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Introduction and Background

The Committee on National Statistics (CNSTAT) of the National Research Council (NRC) convened a workshop on June 15-16, 2004, to review federal research on alternative methods for measuring poverty. The workshop had been requested by the U.S. Office of Management and Budget to evaluate progress in moving toward a new measure of poverty, as recommended by the 1995 report, Measuring Poverty: A New Approach (National Research Council, 1995:1):

Our major conclusion is that the current measure needs to be revised: it no longer provides an accurate picture of the differences in the extent of economic poverty among population groups or geographic areas of the country, nor an accurate picture of trends over time. The current measure has remained virtually unchanged over the past 30 years. Yet during that time, there have been marked changes in the nation’s economy and society and in public policies that have affected families’ economic well-being, which are not reflected in the measure.

The 1995 report was produced by the NRC Panel on Poverty and Family Assistance. In the years since its publication, there has been much research on elements of the recommendations by researchers in a variety of government agencies, think tanks, and universities. The U.S. Census Bureau has also produced a large number of alternative measures of poverty. However, the methods used to produce these alternatives have changed from year to year, so that there are no consistent time series of alternative poverty statistics. Thus, the central purpose of the workshop was to obtain feedback



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Experimental Poverty Measures: Summary of a Workshop 1 Introduction and Background The Committee on National Statistics (CNSTAT) of the National Research Council (NRC) convened a workshop on June 15-16, 2004, to review federal research on alternative methods for measuring poverty. The workshop had been requested by the U.S. Office of Management and Budget to evaluate progress in moving toward a new measure of poverty, as recommended by the 1995 report, Measuring Poverty: A New Approach (National Research Council, 1995:1): Our major conclusion is that the current measure needs to be revised: it no longer provides an accurate picture of the differences in the extent of economic poverty among population groups or geographic areas of the country, nor an accurate picture of trends over time. The current measure has remained virtually unchanged over the past 30 years. Yet during that time, there have been marked changes in the nation’s economy and society and in public policies that have affected families’ economic well-being, which are not reflected in the measure. The 1995 report was produced by the NRC Panel on Poverty and Family Assistance. In the years since its publication, there has been much research on elements of the recommendations by researchers in a variety of government agencies, think tanks, and universities. The U.S. Census Bureau has also produced a large number of alternative measures of poverty. However, the methods used to produce these alternatives have changed from year to year, so that there are no consistent time series of alternative poverty statistics. Thus, the central purpose of the workshop was to obtain feedback

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Experimental Poverty Measures: Summary of a Workshop from the scientific community on which components of alternative measures are methodologically sound and which might need further refinement, toward the goal of narrowing the number of alternative measures that should be considered. For the workshop, the planning group asked several researchers to prepare papers as the basis for discussions. The paper authors were charged to summarize the work that had been conducted on a particular element of alternative poverty measures, discuss the technical issues that have arisen, and outline the strengths and limitations to alternative approaches. Designated workshop discussants were asked to give their assessments of whether different alternative measures were sound enough methodologically as an improvement over the current measure. During the open discussion in each session, all workshop participants were encouraged to comment on whether each alternative measure was sound enough methodologically to be considered an improved alternative measure over the current measure of poverty. At the outset of the workshop, the planning group explained that three changes to the current poverty measure that were recommended in the 1995 report have such broad support they were not included in the charges to the paper authors nor specifically slated for discussion at the workshop. Those changes involve the family resources part of the measure, currently defined as gross cash income: Subtract income taxes and payroll taxes and add the Earned Income Tax Credit (EITC) and realized capital gains or losses. Add the value of food stamps and other near cash benefits, which include school lunch benefits, energy subsidies, and, if the data are available, the value of benefits received under the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) and the school breakfast program. Subtract child support payments made by the payer, if the data are available. THE CURRENT OFFICIAL POVERTY MEASURE The current official poverty measure has two components—poverty thresholds and the definition of family resources that are compared to these thresholds. Mollie Orshansky, a staff economist at the Social Security Administration, developed poverty thresholds in 1963 and 1964 by using the “Economy Food Plan” (the lowest cost food plan) prepared and priced by

