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Measuring Poverty: A New Approach
A way to implement a regular adjustment of the thresholds would be to return to the original concept for developing the poverty line and apply it afresh each year, namely, determine a minimum food budget and apply a multiplier that is equal to the inverse of the share of food in the total expenditures of the average family. If that procedure was correct for 1963, then it should be correct for every other year. The advantages of this method of updating mirror its initial attractiveness: it rests on a commodity, namely food, that all would agree is a necessary item of consumption; it is understandable ("food times a multiplier"); and it is easy to implement with available consumer expenditure data. However, we believe that its problems outweigh its advantages.
One problem is the reliance on experts to determine the minimum food budget. As we show below, judgement inevitably enters into the determination of a poverty level for any basic need, whether food, housing, or anything else. We believe it best if these judgements are introduced explicitly and not with an apparent reliance on experts. A more important problem is the use of only one commodity with a large multiplier and, moreover, a multiplier that reflects total expenditures of the average family. This approach is not conservative with respect to adjusting the thresholds over time because the multiplier, which drives the thresholds, will reflect increased spending on luxuries as well as on basic commodities. In other words, continued application of the original threshold concept is more akin to a completely relative concept, like one-half median family income or expenditures.
We sought a concept that would retain the attractive features of the original concept, namely, its understandability and grounding in familiar, basic commodities, but improve on it. Our recommendation is that the reference family poverty threshold be developed by specifying a percentage of median expenditures on the sum of food, clothing, and shelter (including utilities) by two-adult/two-child families in the Consumer Expenditure Survey (CEX), and applying a multiplier to that dollar value so as to add a small amount for other needed expenditures (e.g., personal care, household supplies, non-work-related transportation). This approach builds the budget on three categories of basic goods and services plus a little more, and it uses actual expenditure data directly in the derivation.
Having specified a percentage of median expenditures and a multiplier, these values would then be used to update the poverty threshold for the reference family each year on the basis of more recent CEX data. To smooth out year-to-year fluctuations and to lag the adjustment to some extent, we propose to perform the calculations for each year by averaging the most recent 3 years' worth of CEX data, with the data for each of those years brought forward to the current period by using the change in the CPI. Once the threshold is updated for the reference family, the thresholds for other family types can be calculated (see Chapter 3).