David R. Henderson  

News Item: Half of American Families are Below the Median

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The title of this post should have been the title of my post yesterday. As one of the commenters, Zach Pruckowski, pointed out, the new poverty measure that the U.S. Census Bureau uses does include food stamps. My bad.

But here's what else the U.S. Census Bureau's new Supplemental Poverty Measure, introduced last month, does: it changes the way poverty is measured from an absolute measure to a relative measure. Here's the Census Bureau's explanation of the "weakness" in the old measure:

The current poverty thresholds do not adjust for rising levels and standards of living that have occurred since 1965. The official thresholds were approximately equal to half of median income in 1963-64. By 1992, one half median income had increased to more than 120 percent of the official threshold. [italics in original]

What's the Census Bureau's fix? Make poverty a moving target. If standards of living improve, as most of us optimistic economists expect, then define as poor those people who are below some percentile. Here's the Census Bureau's specific statement:
Adjustments to thresholds should be made over time to reflect real change in expenditures on this basic bundle of goods at the 33rd percentile of the expenditure distribution.

So now throw in now just poor people but also low-income people, with low-income also defined relative to others, and you're just about at the median, as commenter Chris T writes. What the news story I reported on yesterday essentially reported is that half of American households are below the median. Which we already knew.

Oh, and my apologies to Sheldon Danziger. I, not he, am the one who was unaware of the new measure.

HT to Tim Worstall.


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CATEGORIES: Income Distribution



COMMENTS (10 to date)
Lord writes:

The other thing it does is include the value public benefits but also the costs of generating income so it is more a measure of disposable income.

South Street writes:

I do not find this definition of poor to be so bad. Just as GDP is an imperfect measure of development, defining poor in absolute terms (e.g. having an income that only allows to provide for a certain consumption of goods) neclegts very important feature of being poor: ability to social participation and opportunities. If your income is below the 33%quantile of average income, it is likely that you are not able to the same access to information and education. This excludes you from the society and therefore poor.

mark writes:

I may be dense but having read both posts and the Census Bureau publication itself, I can't find any where the Bureau explains the choice of a 33% threshold. It looks like a choice and not the level that fell out of an application of the new approach.

I also don't see any inclusion of Medicaid or other health assistance in the "in-kind" benefits. I scanned the PDF of the report for that word but could not find a section that said Medicaid benefits were being counted as in-kind benefits at some value.

Mark writes:

Not only is it just a measure of disposable income, it's a measure of disposable income net of out-of-pocket medical expenses (MOOP).

Suppose a 50-year-old couple with two teenage kids and with household income of $60,000 experiences a year of out-of-pocket medical expenses substantially higher than normal. Fortunately, everything is cured. And fortunately they have savings to draw on, they forego their vacation that year and temporarily suspend their HBO subscription to pay their medical bills. If the expenses are large enough, this family is now considered living in poverty.

I wonder if the changes in determining the poverty rate by the Census have anything to do with ObamaCare?

guthrie writes:

Hilarious title David!

Chris T writes:

It turns out the writer misread the census data anyway. The actual figure is about 31.8% for those in poverty or considered low income.

http://www.newsmax.com/StreetTalk/census-poverty-lowincome/2011/12/16/id/421232

Alas, the incorrect figure will be the accepted wisdom for the next twenty years.

Zach Pruckowski writes:

Chris T -

To me, it looks like what happened is that all the "nearly half" reports looked at the median income and the "twice the poverty line" number and saw that they were within a few thousand dollars of each other (it's something like $45k for top low income and $49k for median income I think, but I couldn't find the exact numbers offhand). Since incomes are distributed in a pattern with a huge bulge at the median, a few thousand bucks either way is all that separates the fourth, fifth, and sixth deciles.

Foobarista writes:

This is a good way to insure that "the poor will always be with us", no matter how well-off the relatively poor happen to be. And since they're "poor", they'll need government cash and, most importantly, the bureaucracies associated with the handouts, forever.

Daublin writes:

I strongly agree about the general argument, David. However, my impression is that the "poverty line" has always been a defined as a relative measure, and intentionally so. I first looked up a definition a decade ago and it was already relative.

I confess I don't understand the rationale for defining it this way. As you point out, defining it as a relative quantity means poverty will never go away.

I would also add that it defies common sense. When you think "poverty", you think people being homeless and hungry. Not that they only have one television rather than three.

David R. Henderson writes:

Daublin writes:
However, my impression is that the "poverty line" has always been a defined as a relative measure
No. That’s incorrect. The measure was chosen by Mollie Orshansky in about 1965 and it was equal to 3 times what they estimated a family needed to have 3 square meals a day.

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