rather than from expert judgements about standards of need. Specifically, we recommend that a new poverty threshold for the reference family be derived by specifying a percentage of median expenditures on the sum of food, clothing, and shelter 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. (CEX data can also inform the selection of the multiplier.)

Having specified a percentage of the median 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 below).

An important advantage of our proposed threshold concept is its implications for updating over time. Historically, spending on food, clothing, and shelter has increased at a slower rate in real terms than has total spending. We have estimated the elasticity with respect to real total expenditures of real spending on food, clothing, and shelter (including utilities) for the period 1960-1991 at about 0.65: in other words, for each 1 percent increase in real expenditures for all items, we estimate that expenditures on food, clothing, and shelter increased by about two-thirds of 1 percent (see Council of Economic Advisers, 1992: Table B-12). Hence, tying the poverty thresholds to spending levels for these three necessary commodities is a conservative way of updating; it adjusts the thresholds for real increases in consumption of basic goods and services, rather than for all goods and services.12 Supporting the reasonableness of this degree of updating is the evidence that subjective poverty thresholds have an elasticity in the range of 0.65-0.80 with respect to median income: when people are asked in successive years to set a value for a minimum income, their answers reflect changes in living standards but on less than a one-for-one basis (see Figure 1-1).

RECOMMENDATION 2.1. A poverty threshold with which to initiate a new series of official U.S. poverty statistics should be derived from

12  

One could argue that a completely relative updating procedure is preferable to a "conservative" procedure on the grounds that, over time, "luxuries" become "necessities" (e.g., as in the case of radios and televisions). However, we argue that it is appropriate for a poverty measure to reflect such changes with a lag. An example is modern-day computing technology. Our proposed updating procedure will not immediately reflect the spread of such technology to consumers; however, when the technology becomes so integrated into the American life-style that housing and utilities are reconfigured to accommodate it, our measure will likely pick up that change.



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