conversableeconomist

The Food Stamp Explosion

 For starters, Food Stamps have a new name. The 2008 farm bill changed the name to the Supplemental Nutrition Assistance Program, or SNAP. But whatever the name, enrollment rose from 17.3 million in 2001 to 46.2 million in October 2011. In the March 2012 issue of Amber Waves, published by the U.S. Department of Agriculture,  Margaret Andrews and David Smallwood ask: \”What’s Behind the Rise in SNAP Participation?\”


 What\’s perhaps less expected in the graph is that Food Stamp enrollment was rising steadily from 2001 up through 2006, although unemployment rates were low and falling during much of that time. The authors trace much of this change to changes in federal rules making it easier for people to apply, and easier for states to certify to the federal government that the benefits are being targeted. In addition, SNAP benefit levels were increased both in the 2008 farm bill and in the 2009 \”stimulus\” legislation, making it more attractive to apply. Here\’s a graph showing the maximum SNAP benefit for a household of four and the average benefit.

When you look at the numbers, Food Stamps play what may be a surprisingly large role in America\’s social safety net for the poor. Total spending on Food Stamps in 2011 was about $78 billion. According to the Center on Budget and Policy Priorities, \”Roughly 93 percent of SNAP benefits go to households with incomes below the poverty line, and 55 percent go to households with incomes below half of the poverty line …\”

For comparison, federal expenditures through the Earned Income Tax Credit were about $56 billion in 2011. As another comparison, total spending on Temporary Assistance for Needy Families (TANF), what is what most people mean by \”welfare,\” was about $33 billion in combined federal and state spending in 2010. In many states, SNAP far outstrips TANF in the level of support it provides for low-income families.

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International Poverty: Progress and a Puzzle

Shaohua Chen and Martin Ravallion at the World Bank have prepared a \”briefing note\” with good news: global poverty rates are dropping.  They write: \”That means that 1.29 billion people in 2008 lived below $1.25 a day, as compared to 1.94 billion in 1981. 2.47 billion people in 2008 consumed less than $2 a day, as compared to 2.59 billion in 1981.\”

The idea of measuring poverty as $1.25 per day or $2 per day may shock some Americans. After all, In contrast, in the United States the poverty threshold in 2011 for a three-person family, single parent with two children, was $18,123, which works out to about $16.50 per person per day. But as the report explains: \”$1.25 is the average of the national poverty lines found in the poorest 10-20 countries.
Using this line, poverty in the world as a whole is being judged by what “poverty” mean
in the world’s poorest countries. Naturally, better off countries tend to have higher poverty lines than this frugal standard. $2 a day is the median poverty line for all developing countries.\”

The reduction in poverty rates reaches across all regions of the developing world. Not surprisingly, much of the most rapid reduction of poverty has come from China. As the figure shows, it used to be that if you included China with the rest of the developed world, it raised the overall poverty rate. But now, if you include China with the rest of the developed world, it reduces the overall poverty rate. Nonetheless, 173 million people in China remain below the $1.25 poverty line. As the World Bank describes it:

\”Looking back to the early 1980s, East Asia was the region with the highest incidence of poverty in the world, with 77% living below $1.25 a day in 1981. By 2008 this had fallen to 14%. In China alone, 662 million fewer people living in poverty by the $1.25 standard, though progress in China has been uneven over time. In 2008, 13% (173 million people) of China’s population still lived below $1.25 a day. In the developing world outside China, the $1.25 poverty rate has fallen from 41% to 25% over 1981-2008, though not enough to bring down the total number of poor, which was around 1.1 billion in both 1981 and 2008, although rising in the 1980s and ‘90s, then falling since 1999 …\”

The reduction in poverty rates is clearly good news, but the pattern of reduction in poverty rates across countries poses a puzzle that Martin Ravallion raises in \”Why Don’t We See Poverty Convergence?\” in the February 2012 issue of the American Economic Review. The article isn\’t freely available on-line, although many academics will have access through their libraries. He sets up the discussion of the puzzle this way\”