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Experimental Poverty Measures: Summary of a Workshop the U.S. Department of Agriculture. The plan was designed for “temporary or emergency use when funds are low.” To get from the food plan cost to an overall poverty threshold figure, Orshansky used information from the 1955 Household Food Consumption Survey that indicated that families of three or more people had spent about one-third of their after-tax income on food in that year. She therefore multiplied the costs of the food plan for different family sizes by three to come up with income thresholds for those family sizes. (She used a different approach for one- and two-person families.) The food plan—and thus the thresholds developed from it—reflected the differing food needs of children and adults. The thresholds have been updated yearly for inflation using the Consumer Price Index (CPI). The definition of family resources used to compare to the thresholds is the Census Bureau’s definition of income—gross annual cash income from all sources, such as earnings, pensions, interest income, rental income, asset income, and cash welfare. A family and its members are considered poor if their income falls below the poverty threshold for a family of that size and composition.1 One advantage of the current poverty measure is that it is simple to describe. It also provides an unchanging benchmark to reflect the 1964-vintage measure of what was then considered poverty. The current official poverty measure was indeed, for a time, a sensible indicator of material deprivation in the United States. At the time of its initial adoption by the Office of Economic Opportunity in 1965, the poverty lines were set at a dollar level that coincided with people’s views of poverty. The method of measuring people’s resources—gross cash income—also managed to fairly accurately capture the income people had to meet their basic needs. Over the past 40 years, however, the poverty measure has become increasingly outdated (see National Research Council, 1995:1-2). According to the NRC’s report, the measure of both basic needs and families’ resources no longer allows us to accurately gauge changes in the extent of poverty in society nor the composition of the poverty population. The poverty lines, originally devised by multiplying the cost of food needs by three 1   Since its adoption, the official poverty measure has undergone minor changes to the thresholds; see National Research Council (1995:24-25).

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Experimental Poverty Measures: Summary of a Workshop to account for other needs (such as clothing and shelter), no longer capture families’ basic needs because of the growth in housing costs and other expenditures (such as medical care and childcare) relative to food costs. Today, people spend closer to one-sixth of their income on food rather than one-third. Thus, while the official poverty threshold for a four-person family once coincided with people’s views of the dollar amount needed to support such a family in the 1960s—as reported in public opinion surveys—this was no longer true by the 1990s (National Research Council, 1995). A more refined threshold could use more recent data to price out the cost not only of food, but also other necessities like shelter and clothing. Likewise, many have argued that the definition of money income used in the official measure—gross cash income—inadequately captures the resources people have at their disposal to meet basic needs. It has been argued that taxes should be subtracted from income, as this money cannot be spent to meet basic needs, and that near-money government benefits should be added—such as food stamps and housing subsidies. The omission of these items from the official definition of income has become increasingly serious in recent years because government transfers are now concentrated in benefits that are not considered part of families’ gross cash income—such as housing subsidies, child care subsidies, and the EITC—rather than cash welfare assistance. The unfortunate result is that the current official poverty measure no longer accurately captures either people’s perceptions of poverty or the effect of various policies on poverty. RECOMMENDATIONS IN THE 1995 REPORT AND SUBSEQUENT RESEARCH In response to the increasingly apparent weaknesses of the official poverty measure, the U.S. Congress appropriated funds for an independent scientific study of the official poverty measure, which led to the 1995 NRC report, Measuring Poverty: A New Approach. The report recommended that a new poverty threshold be calculated by determining, for a reference family of two adults and two children, a dollar amount for food, clothing, shelter, and utilities, and then increasing that dollar amount by a modest percentage to allow for other common needs (such as household supplies, personal care, and non-work-related transportation). The dollar amount would be scaled down from the median spending for those four basic items, using data gathered in the Consumer Expenditure Survey. Rather than recommending a specific dollar figure for the total thresh-

