THE AVENUE NOVEMBER 8, 2011
In the midst of nationwide protests over inequality, Robert Rector and Rachel Sheffield at the Heritage Foundation, a think tank, released a study arguing that most poor people in the United States shouldn’t actually be considered poor. Without offering a formal definition of poverty, they claim that Americans view poverty as deprivation in three things--food, clothing, and shelter--and by that standard, current poverty statistics grossly exaggerate the severity of living conditions. They point out that many poor people own consumer electric products and even cars, suggesting that the poor suffer from, amongst other things, a weak work ethic as a result of welfare policies.
First off, while the notion that poor people use welfare programs to enjoy the accoutrements of a middle class lifestyle fits in neatly to the “welfare queen” trope that has been used to justify cuts in public transfers to poor people, it is far from reality.
The latest Consumer Expenditure Survey tells a radically different tale: The poorest 20 percent of Americans spend much less than the average American on every category of spending, including alcohol (37 percent of what the average American spends), entertainment (41 percent), housing (52 percent), food (54 percent), audio/visual equipment (56 percent), and education (59 percent). Overall, expenditures of the poorest group are just 44 percent as high as the average American. Even that low level of spending is twice as high as their after-tax earnings, suggesting it is funded by borrowing, savings, and government transfers.
It also turns out that, contrary to anti-poor stereotypes, the poor allocate the limited money they do have in much the same way as the “prudent” middle and upper classes. In fact, they arguably spend it more wisely. As a percentage of expenditures, the poor allocate a lower percentage to alcohol (0.7 percent vs. 0.9) and entertainment (4.9 percent compared to 5.2 percent for the average American)—which includes the flat screen TVs and stereos highlighted by Rector. They also spend a higher percentage on education (3.0 percent compared to 2.2 percent) and other things that matter, like healthcare, food, and housing (41.4 percent vs. 34.4). In other words, the poor behave a lot like rational human beings who try to maximize their welfare under tight budget constraints.
A larger problem with Rector and Sheffield’s argument is that they want to define poverty too narrowly, based on an absolute threshold. America’s poor are indeed better off than many in places like Somalia and rural China, but applying an absolute standard misses quite a lot. Any concept of poverty should include unrealized capabilities in commanding the resources required to realize one’s full potential. The Census Bureau’s official definition and more refined supplemental definition both attempt to calculate an absolute threshold, but because of the way they are calculated (based on the consumption of people at the middle and lower third of the income distribution), the measure ends up reflecting relative poverty too. (It could do so more purposefully, but that’s a topic for another day.)
As economist Robert Frank writes in his excellent new book, “The Darwin Economy,” individual rewards--like access to good schools--depend on relative performance and competition, over expensive real estate, for example. Having enough money to go to an interview in a suit and on a full stomach doesn’t get you a job, though it undoubtedly helps. While the exact poverty line is somewhat arbitrary, growing up poor in America means you are less likely to have the education, health, and personal relationships needed to get the job or live the life that best matches your potential. Some people born to rich families might lack those things as well, but it is much less likely a result of their limited buying power, as it is bad luck or inadequate resolve.
To understand why relative poverty matters, read a new report from my colleagues at the Metropolitan Policy Program. Their study, which came out last week, documents rising concentrated poverty--the number of poor people living in poor neighborhoods.
They cite literature that points to why this matters and in so doing, show the importance of relative poverty: People living in poor neighborhoods typically suffer from inadequate access to quality education; higher crime rates; higher rates of physical and psychological ailment; limited access to credit and wealth accumulation; higher prices for goods and services; and constrained access to job opportunities.
Effectively combating poverty isn’t easy, but many government transfer programs at least allow the poor to meet some of their most basic needs. For instance, yesterday’s census release shows that without things like the Earned Income Tax Credit and food stamps, the poverty rate would have been significantly higher (2.0 and 1.7 percentage points, respectively) in 2010. Though, as recent Brookings research has pointed out, with the exception of tax credits like the EITC, access to safety net services aren’t keeping up with changes in the geography of poverty.
Promoting income mobility is another matter all together, and here steps--like zoning reform--need to be taken to increase access to high quality neighborhoods and schools, and to help the poor accumulate wealth through human capital, property, and savings. Of course, broad-based economic growth and job creation would be a huge help as well. Over the next year, we will be working to better identify promising strategies to increase mobility at the regional and national levels.
For now, it’s somewhat comforting to know from Rector’s work that most poor people, as defined by the Census, aren’t starving, living on the streets, or altogether foregoing the technological comforts of a modern industrial economy, but in terms of defining poverty, that’s a miserably low bar for a prosperous republic like the United States.