Who is Poor in America? Dr. Norman R. Cloutier, Director UW-Parkside Center for Economic Education December 3, 2010, ASET Meeting, Miller Park, Milwaukee,

Who is Poor in America?Who is Poor in America?

Dr. Norman R. Cloutier, DirectorUW-Parkside Center for Economic Education

December 3, 2010, ASET Meeting, Miller Park, Milwaukee, WI

Societal Economic GoalsSocietal Economic Goals

Low UnemploymentLow UnemploymentEconomic GrowthEconomic Growth

Low InflationLow InflationEfficiencyEfficiency

EquityEquity

Adam Smith on EquityAdam Smith on Equity

“By necessaries I understand, not only the commodities which are necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without.”

− Adam Smith, Wealth of Nations (1776)

“However selfish a man may be, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. We feel pity or compassion when we see the misery of others…” − Adam Smith, paraphrased from the opening

paragraph of Theory of Moral Sentiments (1759)

U.S. Poverty Rate U.S. Poverty Rate 1971—20091971—2009

14.3

9.4

25.8

25.343.6 millionpeople

Single mothers increase their chances Single mothers increase their chances of living in poverty 416% relative to of living in poverty 416% relative to

married couples married couples

Living Arrangement 2009 Poverty Rate

Married-couple 5.8%

Female householder, no husband present

29.9%

Male householder, no wife present

16.8%

High school dropouts increase their High school dropouts increase their chances of living in poverty by 529% chances of living in poverty by 529%

relative to a college graduatesrelative to a college graduates

Educational Attainment, Age>25

2008Poverty Rate

College Degree 3.8%

High School Grad 11.6%

< High School 23.9%

Not working increases the chances of living Not working increases the chances of living in poverty 741% relative to those who are in poverty 741% relative to those who are

working full-timeworking full-time

Working StatusAge 16-65

2009Poverty Rate

Full-time, year-round 2.7%

Part time or part year 14.5%

Did not work 22.7%

Measuring PovertyMeasuring Poverty

“. . . you can’t solve a problem until you can measure it.”

“It is not too strong a statement to say that, 45

years after they were developed, the official poverty thresholds are numbers without any valid conceptual basis.”

- Senator Daniel Patrick Moynihan

- Dr. Rebecca Blank (Brooking Institution), testimony before the House Ways and Means Subcommittee on Income Security and Family Support Hearing on Establishing a Modern Poverty Measure Committee, July 17, 2008

What is the official U.S poverty What is the official U.S poverty rate rate actuallyactually measuring? measuring?

A person is in “poverty” if he or she lives in a family that has an income below a poverty threshold.

Calculate your poverty threshold for a family of four, two adults and two children.

How are the official poverty How are the official poverty thresholds determined?thresholds determined?

Mollie Orshanky’s 1963 original measures:At the time, no budgets established except food(food budget) x 3= thresholdAdjusted over time by the CPI-U.

Initially, the terms “poor” and “poverty” were not used in official government statistics.

normative vs. positive language

Problems with the official Problems with the official poverty statistic poverty statistic

No geographic distinctions

The CPI-U overstates inflation

Measured income is pre-tax

In-kind transfers are not counted• Should we count Medicaid and S-CHIP payments as

income?

Items not counted in the official Items not counted in the official poverty statistic, 2002poverty statistic, 2002

Government Program

Average Benefit Within Program

Per

Food stamps $ 2,200 Family

Housing assistance $ 5,400 Family

Medicaid $ 6,000 Family-4

S-CHIP $ 1,000 Child

Energy assistance $ 400 Family

WIC $ 400 Person

TOTAL $15,400

Problems with the official Problems with the official poverty statistic poverty statistic

Should the unit of analysis be the “family” or the “household”?

In 1992, counting household income would have resulted in 1.6 million fewer poor.

Counting all possible sources of income, but using current official thresholds, could decrease measured poverty by 36%.

2007: official=12.5%, adjusted= 7.9%

Threshold ProblemsThreshold Problems

Surveys have indicated that the general public would set thresholds 60%-70% higher than the official level.

In the early-1960s Orshansky assumed families spent 1/3 of the their income on food. Today it is closer to 1/7.

1/3 yields a multiplier of 31/7 yields a multiplier of 14

Threshold ProblemsThreshold Problems

Thresholds should incorporate explicit budgets for clothing, shelter, child care, personal care, transportation, household supplies.

Within region cost-of-living differences?

Equivalence scales

Economic Policy Institute “basic family budgets” • Madison, family of four= $52,019

Should we consider wealth?Should we consider wealth?Characteristics of Ownership in

Poor Family Dwellings1980-1989 2000-2005

Microwave 27% 85%

Dishwasher 18% 31%

Central air conditioning 15% 38%

Washer 60% 64%

Dryer 39% 55%

Television 61% 96%

Computer 4% 38%

Stereo 29% 63%

VCR 25% 76%

Poverty and Material WellbeingPoverty and Material Wellbeing

Supplemental Poverty MeasureSupplemental Poverty Measure

Due for release fall 2011.

Modeled after the 1995 National Academy of Sciences (NAS) recommendations.

Primus (2006) found in the 1990s:Official rate declined 11.7%.NAS adjusted rate declined 27.1%.

Characteristics of New SPMCharacteristics of New SPM• Calculating the Threshold

Will use “household-type” unit of analysis rather than family.

Establish explicit budgets for food, shelter, clothing, and utilities (FSCU).

• Adjustment for homeownership Allow for geographic differences in housing costs

• Region• Urban vs. Rural

Adjustment factor of 1.20

Characteristics of New SPMCharacteristics of New SPM

• Measuring Available Resources (income) Add:

• All (non-medical) in-kind benefits• Income from household members.• Tax credits (EITC)

Subtract:• Taxes• Work expenses, including childcare• Out-of-pocket medical expenses

Is the New SPM a Measure of Is the New SPM a Measure of Poverty?Poverty?

Establishment of “typical” FSCU budget of the 33rd percentile household.

Relative vs. absolute measure

Consumption-based measure? Material well-being is derived from the consumption of

goods and services, not income per se.Reported consumption tends to be higher than

reported income.