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Measuring Poverty: A New Approach
Index (CPI) does not necessarily reflect changes in the price of food. Moreover, the composition of the minimum food diet has not been reevaluated on the basis of new information about the food-buying preferences of low-income families.
If one believes that it is appropriate to have an absolute poverty line that is updated solely for price changes, there is little need to revisit the threshold concept. However, we believe that to maintain a standard in absolute terms becomes increasingly problematic as living standards change over time. The historical evidence supports the conclusion that poverty standards reflect their time and place. This is true not only when poverty standards are set in an explicitly relative fashion (e.g., as a percentage of median income or expenditures), but also when they are developed according to expert criteria for various needs. Similarly, when surveys ask people questions about minimum income levels, their answers generally reflect prevailing levels of consumption.
Hence, we conclude that the relevant question is not whether poverty thresholds should be updated for changes in real consumption, but whether they should be updated on a sporadic or on a regular basis. The former choice would suggest revisiting the standards periodically, perhaps every 10-20 years, and making price adjustments in between major realignments. The latter choice would suggest an automatic mechanism for recalculating the thresholds annually to reflect real consumption changes. We believe that an automatic, regular adjustment is preferable to sporadic adjustments. An automatic adjustment will avoid major breaks in the time series of poverty statistics and also will obviate the controversy that is likely to occur with periodic readjustments.2
A decision to recommend a regular adjustment of the thresholds entails careful consideration of the updating properties of alternative concepts, particularly the implications for the magnitude of the adjustment that is made. We believe that a conservative adjustment is preferable—that is, one that updates them for real growth in consumption of basic goods and services that pertain to a concept of poverty, rather than to update them for real growth in total consumption or income. There is support for a conservative approach from ideas of poverty levels derived from surveys, specifically, those developed on the basis of responses to questions about minimum income amounts needed to "get-along." Over time, such levels have reflected growth in real income but less than proportionately with overall growth (see below). Also, a conservative updating approach will make less of a break with the historical time series.
Of course, even an "automatic" updating procedure should be reviewed periodically to determine if it is performing as intended or whether it needs to be modified. Such a review, which would include the data source and methodology, should be part of the regular reviews of the poverty measure that we recommend be carried out every 10 years by the U.S. Office of Management and Budget (see Chapter 1).