National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: Implications

« Previous: Resources as Consumption or Expenditures
Suggested Citation:"Implications." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 211
Suggested Citation:"Implications." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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Page 212

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DEFINING RESOURCES 211 Rationale One argument that is often made for consumption (or expenditures) as the resource definition rather than income is that consumption is a better estimate of families' long-term or "permanent" income. Thus, Friedman's (1957) permanent income hypothesis suggests that current income is comprised of a permanent component and a transitory component. Families with low levels of current income are disproportionately comprised of families with temporary income reductions. If consumption is based on permanent income and not on transitory income, families with negative "income shocks" will have consumption levels that are high relative to their income levels because they expect their long-term income to be higher, on average, than their current income. Consequently, they ''dissave" in order to smooth consumption and thereby material well-being: for example, they may liquidate their savings accounts or borrow on their credit cards. Such families may be income-poor but able to maintain a constant standard of living through dissaving. The reverse will be true of high-income families, who will have consumption levels that are low relative to their income levels and positive savings. Modigliani and Brumberg's (1954) closely related life-cycle model of behavior assumes that current consumption is equal to average lifetime resources. Thus, younger families, by borrowing, and older families, by spending down assets, tend to exhibit high consumption-to-income ratios, while middle-aged families with the highest earnings potential tend to exhibit relatively low consumption-to-income ratios. Again, it is supposed that families smooth consumption and well-being on the basis of wealth and on expected earnings by saving and dissaving at various points during their life cycles. We note that it is not necessary to accept all of these arguments in order to support a consumption definition of resources. Thus, one need not accept the life-cycle model or the view that what is wanted is a measure of long-term or permanent income. One could simply believe it is preferable to estimate a family's actual consumption rather than the consumption that it could potentially achieve from its available income. Another point that is often made in support of using consumption or expenditures rather than income as the resource definition is that income is poorly measured. Those making this argument can cite the known under- reporting of asset income (and other sources) in the March CPS, the likelihood that income earned "off the books" or illegally is not reported at all, and the fact that self-employed people who report business losses are often able to take sufficient cash out of their business to sustain their own standard of living. Implications Consumption and income definitions of resources have somewhat different implications for who is counted as poor. A consumption resource definition

DEFINING RESOURCES 212 will include in the poverty count people who are income-rich but consumption- poor, that is, people who choose to spend at levels below the poverty threshold when they actually have incomes above that level. Some of these people may contract their spending because they foresee a drop in their income in the future, while others may simply opt for a low standard of living. In contrast, an income resource definition will exclude people from the poverty count who have an adequate income during the measurement period, whether they spend it or not. At the same time, a consumption resource definition will exclude from the poverty count people who are income-poor (e.g., because they lost a job) but who sustain their consumption at a level above the poverty threshold by such means as borrowing from relatives or charging to the limit on their credit cards. In contrast, an income definition will count such people as poor.7 This statement applies both to the current gross money income definition and to the proposed disposable money and near-money income definition.8 What one thinks of the contrasting ways in which consumption and income resource definitions treat people who are income-rich but consumption-poor and people who are in the reverse situation depends on one's view of the meaning and purpose of a poverty measure. One view is that the poverty measure should reflect the actual level of material well-being or consumption in the society (in terms of the number of people above the threshold), regardless of how that well-being is attained. Another view is that the poverty measure should reflect people's ability to obtain a level of material well-being above the threshold through the use of their own income and related resources. Some with this view would go farther to say that the members of a society have a right to be able to consume above the poverty level without having to resort to such means as begging, unsecured borrowing, stealing, or losing their homes. (For a discussion of the two perspectives, one emphasizing people's actual consumption levels and the other their ability to consume at a level above poverty from their own income, see Atkinson, 1989.) In a somewhat different vein, a focus on current income (e.g., income available to families over a period such as a year) accords with the view that there is policy interest in measures of relatively short-term economic distress 7 As currently implemented, an income definition will also count as poor self-employed people who have business losses in accounting terms but nonetheless have adequate cash flows from their businesses for their own needs. However, it is not necessary to estimate self- employment income in business accounting terms, and, in fact, SIPP obtains reports of cash drawn out of businesses. 8 A crisis definition that adds asset values to income will similarly count some of the income-poor as not poor. It may even more closely resemble a consumption definition in this respect if it also includes credit card and overdraft limits.

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Measuring Poverty: A New Approach Get This Book
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Each year's poverty figures are anxiously awaited by policymakers, analysts, and the media. Yet questions are increasing about the 30-year-old measure as social and economic conditions change.

In Measuring Poverty a distinguished panel provides policymakers with an up-to-date evaluation of:

  • Concepts and procedures for deriving the poverty threshold, including adjustments for different family circumstances.
  • Definitions of family resources.
  • Procedures for annual updates of poverty measures.

The volume explores specific issues underlying the poverty measure, analyzes the likely effects of any changes on poverty rates, and discusses the impact on eligibility for public benefits. In supporting its recommendations the panel provides insightful recognition of the political and social dimensions of this key economic indicator.

Measuring Poverty will be important to government officials, policy analysts, statisticians, economists, researchers, and others involved in virtually all poverty and social welfare issues.

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