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Experimental Poverty Measures: Summary of a Workshop old, the report recommended a range of possible values based on its own judgment, informed by a consideration of family budgets developed by experts, relative poverty thresholds, and “subjective” poverty thresholds. A subsequent Census Bureau report used the midpoint of the recommended range; this figure, for the four basic categories plus other needs, turned out to be roughly equal to the median actual expenditure for the four basic categories alone in 1997. The report further recommended adjustments to the reference family threshold, using an equivalence scale, to reflect the needs of different family sizes and types.2 Unlike in the official U.S. poverty measure, the thresholds would be further adjusted for geographic variations in housing costs in different regions and metropolitan areas of different population sizes. Family resources in the NRC report are defined as the value of cash income from all sources plus the value of near-money benefits that are available to buy goods and services covered by the new thresholds, minus some basic expenses. Cash income sources are the same as those in the current official Census Bureau poverty measure. The income definition also includes near-money income: food stamps, housing subsidies, school breakfast and lunch subsidies, home energy assistance, assistance received under the WIC Nutritional Supplement Program (if the data are available), the EITC, and realized capital gains (or losses). Basic expenses to be subtracted include taxes, child care, and other work-related expenses of working parents, medical out-of-pocket costs, and, if the data are available, child support payments made to another household. Taxes represent a nondiscretionary expense in that people cannot spend this money. Child care and other work-related expenses (such as commuting expenses) are also subtracted because, the panel argued, these costs are often incurred if parents are to work and earn labor market income.3 The release of the NRC report in 1995 was followed by a flurry of research activity. By 1998, an interagency technical committee was formed to guide the research agenda and provide structure for government reports using experimental poverty measures. In 1999 and 2001, the U.S. Census 2   The report recommended a two-parameter scale: one parameter takes into account that children consume less than adults and the other that there are economies of scale in larger families 3   Short et al. (1999) contains detail on the actual operationalization and implementation of the NRC-recommended poverty measure.

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Experimental Poverty Measures: Summary of a Workshop Bureau, in a coordinated effort with researchers at the Bureau of Labor Statistics, issued two reports devoted to experimental poverty measures. The Census Bureau has also released a number of alternative poverty measure estimates in materials that accompany the annual official poverty reports from 1999 to the present. Some 50 research papers on experimental poverty measures have also been written (many of these are available on a Census Bureau website)4 by researchers in various government agencies, including the Census Bureau, the Bureau of Labor Statistics, the Department of Health and Human Services, the Office of Management and Budget, and the Social Security Administration, to name a few, and by researchers at think tanks and various universities. This research has been enormously informative and has helped identify strengths and weaknesses in the NRC recommendations. As noted above, Census Bureau reports have offered a large number of alternative measures of poverty, which have also changed from year to year. The second experimental poverty report (Short, 2001a), for example, presented 24 alternative poverty measures. Tables released with the subsequent 2002 annual official poverty report contained six NRC-related experimental measures that were a subset of those contained in the second experimental poverty report. WORKSHOP GOAL One of the central purposes of the workshop was to obtain feedback from the scientific community on which components of alternative measures are methodologically sound and which might need further refinement. In her introductory remarks, Katherine Wallman, chief statistician at the Office of Management of Budget, explicitly expressed her hope that workshop participants would (1) identify areas of agreement on technical issues and (2) specify elements of the poverty measure for which more research is necessary. Planning group member Timothy Smeeding (Syracuse University) added a third goal: (3) identification of possibilities for trimming the number of experimental measures issued in Census Bureau reports. 4   See http://www.census.gov/hhes/www/povmeas.html [October 2004].

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Experimental Poverty Measures: Summary of a Workshop The workshop was designed to include discussion of the elements of the NRC recommendations that have received considerable attention. Sessions were devoted to the following: setting and updating a reference family poverty threshold; equivalence scales; geographic adjustments to thresholds; medical out-of-pocket expenses; work-related expenses including child care; incorporating the value of housing; and data issues and other miscellaneous topics. These elements are discussed in the following chapters. The workshop agenda and list of participants are shown in Appendixes A and B. This report does not offer any conclusions or recommendations; it is merely a summary of the discussions that took place at the workshop. This summary is intended to reflect the variety of opinions expressed by the presenters, discussants, and participants at the workshop.