Spotlight Exclusives

Five Things the Government’s Poverty Numbers Do (and Do Not) Tell Us

Angela Rachidi, American Enterprise Institute Angela Rachidi, American Enterprise Institute, posted on

Each September, the federal government releases official statistics on income and poverty for the year prior, including the official poverty measure (OPM) and supplemental poverty measure (SPM). The flaws of both measures are well known, but they still reveal some important information about poverty and economic wellbeing in the United States. Below are five things this year’s statistics do and do not tell us about poverty.

1. A strong economy means fewer Americans in poverty. This may seem obvious, but it is worth restating. The OPM does not count all household resources, including post-tax and in-kind assistance like refundable tax credits and Supplemental Nutrition Assistance Program (SNAP) benefits, making it an inaccurate measure of poverty. But it still tells us something about the relationship between “market income” and poverty, meaning income that comes primarily from employment and cash transfers linked to employment like social security or unemployment insurance. This means that trends in the OPM reveal the link between the economy and poverty, and this year’s statistics demonstrate positive effects. The official poverty rates for individuals and children in 2018 were at their lowest levels in 17 years and comparable to the low rates seen in the strong economy of the late 1990s.

2. The social safety net relieves financial stress for low-income families. The SPM addresses problems with the OPM by including most post-tax and in-kind government benefits when calculating household income. In doing so, it shows that government assistance reduces poverty, particularly for children. For example, without refundable tax credits, the SPM for children would be 5.63 percentage points higher and 1.81 points higher without SNAP.

3. We still don’t know how many Americans fail to meet their basic needs, and how this has changed over time. The omission of billions of dollars of government assistance in the OPM makes it useless in assessing the material wellbeing of households, but two components of the SPM make it equally inadequate. One problem is that the household surveys that inform the SPM (and the OPM for that matter) suffer from income underreporting issues that heavily skew both poverty rates upwards. Another problem is that unlike the OPM, the SPM thresholds are based on the distribution of annual household consumption expenditures making them “quasi-relative” rather than absolute. Together, these factors lessen the utility of the SPM and make it difficult to estimate how many households in this country struggle to meet their basic needs.

Alternative measures would be a good addition to the government’s official national statistics on poverty. One replaces the quasi-relative threshold of the supplemental poverty measure with an “anchored” threshold that is adjusted for inflation, and counts government resources as income. Another abandons the use of flawed income data entirely, relying on consumption data and an absolute threshold to measure poverty. The use of an anchored threshold can alter our view of certain policies, and a consumption-based poverty measure can avoid the pitfalls associated with misreported income. Some prefer a “full-income poverty measure” that includes the full value of employer- and government-provided health insurance in the count of resources, which could add yet another view of household economic well-being.

4. Annual poverty statistics tell us nothing about persistent poverty. Both the OPM and the SPM rely on an annual survey of households and calculates whether income exceeds a threshold of poverty for that year. This gives us a snapshot of poverty at a point in time, but tells us nothing about how long households experience poverty. This is important because research shows that persistent poverty is far more detrimental than short-term poverty, especially for children, and short-term poverty requires different policy approaches than entrenched poverty. Fortunately, research suggests that persistent poverty according to the official poverty measure is fairly rare in the United States and almost nonexistent when considering the supplemental poverty measure. This truth gets lost when focusing on annual poverty statistics.

5. Policies should support a strong economy and government assistance programs that keep people connected to the labor market. A strong economy is essential to lowering poverty, making federal policies that support jobs and wage growth an anti-poverty policy priority. As we see from this year’s poverty statistics, government transfers can relieve financial stress for poor families, but programs can also reduce work incentives and leave families little better off in the long run. Policymakers must keep the behavioral effects of government programs in mind when crafting policies and design approaches that encourage employment, such as lowering effective marginal tax rates and imposing work requirements in government benefit programs.

This year’s poverty statistics, while flawed, remind us that many households are much better off economically today than in years past, which can be attributed to a strong economy and increases in government spending on poor families. Continuing progress requires a balance of both, along with better government statistics.

Angela Rachidi is a senior research fellow in poverty studies at the American Enterprise Institute and a member of Spotlight’s advisory board.

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