Poor Getting Poorer?
Just not true...
[Gary M. Galles] 9/8/05
The Census Bureau's recently released 2004 income statistics
became instant news because they reported that the poverty rate
increased for the fourth straight year - to 12.5 percent from
11.3 percent in 2000 - offering a convenient premise for all
sorts of political claims and finger-pointing.
flaws in the data make drawing valid conclusions very hazardous.
As Rebecca Blank, dean of Michigan's
public policy school, who served on a National Academy of Sciences
panel to upgrade the information, put it, "The poverty statistics
are absolutely wrong."
The most glaring inaccuracy in income data is that in-kind welfare
programs go uncounted, so they do not improve the measured situations
of the poor. However, since such programs reduce benefits as
incomes rise - for example, the 30 cent reduction in food-stamp
benefits for each dollar of net income - they undermine people's
incentives. Many therefore earn less, which is reflected in the
data that make recipients appear poorer.
Gary M. Galles
Galles is a professor of economics at Pepperdine University.
[go to Galles index]
This is a large and growing error. Of more than $500 billion
given annually in government means-tested assistance - which
does not include an additional $250 billion a year Medicare spends
on the elderly - roughly three quarters is now given in-kind.
The data also omit taxes, hiding the disproportionate burden
borne by higher-income families. Further, despite the fact that
it is refundable, putting dollars directly into recipients' pockets,
the Earned Income Tax Credit is categorized as a negative tax,
and more than $30 billion in annual aid for lower income families
is also overlooked.
Moreover, most recipients lose benefits as incomes rise, increasing
their effective income tax rates. That also leads to reduced
earnings, so that giving recipients money makes them appear poorer.
Poverty is also overstated by substantial underreporting of
income. For example, the more accurate Survey of Income and Program
Participation, which surveys households each month, routinely
finds poverty rates 25 percent below official Census Bureau estimates,
which ask those surveyed in March to recall prior year incomes.
Official measures also ignore substantial family size and age-related
Reports on changes in household income ignore that households
have become substantially smaller than in the past, thus substantially
underestimating the growth in income - that is, real per-household
income rose only 6 percent between 1969 and 1996, while real
per-capita income rose 51 percent. Further, our aging population
has increased the proportion of those retired, increasing apparent
This mismeasurement is also reflected in the dramatically smaller
inequalities in measures of consumption - far better indicators
of well-being - than in current income.
The poverty line has also been indexed for inflation by the
Consumer Price Index since the 1960s. However, the CPI overstates
inflation. While its upward bias has recently been reduced, it
has not been corrected going back in time, leading to a large
cumulative overstatement of the poverty rate. Using the CPI to
adjust wages or incomes for comparison with the past creates
Political support for a plethora of redistribution policies
has long been maintained by skillful abuse of data concerning
poverty and inequality in America. That abuse accurately reflects
the huge payoff for those groups that use it to win redistribution
in their favor, but it does not accurately reflect reality.
But since reality is the necessary basis for effective policy,
the result is to undermine real understanding - and therefore
the potential for effective policy - in the process. tOR
2005 Gary M. Galles