Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Tuesday, September 13, 2005

Poverty Rates and Poverty Lines;
a flawed measuring device

Economists have long known that reported poverty rates are misleading, at best. Many, if not most (though surely not all), of the people living in poverty today have a better lifestyle than the lower middle classes did just 50 years ago. Anyone who lives now the way most of us did back then would be considered fairly poor. And most of us simply cannot imagine living under conditions that most of the poor in the 3rd world experience.

That means poverty must be relative, not absolute, a point made very well by Nicholas Eberstadt in this NYTimes piece [reg. req'd], "Broken Yardstick".

According to the latest poverty rate estimates - released by the Census Bureau on Aug. 30 [2005] - the total percentage of Americans living in poverty was higher in 2004 (12.7 percent) than in 1974 (11.2 percent). [Does this even seem plausible????]

... The profound flaws in our officially calculated poverty rate are revealed by its very intimation that the poverty situation in America was "better" in 1974 than it is today. ... But even the most basic facts bearing on poverty alleviation confute the proposition that material circumstances in America are harsher for the vulnerable today than three decades ago. Per capita income adjusted for inflation is over 60 percent higher today than in 1974. The unemployment rate is lower, and the percentage of adults with paying jobs is distinctly higher. Thirty years ago, the proportion of adults without a high school diploma was more than twice as high as today (39 percent versus 16 percent). And antipoverty spending is vastly higher today than in 1974, even after inflation adjustments.
And changes in the distribution of income simply cannot explain the differences.

In 1972-73, for example, just 42 percent of the bottom fifth of American households owned a car; in 2003, almost three-quarters of "poverty households" had one. By 2001, only 6 percent of "poverty households" lived in "crowded" homes (more than one person per room) - down from 26 percent in 1970. By 2003, the fraction of poverty households with central air-conditioning (45 percent) was much higher than the 1980 level for the non-poor (29 percent). [emphasis added to "non"]

... All strata of America - including the disadvantaged - are markedly healthier today than three decades ago. Though the officially calculated poverty rate for children was higher in 2004 than 1974 (17.8 percent versus 15.4 percent), the infant mortality rate - that most telling measure of wellbeing - fell by almost three-fifths over those same years, to 6.7 per 1,000 births from 16.7 per 1,000.
Furthermore, the poor seem to be able to spend much more than they earn:

In the Labor Department's latest Consumer Expenditure Survey (2003), the average reported income for the bottom fifth of households was $8,201, while reported outlays came to $18,492 - well over twice that amount.

Unfortunately Eberstadt overlooks one of the major reasons for this divergence between income and spending among the poor: most (note that I am saying most, not all) of the poor expect to be, or have been, poor only a portion of their lives. The poor are often at extreme ends of the life cycle and are serious dissavers during what they view as a temporary phase: very young individuals or couples spend more than they earn, expecting to earn more in the future; in the meantime, they borrow. Older people also practice dissaving, consuming from their retirement savings. This point has been made superbly by Jim Davies, a colleague at UWO, in several papers showing that over the life cycle, sales taxes are neutral, not regressive, for precisely the same reason.

Update: Phil Miller also has some thoughts on this topic.

Tyler Cowen has a piece on the same topic which came out after I wrote this and put it into my posting queue. Check out some of the comments there, too. But they all seem to have overlooked the importance of the life cycle in poverty measures.

[I hate when I write something, put it in the queue, and then Tyler posts about it before I do.]

For a poignant insight into poverty, read the latest at Asymmetric Information.
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