Friday, August 29, 2008

Poverty Measure Proposals

Last month, New York City Mayor Michael Bloomberg announced the findings in the city's Center for Economic Opportunity's proposal for a new poverty measure to replace or supplement the measure used by the Federal government.  The Federal poverty measure was originally based on the cost of the U.S. Department of Agriculture's economy food plan that detailed the minimum nutritional requirements for a family in need.  The poverty threshold was calculate as three times the annual cost of the food plan, based on the average composition of family spending when the measure was developed in the 1960s.  Since its development, the measure has been updated only based on increases in the Consumer Price Index.  Advocates for the poor claim that the forty-year old measure is now out of date, and thus does not accurately represent the level of poverty in America.  To support this, the advocates claim that food spending now makes up only one-eighth (not one-third) of family expenditures, due to increases in other necessary spending such as shelter and health care.  Moreover, although the Federal poverty measure is used uniformly throught the nation, cost of living varies dramatically by location---for the cost of renting a studio apartment in New York City, one could buy a small house in a less-urban location.

In response to this, the NYC CEO has proposed adopting a more detailed measure developed by the National Academy of Sciences in 1995.  The new measure sets a threshold just under median family expenditure on food, clothing, shelter, and utilities in a particular geographic location.  Additionally, instead of counting only pre-tax income, the new measure includes both post-tax income and the value of near-cash benefits such as food stamps and housing subsidies, minus work-related expenses (such as child-care and transportation costs) and out-of-pocket medical expenses, which reduce a family's resources available for meeting its basic needs.

While this new measure makes significant strides in providing a more accurate picture of poverty in the United States, it suffers from at least two particular weaknesses.  First, the poverty threshold's calculation of expenditures for basic needs is based on the median expenditure among all families, and not on a family's actual needs for survival.  Over time, as the real income of median families increases, a significant number of these families are bound to choose to purchase more-expensive food items or more-expensive clothing.  As a result, median expenditures will increase beyond the cost of minimally adequate goods to meet basic needs.  Although establishing a budget of minimally adequate goods does depend on the judgement of experts, as the NAS panel points out, the solution to expert bias is to include more and varied voices in the deliberation of what constitutes minimally adequate.  Instead, the multiplier approach the panel recommends is based not on what consumers' needs, but simply on how consumers choose to spend their money, whether those choices are motivated by wants or needs.

Second, the new measure's proposal to include welfare receipts among a family's resources gives a misleading picture of the family's ability to support itself.  While it is certainly true, as the panel notes, that welfare services have "have made important contributions to reducing material hardship in the United States," the fact that families must rely on these services to make ends meet is itself an indicator of poverty, thus it makes little sense to reduce poverty figures based on the input of social services.  These services, while highly valuable and eminently necessary to relieve immediate suffering, merely treat the symptoms of poverty---they cannot and do not reduce it.

Bloomberg is not the only public official to recommend use of the new NAS-proposed poverty measure: Representative Jim McDermott has also drafted a bill based on the NAS panel's findings, though the bill has yet to be introduced in Congress.  While the new poverty measure is a step in the right direction, I believe more work is necessary before we arrive at a high-quality picture of poverty in the U.S.