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Consumption, not income, a better measure of poverty according to new report

Published: Wednesday, Sept. 26 2012 4:28 p.m. MDT

Jose Guillen, 68, sorts recyclable items at a recycling center in Los Angeles, Wednesday, Sept. 14, 2011.

Jae C. Hong, Associated Press

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SALT LAKE CITY — The poverty rate barely budged between 2010 and 2011, according to a report released last week by the U.S. Census Bureau. In 2010 and 2011 nearly 46 million Americans, or 15 percent of the population, lived in poverty, according to the report.

In the United States poverty is measured in terms of income. The poverty line is the threshold below which families or individuals are considered to be lacking the resources to meet the basic needs for healthy living; in other words, having insufficient income to provide the food, shelter and clothing needed to preserve health. In 2012 the poverty line was about $23,050 for a family of four, according to the United States Department of Health and Human Services.

Given that income is how poverty is measured, it is curious that the "largest government programs to help the poor have zero impact on officially measured poverty rates," wrote Timothy Taylor, editor of the Journal of Economic Perspectives, on his blog the Conversable Economist. For example, food stamps are not counted as part of income for calculating the poverty rate because they are technically a non-cash benefit. Similarly, Earned Income Tax Credits and Child Care Credits are processed through the tax code and so are not counted as part of income.

The fact that anti-poverty programs have no impact on measured poverty is no secret. The Census report itself notes:

"The poverty estimates in this report compare the official poverty thresholds to money income before taxes, not including the value of non-cash benefits. The money income measure does not completely capture the economic well-being of individuals and families, and there are many questions about the adequacy of the official poverty thresholds. Families and individuals also derive economic well-being from non-cash benefits, such as food and housing subsidies, and their disposable income is determined by both taxes paid and tax credits received."

Given that current measures of poverty provide murky insight on the well-being of Americans, some economists suggest it is time for a new way to measure poverty. A rate based on consumption instead of income would provide more insight on the well-being of Americans, according to a research paper released in 2012 by Bruce Meyer of the University of Chicago and James Sullivan of University of Notre Dame.

Meyer and Sullivan compared those who qualify as "poor" based on income and those who qualify based on consumption across 25 indicators of household well-being, including assets, health insurance, number of bathrooms in the home, whether the family owned a dishwasher and other appliances, computer access and whether the head of the household is a university graduate.

They found that those who are "poor" by the consumption definition of poverty are worse off in 21 of the 25 categories of household well-being. Taylor explained the outcome, saying, "Some of those who fall below the poverty line when these are not considered, in the official income-before-taxes poverty measure, rise above the poverty line when these are included. In addition, consumption poverty better captures those who don't have other resources to fall back on, so those whose income is temporarily low enough to fall below the poverty line, but have other ways to keep their consumption from falling as much, don't show up as falling below a consumption-based poverty line."

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