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Measuring Poverty: A New Approach
how often to update them for real changes in living standards. We believe there are advantages to an automatic updating method over an approach that updates the thresholds at sporadic intervals. We also conclude that it is time to reconsider the current U.S. thresholds, which have been maintained in absolute terms for more than 30 years and rest on survey data that are almost 40 years old. We recommend a new concept and procedure for updating the U.S. poverty thresholds; however, given the element of judgement involved, we do not recommend an initial threshold for a two-adult/two-child family.
In considering concepts for a poverty threshold, we identified some attractive features of Orshansky's original multiplier method (and that of other expert budgets), in particular, the reference to specific needs (e.g., food). This feature produces poverty thresholds that have a normative cast, which we believe is likely to be more attractive to policy makers and the public than are thresholds developed by a purely relative approach (e.g., one-half median after-tax adjusted family income). But, in practice, the Orshansky multiplier approach is little different from a purely relative approach because the multiplier that is applied to the food budget (and essentially drives the thresholds) includes all spending—on luxuries as well as necessities—by the average family.
We believe a preferable approach is one that updates the thresholds in a conservative or quasi-relative manner—one that drives the thresholds by changes in spending on necessities that pertain to a concept of poverty rather than by changes in spending on all kinds of consumption. We also believe the bundle of necessities should include more than just food. However, to try to develop a detailed list seems an exercise in futility and likely to raise needless controversy. A good compromise, we concluded, is to specify a bundle of food, clothing, and shelter (including utilities) and apply a small, fixed multiple for other needed spending, such as personal care, household supplies, and non-work-related transportation.
Everyone agrees that food, clothing, and shelter are necessary goods and services (although the level of each that is needed is a matter of debate). These categories are evident in society's thinking about the needs of the poor, as evidenced in homeless shelters, soup kitchens, and winter clothing drives. The food, clothing, and shelter bundle also constitutes a large share of spending for the average family—45 percent in 1991 of total after-tax expenditures by four-person consumer units (Bureau of the Census, 1993d: Table 708). Most important, historically these items have behaved like necessities: that is, their combined elasticity with respect to total expenditures has been less than 1.0 (we estimate that elasticity at about 0.65 over the period 1959-1991). 39
This estimate is derived from data in the National Income and Product Accounts (NIPA) for 1959–1991, the log of personal consumption expenditures on the sum of food, clothing and shoes, housing, fuel oil and coal, and electricity and gas regressed on the log of total personal consumption expenditures minus expenditures for medical care, with all amounts in constant 1987 dollars (see Council of Economic Advisers, 1992: Table B-12). The reason for subtracting medical care expenditures is that the NIPA includes payments by insurance as well as out-of-pocket expenditures. A similarly derived estimate of the elasticity of food with respect to total expenditures minus medical care is 0.33.