a new measure should address the too-low and too-narrow problems, the NAS measure raises new problems related to accuracy. This can be seen by comparing it with other measures of deprivation and well-being. Examples include food insecurity and the new American Human Development Index, which includes health and education indicators.

 

If the NAS measure is an improvement, state-level NAS poverty rates should be more strongly associated with state-level indicators of deprivation and human development than the current poverty measure. In a recent paper, I found this wasn’t the case; in fact, the NAS measure was less associated with such indicators than the current measure.

 

A related problem with the NAS measure is that it generally produces a much higher poverty rate for the elderly and a lower or relatively unchanged poverty rate for children. Again, if it really is the case that we are undercounting elderly poverty and over-counting child poverty, this shouldn’t concern us. But we know that children are much more likely to suffer from food insecurity and other forms of hardship than the elderly, so it doesn’t seem right that the child and elderly poverty rates end up being roughly the same.

 

What would a measure look like that addresses the too-low and too-narrow problems? The United Kingdom’s child poverty measure, adopted in 2003 after a 20-month consultation process, provides the best starting point. The measure has three tiers that, according to the government, “captur[e] different aspects of poverty whilst respecting the finding...that income is at the core of people’s conception of poverty.”  

  •       Income-Poverty Measure Adjusted for Inflation: 60 percent of median income in a baseline year. Updated annually for inflation. 
  •         Income-Poverty Measure Adjusted for Overall Income Growth: 60 percent of median income. Updated annually to remain at that percentage. 
  •         Material Deprivation and Low Income: 70 percent of median income and “materially deprived,” i.e., suffering from certain material hardship.

In adapting this measure for use here, we should retain the second and third tiers largely as they are. For the first tier, a poverty measure not tied initially to a percentage of median income could be used.

 

Pegging the second and third tiers to a percent of median income is particularly important. It ensures that the measure is updated annually in a manner consistent with the basic value of shared prosperity. That is, when our economy grows, we should all grow together, rather than further apart, as has happened in recent decades.  As noted above, it also jibes with public understanding of the income needed to get along at a basic level.

 

A poverty measure tied to median income may strike some as a big change. But a number of means-tested programs in the United States use, or have used, low-income measures tied to a percentage of median income, giving the approach ample precedent.

 

Finally, one basic political concern, applicable to both the NAS alternative and a United Kingdom–style approach, is that they would result in higher poverty rates, which some say no President wants to have happen on his or her watch. With the NAS alternative, the increase would likely be relatively small, depending on the final structure of the measure. Census Bureau estimates suggest that an NAS rate for 2006 would range from 12.2 percent to 14.1 percent, compared with an official 2006 poverty rate of 12.3 percent.

 

The tiered approach would result in three new rates. Whether the first and third tiers produce higher or lower rates would depend on the details of their design. The second tier, roughly equal to 200 percent of poverty, would be considerably higher. 

 

Given the timing of the current economic downturn, a measure that produces a higher rate may be less of a concern for the new occupant of the White House. If a recent statement about deficit accounting made by Peter Orszag, Director of the Office of Management and Budget (OMB) — that President Obama “prefers to tell the truth…rather than make the numbers look better by pretending” — also applies to poverty measurement, it may be a non-issue altogether. Still, a measure that doubles the rate may raise eyebrows, even if the other tiers of the overall measure result in rates that are lower than, or similar to, the current one.

 

For this reason, it’s important to be clear that the new approach isn’t a minor updating of the current measure. Instead, it’s a new and broader measure of minimum economic security, one that isn’t simply a measure of income inadequacy, but also gauges the extent to which we’re moving toward (or away from) an inclusive economy that works for all Americans. To reflect this change, it would make sense to call the new approach a measure of poverty and economic inclusion.

 

This broader understanding would be more consistent with how the vast majority of lower-income Americans, including most of those living below the current poverty line, self-identify. Not as “poor people,” a term heard as a pejorative by many of them, but as working- and middle-class people who struggle every day to make ends meet, while hoping and working to better their economic circumstances.

 

The approach to measuring poverty and economic inclusion outlined here would paint a far more accurate picture of the economic conditions of millions of Americans than either the current poverty measure or the NAS alternative. It would place new spotlights on both the most severe poverty — the combination of low income and material deprivation — and the millions of Americans, roughly the bottom third in income terms, who, as President Obama recently put it when he announced his Middle Class Task Force, “aspire to be in the middle class ... and share our American Dream.”

 

For more on this topic, please see “Measuring Poverty and Economic Inclusion: The Current Poverty Measure, the NAS Alternative, and the Case for a Truly New Approach,” by Shawn Fremstad, published in December 2008 by the Center for Economic and Policy Research.

 

Shawn Fremstad is Director of the Bridging the Gaps project at the Center for Economic and Policy Research, which conducts both professional research and public education to promote democratic debate on the most important economic and social issues that affect people's lives. He blogs at inclusionist.org.