The Poverty Rate: A misleading metric that fails policy-makers

Good public policy “happens” after we correctly define our problems, ascertain their magnitude and underlying causes, and divert our attention away from their associated symptoms.

The Radical Moderate has been a vehicle for cutting through agenda-driven ideologies and discerning the real causes of our very real problems. Upon the foundation of Heightened Understanding, RM #22 presented 26 critical reforms that will keep America vigorous and allow her to remain the “last best hope” of a very troubled world.

But a few loose ends remain, mostly involving policy issues that remain perpetually muddled because they are consistently explained with unhelpful and/or misleading data. Poverty Policy is the poster child for this category and will be addressed below. Next time, RM #24 will address the Minimum Wage, a topic that rarely gets the honor of being examined rationally… And finally (at least for awhile), RM #25 will wrap up this blog series with a look at the fundamental components of success and failure.

The Federal Poverty Level 

Nobody really knows how we’re faring in the War on Poverty because the main measurement we use to judge our progress doesn’t tell us the whole story. In fact, it doesn’t even tell us half the story; but it’s generally presented to the public as if it does.

The U.S. government uses the Federal Poverty Level (FPL) to define who is poor. And it multiplies the FPL by factors greater than one to determine America’s “near-poor.” The Affordable Care Act, for instance, extends Medicaid benefits to those with cash incomes of up to 133% FPL and it provides health insurance subsidies for folks earning up to four times the FPL.

The FPL is based on a family's annual cash income, with no consideration given to total wealth, benefits from anti-poverty programs, actual consumption levels, or other factors that determine an individual’s well-being such as living near mass transit. The FPL formula has not been changed, other than by inflation adjustments, since 1963, when policy-makers combined U.S. Department of Agriculture food budget estimates for low income families with 1955 data that showed an average 1950’s family spent about one-third of its income on food.

Over fifty years later, a household’s FPL is still determined by taking an age-old estimate of what a bare minimum diet costs, adjusting it for inflation and family size, and then multiplying that number by three. Today, the FPL is $23,550 for a family of four, with $4,020 added or subtracted per family member, which makes a single-person “household” poor if his or her applicable income is less than $11,491 (slightly more in Alaska and Hawaii). But adding or subtracting a constant number ignores the savings that larger families inevitably gain from “economies of scale,” and it discounts the fact that smaller households have fewer people to distribute their fixed costs amongst. In other words, the FPL should be adjusted downwards by more than $4,020 for a three person household and upwards by less than $4,020 for a five person household.

The FPL is based on the pre-tax income of parents and children. This includes their earnings, pension or retirement income, interest, dividends, rents, royalties, income from estates, trusts, educational assistance, alimony, and spousal (or ex-spousal) child support. It also includes cash benefits such as unemployment and workers' compensation, Social Security, Supplemental Security Income (SSI/Disability), veterans' payments, and survivor benefits.

It counts the income of family members, but excludes the income of roommates and other non-relatives who contribute to the household. This paradigm insidiously disincentivizes marriage by making boyfriends and girlfriends who pool their incomes eligible for less assistance once they marry.

“Out of pocket” expenses for healthcare and education, which have grown much faster than the rate of inflation, are not considered. And here’s what else is not included:  food stamps (SNAP), refundable earned income (EITC) and child tax credits, free or reduced school breakfasts and lunches, after-school and summer food assistance programs, housing subsidies, home energy assistance programs, assistance for single mothers (WIC & TANF), Medicaid, Medicare, Obamacare subsidies, educational services such as Head Start and Early Head Start, federal and state children’s health insurance programs (CHIP/SCHIP), private charity assistance, state-sponsored/state-augmented anti-poverty programs, income from capital gains, and the “imputed” income a homeowner gains from not having to pay anyone rent.

Selecting Oranges by Tasting Apples

What the FPL measures best is the portion of America’s population that its private economy cannot sustain – a measurement that has remained virtually unchanged since 1965 at around 15%. In other words, on average, about 15% of our population has – and will have – trouble earning a sufficient income (assuming three times an inflation adjusted 1955 minimum diet constitutes one’s sufficient income). But the FPL omits the collective impact of dozens of anti-poverty programs that cost (or will cost) American taxpayers hundreds of billions of dollars. So ultimately, the FPL tells us too little about who is and who is not truly impoverished.

Without useful, broadly understood poverty metrics it’s very for hard for policy-makers to really know how we’re doing fighting U.S. poverty. But the FPL does make it relatively easy for poorly informed or low integrity politicians to demagogue poverty issues with guilt-inducing assertions that can be neither backed up nor refuted.

So the Radical Moderate cannot say with certainty what needs to be done about poverty, because nobody else can either… Until we get serious about understanding poverty’s details, we will continue to “grope in the dark” with ill-informed poverty policy that’s both wasteful and inadequate...or adequate – who knows?