Why You Should Forget About the Poverty Rate

By Jordan Weissmann
Lyndon Johnson's administration created the official poverty rate. Ironically, it tells us little about his legacy fighting economic hardship. (Reuters)

If you want to appreciate just how much progress America has made fighting poverty since Lyndon Johnson declared his war on it 50 years ago this week, here's a tip: Forget the official poverty rate. 

Well, don't forget it entirely. But do understand its limits. In 1964, the rate was 19 percent. Today, it's 15 percent, which, as my colleague Derek Thompson wrote yesterday, suggests we've barely made a dent in economic deprivation. But for such an influential and obsessed-over number, there's widespread agreement that the government's standard poverty measure is deeply flawed, and it almost certainly understates how much the social safety net has improved U.S. living standards over time.

In other words, there are lies, damn lies, and in this case, outdated economic statistics. 

The poverty line itself is sort of the shag carpet of economic indicators—a poorly-aged, 1960s throwback. It was first set during the Johnson administration at three times the cost of a basic diet because, at the time, the typical family was thought to spend about one-third of its income on food. Since then, it has mostly been adjusted for inflation rather than our changing spending habits, which today are geared less towards groceries, and more towards things like housing and healthcare.  

The Census Bureau's method for deciding whether a family falls above or below the poverty line is also a problem, because it only considers pre-tax cash income—meaning wages and government benefits like Social Security payments. What's wrong with that? Well, it ignores massive anti-poverty programs like food stamps, which families spend just like cash, or the Earned Income Tax Credit, which gives their finances a boost after tax season. 

Our current approach to calculating poverty is so full of holes that, for the past few years, the Census Bureau has produced an alternative number known as the "supplemental poverty measure" or "SPM"—which is bone-dry government speak for "the statistic you should really be paying attention to." Think of it as the official poverty rate's smarter, more realistic cousin. On the one hand, it accounts for additional expenses, like medical care and regional variations in housing. On the other, it better incorporates government benefits, like food stamps and housing subsidies. In the end, it usually comes out to be a little less than a percentage point higher than the official poverty rate.

That might not seem like an enormous difference, but what happens when the Census's new method is stretched back through time? That's what a group of researchers from Columbia University sought to find out in a pair of recent papers. They conclude that a) The U.S. has done a far better job fighting poverty than the official rate lets on and b) the safety net has played a key role in that success.

Unfortunately, the Census hasn't always collected all of the information it now uses to calculate its new poverty measure. But by pulling in data from other official sources and using some reasonable inferences, the studies reconstruct what the SPM might have looked like dating back to 1967. The results? If you hold living standards constant based on how families spent in 2012, the government has reduced real poverty by 10 percentage points since 1967, from 26 percent to 16 percent, even though the official poverty rate has stayed almost the same. 

If you assume living standards should have increased as the economy did, the gains are a bit less impressive. In other words, if you think there should be a higher threshold for poverty today than in the 1960s, the SPM has only declined from 19 percent to 16 percent. 

Finally, if the entire safety net from Social Security on down to food stamps, were entirely yanked away, the researchers find today's poverty rate would nearly double to 29 percent—up from 27 percent in 1967. 

In the end, even a 16 percent poverty rate is still unacceptably high. But it's important to recognize the progress that we've already made, and how we've made it. If you only look at our official poverty measure, you might be tempted to think the government's entire approach to solving need has been a flop—that it's time to embrace a conservative alternative by cutting benefits and (maybe) forcing more adults to work. But if you take a more nuanced view, it's clear that while the percentage of low-earning Americans has stayed stubbornly high through the years, the government has prevented a great deal of hardship through the safety net. It seems cruel to backtrack now. 

This article available online at:

http://www.theatlantic.com/business/archive/2014/01/why-you-should-forget-about-the-poverty-rate/282849/