Defining Poverty

There is a great deal of discussion in this country about the poverty line, and the percentage of the population that lives below the poverty line.  In the debate about increasing the minimum wage, the issue is often couched in terms suggesting that the minimum wage should be high enough for a single wage earner to earn over the poverty line for a family of four.

In an earlier post, I pointed out that with current Federal antipoverty programs, one wage earner can get a family above the poverty line.  In this post, I want to look at a different question: where does the poverty line come from?  We say that a family of four that has less than $23,450 of annual income is living in poverty.  How do we make that determination?  It turns out it is not hard to find that information.

In 1963-64, an economist with the Social security Administration, Mollie Orshansky, made the first official definition of poverty.  Her methodology was simple.  She took a Department of Agriculture economy food plan that listed how much a person should eat during a week (3 lbs. of milk and cheese, 2 lbs. of meat, 5 eggs, etc.).  This amount of food was added together for various family sizes, then the cost was calculated.  Orshansky then multiplied the dollar cost of the food by a factor of three.  That was the definition of the poverty level adopted in 1965. 

Where did the factor of three come from?  In 1955, the Department of Agriculture did a survey that showed families of three or more persons spent about a third of their after tax income on food.

In 1969, this poverty line was indexed to changes in the consumer price index (CPI), so that it increases with inflation.  Other then minor changes regarding issues such as the distinction between farm and non-farm families, the formula has remained constant since then.  You can find this history here.

The problem with a static definition of poverty is obvious.  It does not take productivity growth and technological change into account.  Long term productivity growth means you can buy more stuff with less money.  For example, in 2011 Americans spent only about 8% of their income on food, tobacco, and alcohol combined.  That number reflects a remarkable shift in spending patterns over the last 50 years.  The money not spent on food is deployed in other ways.  For example, only 18% of household below the poverty line do not have air conditioning, and some of those people live in Alaska.  Television ownership is almost universal in our society.

Those in favor of more government intervention in the economy often cite poverty statistics to demonstrate that the government needs to do more giveaways of other people’s money.  I would argue that a bad definition of poverty leads to bad policy making. 

After all, if “poor” people are 50 pounds overweight, and walking around with smart phones, TVs and iPads, doesn’t that indicate that the “war” on poverty has been pretty much won?  Maybe we can declare victory and go home.