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What consumption can tell us about who is really poor

Published: Monday, Oct. 8 2012 7:40 a.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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Winning the lottery last fall was life changing for 24-year-old Amanda Clayton of Michigan. Taking a $735,000 lump sum payment, Clayton purchased a new house, a car and electronics. Although her net worth grew exponentially, Clayton still qualified for and collected $200 in food stamp benefits.

How can a person who collects a six figure payday qualify for federal assistance? Clayton wasn't scamming the system. In Michigan, as in many other states, food stamp eligibility is determined by income. Lotto winnings, if spent within 30 days, are not considered income and so winners can technically still qualify for various forms of government assistance.

Clayton's story highlights a serious problem with the way the government determines who is most in need of help. Part of the problem is that the official U.S. Census Bureau’s poverty measure, which is based on income levels, doesn’t always provide insight into who is really poor.

This has prompted a debate about the best way to identify those in need, which can be used to direct welfare efforts. Some poverty experts suggest measuring consumption, rather than income, would be a better alternative. The consumption measure implies that government assistance should be directed to families with children before giving more support to the elderly, said James Sullivan, a professor of economics at the University of Notre Dame.

The official rate

Since the 1960s, the poverty line has been defined as the amount it costs to feed a family the cheapest nutritionally viable diet, multiplied by three. "Except for annual adjustments for inflation, the line hasn’t been touched since,” said Rourke O’Brien, a sociologist at Princeton University, in a 2010 essay for the Stanford Social Innovation Review. In 2012, the poverty threshhold was about $23,050 for a family of four, according to the United States Department of Health and Human Services. The poverty rate is the percent of families whose incomes fall below this line.

While income is the official measure of poverty, it's limited when it comes to identifying the most disadvantaged in American society, according to James Sullivan, professor of economics at the University of Notre Dame. Even the Census report that determines the poverty rate notes that "the money income measure does not completely capture the economic well-being of individuals and families."

An alternative measure

"Consumption is a better indicator of how well people are actually living," according to a research paper released in 2012 by Sullivan and his colleague Bruce Meyer at the University of Chicago. Measures of consumption include the value people get from home ownership and government services as well as from purchased goods.

Meyer and Sullivan compared those who qualify as "poor" based on income and consumption across 25 indicators of 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 reported that consumption was a more accurate measure of poverty in 21 of the 25 indicators.

The implication is that some people who are truly poor are not covered by the traditional measure and some whose incomes fall below the poverty line do not need as much support. Thus, using a consumption measure changes the demographics of poverty. According to the conventional definition, the elderly account for a large percentage of the economically deprived, Meyer said. Some elderly are income poor but live comfortably in homes they own outright. Consumption models of poverty however show that low-income children across the country are on average worse off, particularly in large families.

Meyer and Sullivan said that some families who reduce their consumption in order to save money may appear to be worse off than they actually are, but this effect is only significant for the middle class. “Those at the bottom are still living hand to mouth,” they concluded.

Evaluating effectiveness

“We want poverty to measure who are the worst off, the most disadvantaged in society,” Sullivan said. Consumption poverty is attractive because it provides a sense of how people are actually living. Do they have food? Do they have a car or air conditioning? Have they graduated from high school? Do they have adequate housing?

Sullivan warns that using consumption as a measure to determine eligibility for government aid programs such as food stamps may create a moral hazard by encouraging people to game the system. Still, consumption is a "useful tool for evaluating the effectiveness of government programs,” he said. “It can show us if the programs are actually improving the lives of the poor."

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