Ed Dolan's Econ Blog

Understanding the New View of Poverty (1): The Erosion of Stereotypes

We all thought we knew who is poor in America. Children, especially in one-parent households. Racial minorities. Families who aren’t able to participate in the great American dream of home ownership. Really? The Census Bureau’s new Supplementary Poverty Measure (SPM) erodes all of these stereotypes. They still contain some truth, but less than it seemed. No matter who you are, you cannot dismiss income insecurity as a problem that doesn’t threaten people just like you.

The news does not come without warning. The official 2010 poverty figures, released in September, already showed a record high poverty rate for working-age Americans—some 13.7 percent, up from 12.9 percent in 2009, itself a record. Now the new SPM shows that official figures understate the problem. Why, and what does it mean?

There is nothing really radical in the SPM. The Census Bureau’s own staff and independent analysts have long known that the official poverty measure is deeply flawed. That measure, based on a minimum diet multiplied by three, fails to take into account the changing costs of budget elements other than food, the value of in-kind government benefits like SNAP (formerly food stamps), and the impact of taxes. Other problems include inadequate attention to regional differences in living costs and an inadequate view of family structure.

The new SPM begins from a minimum budget that includes not just food, but food, shelter, clothing, and utilities (FCSU). The FCSU budget is then multiplied by 1.2  to allow for other items and adjust for family size and regional differences in housing costs. The SPM then compares the poverty budget to a measure of resources that adjusts the old cash income concept in three ways. First, it adds the value of in-kind benefits that can be used to meet FCSU needs. Second, it subtracts net taxes. (In doing so, it treats the earned income tax credit as a negative tax.) Third, it subtracts other necessary expenses, the largest of which are work-related child care and out-of-pocket medical expenses.

The resulting poverty thresholds are only a little higher than under the official measure: $24,391 vs. $22,113 for a family of four in rental accommodations. To put it in perspective, we can break the numbers down to see the kind of lifestyle such an income allows. Imagine a family of two adults and two children with a total income of $30,000 after taxes, including the cash value of SNAP and other in-kind benefits. Suppose they are healthy and manage to keep their out-of-pocket medical costs down to $400 a month, perhaps using an employer-subsidized high-deductible insurance plan. Suppose they can juggle work schedules to avoid all-day childcare costs, allowing them to hold work-related expenses to $809 per year. That would leave them right at the poverty line. Almost all of their cash income would go to meet food, clothing, shelter, and utility needs. They would have just $391 a month for phone bills, gasoline, appliance repairs, and maybe Internet service, if they wanted to give their kids a chance to be part of the modern world.

That is the new view of poverty. Who falls within it?

Overall, the SPM does not give us all that many more poor people—16 percent of the population in 2010, compared with 15.2 for the old measure. The surprises come in how that poverty is distributed among the population. The SPM records just 18.2 percent of children as poor, down from 22.5 percent by the official measure. The working age poverty rate rises from 13.7 percent to 15.2 percent, and the rate for the elderly from 9 percent to 15.9 percent. To put it a different way, the SPM tells us that 60 percent of all poor people are of working age, which means more than twice as many working-age as children.

The SPM makes an even bigger difference for the income status of the working-age population if we look at near-poverty, that is, incomes from 1 to 2 times the poverty threshold. Under the official measure, 16.3 percent of the working-age population fell in that income bracket. Under the SPM, the figure rises to 29 percent. That means almost 45 percent of the U.S. working age population are living on incomes less than double the poverty level. Ouch.

The next stereotype to suffer erosion concerns poverty and family structure. According to the SPM, 37.3 percent of poor people, the largest group, are members of two-parent households, up from just 30.5 percent under the official measure. Households headed by women, which contain the greatest number of people under the official measure, come in second, with 36.6 percent of the poor. There are many more poor individuals (mostly children) in households headed by one female parent than in those with a single male parent, but the gap narrows significantly. Yes, having two parents still offers some protection against poverty, but not as much as we thought.

According to the SPM, minorities are still at greater risk of poverty than whites, but once again, the stereotypes do not hold as sharply as under the official poverty measure. The poverty rate for whites rises from 13.1 percent to 14.3 percent. That for blacks falls from 27.5 percent to 25.5 percent. The poverty rate for Hispanics just edges out that for blacks under the new measure, rising from 26.7 percent to 28.2 percent. Although Asians continue to suffer far less poverty than other minorities, their poverty rate shows the greatest increase under the new measure, rising from 12.1 to 16.8 percent.

Finally, consider the picture for home ownership. One often-cited cause of the housing bubble and subsequent crash was a set of policies intended to move lower income people into their own homes, on the theory that doing so would immunize them against poverty. It is true that for both the official measure and the SPM, poverty rates among home owners are lower than for renters, but the SPM shows the gap to be close to 3:1 rather than almost 4:1 under the official measure.

If we look at the distribution of people below the poverty line by ownership status, the SPM indicates that 41.2 percent of all poor people own their own homes, compared with 57.2 percent of the poor who rent. (The remainder, 1.6 percent of the poor, live rent free in homes they do not own.) That is a much narrower gap than is suggested by the official figures, which show 35.5 percent of the poor as owners compared with 62.7 as renters.

The bottom line is that the new view of poverty does not completely dispel the old stereotypes, but it significantly undermines them. In every dimension, the picture is less of two Americas, and more of one America. Yes, the white, home owning, working age population is still more prosperous than the population of minority children and working-age single mothers in rental housing, but the differences between the groups, by every metric, are narrower than we thought.

No group is safe from economic insecurity. Any members of the white, working, home-owning population who are inclined to think of poverty as someone else’s problem might want to think again. We all need to be thinking about what might work and what does not work to mitigate the problem of income insecurity. The insights that the SPM offers on that will be the subject of the second part of this post.

Follow this link to read the second part of this post, “Understanding the New View of Poverty (2): What Helps and What Hurts?”


One Response to “Understanding the New View of Poverty (1): The Erosion of Stereotypes”

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