Measuring Poverty: A New Approach (1995)

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INTRODUCTION AND OVERVIEW 48 nondiscretionary expenses, such as child care.) These numbers indicate both that it would be appropriate to revise the level of the official thresholds and that there is room for debate about the extent of the realignment. For that debate, it would be important to consider the comparative merits of different concepts and the quality of the data underlying them, for two reasons: first, in order to reach consensus on a new reference family poverty threshold, and, second, to recommend improvements to the data and methods for various concepts so as to provide a sounder basis for repeating the realignment in the future. There is yet a third alternative: an automatic mechanism for updating the thresholds on an annual basis for real changes in living standards. (The question of the price index is then irrelevant, except to account for lags in data availability.) In our view, this approach has several advantages over the approach of realigning the thresholds every so often. First, it avoids major breaks in the time series of poverty statistics that will inevitably occur with periodic realignments. Second, it ensures that an adjustment is in fact carried out and is not delayed or negated for political or other considerations. Third, it obviates the controversy that is likely to occur with periodic readjustments. With a decision to update the poverty thresholds annually for changes in living standards, it becomes quite important to look at alternative concepts. Each of the concepts we reviewed, in our view, can contribute to the process of reaching consensus on a new threshold with which to initiate a new time series of poverty statistics. However, each concept has somewhat different implications for updating the poverty thresholds, particularly for the extent of the updating—that is, whether the thresholds are updated for real changes in all consumption or only in basic consumption. We believe it will be more acceptable to update the poverty thresholds in a "conservative" manner, that is, to update them for growth in consumption of basic goods and services that pertain to a notion of poverty, rather than to update them for growth in consumption of all goods and services. Threshold Concepts: Assessment Having reviewed the many possible concepts for deriving and updating the official reference family threshold in light of our criteria (see above), we acknowledge the strong attraction of the original SSA concept in terms of public acceptability and understandability. After all, food—more precisely, what is deemed a "minimally adequate" diet—is undeniably a necessary item of consumption. And developing a threshold that is food times a multiplier to allow for such other economic necessities as housing is a simple concept to understand. Also, the concept is easy to implement with available consumer expenditure data. However, we question the use of expert-based standards of need even for 

INTRODUCTION AND OVERVIEW 49 an item, such as food, that seems relatively well grounded in human physiology. It may be feasible for experts to develop "minimum" standards for food on the basis of nutrition needs alone, but because tastiness and some variety are part of the notion of a minimally adequate diet, even experts will rely on actual consumption patterns and not just nutritional need. In this way, judgement inevitably enters any calculation. We believe it best if these judgements are introduced and explained explicitly. Even more we question the use of a large multiplier applied to a single commodity, particularly a multiplier that reflects the total expenditures of the average family. With this approach, if applied regularly, the thresholds will be updated to reflect increased spending on most goods and services, not just basic goods and services. In other words, it is more akin to a completely relative concept, like one-half median family income or expenditures (see Table 1-3). An expert budget approach in which standards are set for a number of goods and services, with perhaps only a small "other" or "miscellaneous" category, avoids the problem of a large multiplier. However, this approach necessitates making a large number of specific judgements about approved expenditures for the poor, each of which must be reexamined for updating purposes. It is true that any approach involves judgements, and the poverty thresholds that result from expert budgets may prove no less acceptable than other thresholds (just as the original SSA thresholds found wide acceptability). However, we believe it best for deriving the official U.S. poverty thresholds to minimize the number of judgements required and, further, to link the thresholds directly, rather than indirectly, to actual spending patterns. A relative concept for the reference family poverty threshold, such as one- half the median level of family income or expenditures (adjusted for family composition), makes explicit the judgement that is involved in setting a poverty level. Although one-half the median is the commonly used standard, it could just as well be some other percentage of median income. Also, as usually implemented, a relative concept provides for an automatic, regular updating of the poverty thresholds for real changes in living standards, as new data on income or expenditures become available. In spite of these attractive characteristics, we believe that a completely relative concept would find little public support. First, it makes no reference at all to a budget and, hence, gives no sense of what a poverty standard entails, except that it is some fraction of median income or expenditures. Second, a relative concept, applied regularly, will update the poverty thresholds for real changes in total consumption, including luxuries as well as necessities. Moreover, the thresholds will reflect short-term changes in the business cycle— both up and down—as well as longer term changes. In an economic down-turn, the thresholds will likely decline in real terms, with the possibly counterintuitive result that the poverty rate falls as well. It certainly seems