On April 14, 2020, Jeffrey Madrick, TCF senior fellow and director of the Bernard L. Schwartz Rediscovering Government Initiative, submitted a comment to the Office of the Chief Statistician, Office of Management and Budget, concerning the official poverty measure (OPM). His comment, slightly edited with an explanatory text, is reproduced below.
The Trump administration is prepared to reduce funding for, and the benefits of, the food stamps program, Medicaid, unemployment insurance, the Affordable Care Act (ACA), and potentially Medicare and Social Security as well; furthermore, it intends to change the way poverty is measured to reduce the poverty line. This comes in a time when the ongoing COVID-19 pandemic makes clear that our policies should be aimed at enhancing the safety net, and not reducing it. The Rediscovering Government Initiative (RGI), of which I am the director, has dedicated itself to combating these efforts.
The latter of these efforts comes from the Office of Management and Budget (OMB), which has proposed to rewrite poverty measures. RGI submitted a detailed response.
As an example of the current state of American welfare, Urban Institute has just completed its annual survey of hardship. It finds, stunningly, that even when unemployment was at its lowest last year, some 40 percent of Americans reported that they have at least one hardship in an area such as housing, health care, utilities, and nutrition. It’s clear that the OMB’s intentions are in blatant disregard of the facts.
The Bernard L. Schwartz Rediscovering Government Initiative at The Century Foundation has been studying poverty for the past seven years, including several major conferences and numerous commissioned papers. In addition to directing RGI, I am the author of Invisible Americans: The Tragic Cost of Child Poverty, which among other issues examines the history of the measurement of poverty in America, and compares it to the approach taken internationally. I offer the following responses to OMB’s request for comment on consideration of additional measures of poverty.
1. The current definitions of poverty are out of date, and inaccurate. They underestimate the prevalence of poverty in America.
The official poverty measure (OPM) seriously understates the poverty line, and after a reasonable period of time should be discarded to reflect a modern, undistorted measure of poverty. When devised in the 1960s, the OPM came to roughly 50 percent of median household income, adjusted for family size. Today, it comes to less than 30 percent, meaning that those who are officially poor today can buy far fewer of the essentials of modern life than they could fifty years ago. This mismeasurement is the consequence of a threshold package of goods and services that has not been changed for more than sixty years except to be adjusted by an inflation index. More realistically, the poverty measure should be roughly one and a half times the official measure, or more, or nearly $40,000 for a family of four, which better reflects what Americans report to pollsters as the minimum needed to “get along.”
The supplemental poverty measure (SPM) improves on the official poverty measure by more realistically accounting for basic expenses, and the value of government benefits. However, it has major flaws as well. For example, the 2019 supplemental poverty measure was roughly $27,000 per year for a family with two adults and children. As I explained in my book, after paying a modest rent of $850 per month, this family would only have $350 per week (including the value of government benefits) for all other expenses including food, child care, clothing, entertainment, taxes, and education expenses. The SPM is particularly biased when it comes to measuring child poverty: the provisions that deduct cash payments for health care and work-related expenses from resources are biased against the poor families, who often cannot afford such expenditures even when necessary, as compared to seniors, for example, who have more resources to pay for health expenses.
2. Because of the poor quality of data, a consumption poverty measure would likely undercount poverty significantly.
Given the current state of research, adopting a consumption measure of poverty, as many urge, would yield a misleadingly low poverty rate. Studies (notably by Richard Bavier) show the inadequacy of existing consumption surveys. Among other problems, they are not consistent with material deprivation analyses. Shaefer and Rivera found that both the SPM and OPM better track patterns of food insecurity and employment over time, whereas consumption poverty measures show it improving during periods like the Great Recession, when hardship was increasing. Another area that may be mismeasured by consumption’s advocates is how to measure the consumption value of housing. Such issues suggest far more research is needed to develop trustworthy consumption data that could be the basis of living standards.
Moreover, adjustments for debt to raise individual consumption levels must be made. If someone borrows against a credit card or takes out a payday loan, he or she is not less poor because they can spend more money. High levels of consumption, including spending a large portion of income on rent, does not make an individual better off if they are done by borrowing.
If someone borrows against a credit card or takes out a payday loan, he or she is not less poor because they can spend more money.
Until such adjustments are made based on evidence-oriented research, poverty measures should rely on income surveys adjusted by transfer income models (TRIM) for underreporting of certain types of income. These TRIM models are not perfect, but they provide a closer estimate to the real state of income for all Americans, including the poor, and significantly counter the arguments about underreporting income made by consumption advocates.
3. Health insurance—whether Medicaid or private—should not be added as a source of income to calculate poverty without also including health coverage as a fundamental basic need in the poverty threshold.
