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Nation's 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.

Unfortunately, serious 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

Mr. 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 earnings differences.

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 income inequality.

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 similar underestimates.

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

copyright 2005 Gary M. Galles



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