The Census Bureau recently released its annual report on poverty in the United States. It was widely reported that the number of people officially defined as poor rose by 1.7 million, raising the poverty rate from 11.7 percent of the population to 12.1 percent. None of the stories I read called attention to another Census report released the same day calling into serious question the way we now measure poverty.
Even many economists probably don't know that the "official" measure of poverty was developed in the 1960s as a sort of "back of the envelope" exercise. The woman who came up with it certainly never meant for it to be taken as a definitive measure. Nevertheless, it has survived to the present day, increased only by the rise in the Consumer Price Index each year.
Liberals have long criticized this method, saying (rightly) that the official poverty measure bears no relation to any meaningful concept of true poverty. The problem is that all of their suggested "improvements" would have the effect of substantially raising the poverty rate. One of their goals, of course, is to justify increased welfare spending and bigger government.
Unfortunately, the whole notion of poverty is extremely subjective. The original definition was based on food consumption, which then took about a third of a low-income family's budget. Now it's about 20 percent, but in the meantime many new needs have emerged that one can reasonably argue have become necessities of life.
Two hundred years ago, Adam Smith recognized that our concept of adequate living standards will change over time. Today's luxuries become tomorrow's necessaries. "By necessaries," he said, "I understand, not only the commodities which are indispensably 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."
Smith noted that a linen shirt would be considered necessary in his time even though the ancient Greeks and Romans got along fine without linen at all. So, too, many items that did not exist even in the recent past are often considered necessary for life today, even by the poor.
In a supplementary report that got no press attention, the Census Bureau looked at some of these new necessities and their ownership by the poor. It turns out that many poor people today own appliances that were considered luxuries when I grew up, and some would still be considered luxuries today. For example, 91 percent of those in the lowest 10 percent of households -- all of whom are officially poor -- own color TVs; 74 percent own microwave ovens; 55 percent own VCRs; 47 percent own clothes dryers; 42 percent own stereos; 23 percent own dishwashers; 21 percent own computers; and 19 percent own garbage disposals.
When I grew up in the 1950s, only the wealthy owned color TVs, clothes dryers, stereos, dishwashers and disposals. These were all considered luxuries. We got by with black and white TVs, hanging our wet cloths on a line to dry, washing dishes by hand and throwing our potato peels in a pail instead of down the drain. So did most other middle-class families. Not even the wealthiest people owned microwave ovens, VCRs or computers.
Some economists have suggested that using consumption, rather than income, as the measure of poverty gives a better idea of the true economic condition of the poor. They note that many of those officially classified as poor based on income actually live quite well. For example, many are elderly who own their homes free and clear. Others may just be poor temporarily and can draw down savings to tide them over. An analysis by economic Daniel Slesnick found that the official poverty rate of 13.8 percent in 1995 would actually have been 9.5 percent if based on consumption rather than income.
The Census Bureau itself acknowledges serious limitations to its calculations. One problem is that it is required by law to use a measure of inflation that is known to overstate price increases. Using a corrected inflation measure would have lowered the poverty rate from 12.1 percent to 10.8 percent last year. The inclusion of income that is not now counted, such as noncash income transfers like food stamps, would lower the rate to just 7.5 percent.
Lastly, it is worth noting that few of the poor remain poor for very long. According to the Census Bureau, over half of all those classified as poor between 1996 and 1999 were so for less than four consecutive months. Eighty percent were poor for less than a year. This sort of income mobility means that our measures of income inequality are also overstated, according to a new Federal Reserve Bank of San Francisco study.