Some forcefully argue that government programs like Medicaid or private employer-paid insurance should be added to the income of the poor, as this coverage reduces hardship. But to make this consistent, the need for health insurance should be added to the package of goods and services that define the poverty level. If health insurance is accounted for as income, it should only be considered as meeting a need as essential to Americans as food or a roof over their head. Thus, if health insurance benefits are added to the income of the poor, the poverty rate calculation must also add an estimate of the cost of such programs. To adjust the basket of basic goods and services, in one analysis, the need for health insurance can be equated to the cost of government or private health insurance. Poverty will be different among the states, according to this methodology, depending on the degree of adoption of Medicaid, among other matters.
4. All inflation estimates are distorted and should not be a basis of poverty measure adjustments.
Poverty rate measurement must be adjusted over time, and a common recommendation is to change the inflation index used. The OPM is only adjusted by reference to the Current Population Survey–Urban consumers (CPI-U). All inflation indices have poorly understood distortions and biases that inevitably increase over time. Some research has shown that the personal consumer expenditures index (PCE) is more accurate for overall inflation, but analysts argue, among other criticisms, that it includes too little housing and too much technology to be of use to measure poverty. Both support for the PCE and criticism of it are controversial, and much more research should be done. To this point, recent adjustments made by researchers and cited by the White House Council on Economic Advisers in 2018 result in implausibly, even absurdly, low poverty rates. When coupled with measures based on consumption, poverty estimates have been recorded at below 5 percent (there are other technical concerns as well, involving analysis over time using the PCE). The conclusions of such studies don’t pass a common sense test when compared to estimates people in general have of what a minimum income should be in America.
Ideally, inflation estimates over time should be minimized or even eliminated from poverty measurement. In a dynamic economy, needs change and quality adjustments that reflect the value of goods and services in a price index become outdated. If used, inflation adjustments should only be used for short periods of time, such as five years, until the underlying basis of poverty can be re-evaluated to account for societal and economic changes.
If the United States maintains a fixed or absolute poverty measure, which I concede is likely, the basket of goods and services measured should be updated every five years, or over a reasonable period of time to be determined by research. This will reflect changes in the economy and basic needs.
The current SPM is a quasi-relative measure, and superior to the OPM. But the basket of goods measured is also questionable, as is the proportion of this basket used to create the SPM. A practical way to eliminate the ambiguities of inflation is to adopt anchor measures that are nominal, as discussed below.
5. The U.S. government should adopt an official relative measure of poverty.
Ideally, the nation could adopt a set of several poverty measures that reflect different aspects of material and aspirational life. Some will argue this is impractical, as policymakers and the public prefer one simple number. But we think it is now imperative to add a relative poverty line set at 50 or 60 percent of median incomes, as is customary in Britain and Europe. This serves important purposes. It minimizes distortion due to inflation. It is an inclusive measure that recognizes low income is a function of a changing economy. As median incomes rise, the poor are enabled to keep up with new products and services that define a good life. Below 50 or 60 percent of the median income, families become so isolated from full economic participation that they and their children become more unlikely to live healthy and fulfilling lives.
6. An absolute or quasi-poverty line must adopt a threshold or package of goods that not merely is adequate for survival but to develop the capacities to lead a decent life of opportunity.
The purpose of defining poverty in 2020 in America is not to assess a bare minimum of food and shelter necessary to life. The goal of modern society is not to prevent its populace from starving, but rather to have the resources to thrive and the opportunity to achieve full potential. It should not be a handout but a stepping stone. Definitions of a level of goods and services will require more research, some of which is being done, such as Oren Cass’s estimate of the cost of “thriving.”
Regarding children, ideally, the poverty measure should result in a poverty line for children above which cognitive and emotional damage would be minimized. I am deeply concerned that efforts to reduce the poverty measure by changing inflation calculations or switching to a consumption based measure will badly undermine these goals. Official government rates are used to set levels of aid delivered to families and to communities with large numbers of poor individuals. For children growing up in poverty, such aid in the form of cash, food, health care , housing, or social services is an irreplaceable necessity. Changing the poverty rate in ways that lessen assistance would lead to lasting impairments not only to these families but to our society. One study estimates the lost productivity and extra health and crime costs stemming from child poverty add up to about $1 trillion a year, and pulling back from investments in these families would undermine not just the lives of children but our economic future.
At a time when the COVID-19 crisis has left poor families scrambling to feed children who once could count on two hot free meals at school, it is highly disappointing that OMB appears undaunted in its effort to create new lower calculations of poverty. The current severe crisis accentuates the importance of the proper approach to measuring and fighting poverty. OMB should strive to assess accurately a true poverty rate at a level at which Americans would have the resources to face a national trauma like COVID-19 with economic security and faith in the future.
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