Since the government will release figures on both poverty rates and median incomes on Thursday, now seems like a good time to summarize how the government goes about calculating poverty.
Calculations are made by the US Census Bureau from surveys of US households undertaken each March. The sampling methods, while not perfect, are probably the best that can be done given time and financial constraints. The Census Bureau tries to ensure that its sample is representative of the country and that it adequately represents all age, racial, regional, etc. groups in the nation.
The surveys ask about the household composition (how many people, who heads the household), socio-demographic information (race, age, etc.), and most important of all, how much income was made during the previous year. From this information, the Census Bureau computes two key figures that receive most of the media attention—the median income in the nation and the poverty rate in the nation. The median income figure is supposed to show indicate how middle-class households are doing. Has their income gone up or down in the past year? Has it increased in real terms (i.e., can it buy more things)? The poverty line is supposed to measure the percentage of households whose income is not sufficient to purchase the basic food, clothing and shelter needed to survive during the year. It represents the extent to which both the market economy and government programs have failed to provide adequate income to its citizens.
The US is one of the few countries in the world with a numerical set of poverty lines and an official definition of poverty. These were developed in the early 1960s by Mollie Orshansky of the Social Security Administration. She was given this task in response to a request by President Johnson, who was about to declare a war on poverty and who wanted to be able to show his progress on this battlefield.
Orshansky proceeded as follows. Using data compiled by the US Department of Agriculture on the minimum amount of food required to survive, she calculated the cost of the subsistence food budget for families of different sizes. Then she looked at government surveys (undertaken in the 1950s) of household expenditures. On average, these surveys found that families spent around one-third of their income on food. So Orshanksy multiplied the cost of a minimum food budget for each family type by three in order to arrive at a poverty line. The national poverty rate is the percentage of households that fall below their poverty line. Every year the poverty line for each family type gets increased based upon the annual rise in consumer prices. Poverty lines in the US thus represent a fixed and constant real standard of living. The poverty rate measures the fraction of households who cannot obtain this standard of living with their income, or who cannot purchase basic necessities with their annual income.
The figures for 2007, reported by the government last year showed that the US poverty rate was 12.5% (with 37.3 million poor Americans). This was up from 11.3% in 2000—the year before "W." took office (whether he was actually elected or not is still a matter of debate). The poverty rate for children in 2007 was 18%, up sharply from 16.2% in 2000.
According to Rebecca Blank, Undersecretary of Economic Affairs in the Commerce Department (which houses the Census Bureau), the numbers to be released on Thursday will show further sharp increases in poverty. She has hinted that the national poverty rate will be at around 12.7% and that an additional 1.5 million Americans were poor in 2008 compared to 2007. Such increases are only to be expected given that the economy tanked at the end of last year, and that the rate of unemployment increased sharply. With fewer jobs and with less income, we can only expect a decline in the median household income as well as an increase in the US poverty rate. The only question is how big the decline will be for 2008. Of course, when the 2009 figures are release next year, we can expect to find that things are even worse.
Tomorrow I will summarize some of the many criticisms of how the US government computes the poverty rate. Of particular interest to me is the large amount of consumer debt that households have, and how paying interest on this debt means that they are unable to buy basic necessities—even though their income is above the poverty line. On Thursday I will discuss the release of the poverty rate figures in considerable detail.