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

Societal Economic Goals Low Unemployment Economic Growth Low Inflation EfficiencyEquity

Adam 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 1971— million people

Single mothers increase their chances of living in poverty 416% relative to married couples Living Arrangement2009 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 chances of living in poverty by 529% relative to a college graduates Educational Attainment, Age> Poverty Rate College Degree 3.8% High School Grad11.6% < High School23.9%

Not working increases the chances of living in poverty 741% relative to those who are working full-time Working Status Age Poverty Rate Full-time, year-round 2.7% Part time or part year14.5% Did not work22.7%

Measuring 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 rate actually 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 thresholds determined?  Mollie Orshanky’s 1963 original measures:  At the time, no budgets established except food  (food budget) x 3= threshold  Adjusted 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 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 poverty statistic, 2002 Government Program Average Benefit Within Program Per Food stamps$ 2,200Family Housing assistance$ 5,400Family Medicaid$ 6,000Family-4 S-CHIP$ 1,000Child Energy assistance$ 400Family WIC$ 400Person TOTAL$15,400

Problems with the official 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 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 3  1/7 yields a multiplier of 14

Threshold 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? Characteristics of Ownership in Poor Family Dwellings Microwave27%85% Dishwasher18%31% Central air conditioning15%38% Washer60%64% Dryer39%55% Television61%96% Computer 4%38% Stereo29%63% VCR25%76%

Poverty and Material Wellbeing

Supplemental Poverty Measure  Due for release fall  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 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 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 Poverty?  Establishment of “typical” FSCU budget of the 33 rd 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.