\”Two prominent stylized facts about economic development are that there is an advantage of backwardness, such that in a comparison of two otherwise similar countries the one with the lower initial mean income will tend to see the higher rate of economic growth, and that there is an advantage of growth, whereby a higher mean income tends to come with a lower incidence of absolute poverty. Past empirical support for both stylized facts has almost invariably assumed that the dynamic processes for growth and poverty reduction do not depend directly on the initial level of poverty. Under that assumption, the two stylized facts imply that we should see poverty convergence: countries starting out with a high incidence of absolute poverty should enjoy a higher subsequent growth rate in mean consumption and (hence) a higher proportionate rate of poverty reduction. That poses a puzzle. The data on poverty measures over time for 90 developing countries assembled for this article reveal little or no sign of poverty convergence.\”

Here is Ravallion\’s figure to illustrate the point. The horizontal axis has poverty rates for 90 countries, mostly from the 1980s and 1990s as data became available. The vertical axis shows the decline in poverty rates from the start of the data up to 2005. Notice that the best-fit line doesn\’t show that countries which started from higher levels of poverty have larger reductions in poverty: if anything, the relationship goes a bit the other way.

Ravallion puts it this way (citation omitted): \”The overall poverty rate of the developing world has been falling since at least 1980, but the proportionate rate of decline has been no higher in its poorest countries.\” This finding suggests that while poverty rates are diminishing over time, there is no particular reason based on past patterns to expect that the poverty rates will fall more quickly where poverty is greatest. Ravallion offers the clear implication: There do often seem to be \”advantages of backwardness,\” which relatively poorer countries can take advantage of global knowledge and market to reach a faster growth rate, but there is apparently also a drag of high poverty rates, in which the existence of a high poverty rate makes it harder for a country to reduce its poverty rate further. These factors tend to offset each other, and as a result, the poorer countries don\’t in fact reduce their poverty rates faster.

Why might the existence of high poverty rates make it harder to grow? Perhaps high poverty rates reflect the lack of a middle class, which in turn makes it harder for an economy to grow. Perhaps high poverty rates reflect a poorly-educated workforce, which means that investment in the country is unprofitable, which slows growth. Perhaps high poverty rates lead to poor health, which reduces the prospects for growth. Ravallion investigates whether factors schooling, life expectancy, and the price
of investment goods might provide a link from high initial poverty to the lack of reductions in poverty, but doesn\’t find statistical connections.  Understanding why the poorest countries have no greater success in reducing their poverty rates remains a good research topic.

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An Alternative Poverty Measure from the Census Bureau

When the Census Bureau released its annual estimates of the poverty statistics in September, I mentioned some of the main themes in U.S. Poverty by the Numbers. I also mentioned that the Census Bureau was going to follow up with a report offering an alternative measure of poverty, which has now been published. Kathleen Short describes \”The Research Supplemental Poverty Measure: 2010\” in Current Population Reports P60-241.

As a starting point, here\’s my one-paragraph overview of the genesis of the current poverty line, taken from Chapter 16 of my Principles of Economics textbook available from Textbook Media:

\”In the United States, the official definition of the poverty line traces back to a single person: Mollie Orshansky. In 1963, Orshansky was working for the Social Security Administration, where she published an article called \”Children of the Poor\” in a highly useful and dry-as-dust publication called the Social Security Bulletin. Orshansky\’s idea was to define a poverty line based on the cost of a healthy diet. Her previous job had been at the U.S. Department of Agriculture, where she had worked in an agency called the Bureau of Home Economics and Human Nutrition, and one task of this of this bureau had been to calculate how much it would cost to feed a nutritionally adequate diet to a family. Orshansky found evidence that the average family spent one-third of its income on food. Thus, she proposed that the poverty line be the amount needed to buy a nutritionally adequate diet, given the size of the family, multiplied by three. The current U.S. poverty line is essentially the same as the Orshansky poverty line, although the dollar amounts are adjusted each year to represent the same buying power over time.\”

It has been argued for at least a couple of decades that while a poverty line defined in this way is workable, it can be improved. Back in 1995, a National Academy of Sciences Panel made some recommendations for a new approach to measuring poverty. Kathleen Short summarizes the main concerns of the NAS panel near the start of her report: 

  • \”The current income measure does not reflect the effects of key government policies that alter the disposable income available to families and, hence, their poverty status. Examples include payroll taxes, which reduce disposable income, and in-kind public benefit programs such as the Food Stamp Program/Supplemental Nutrition  Assistance Program (SNAP) that free up resources to spend on nonfood items.
  • The current poverty thresholds do not adjust for rising levels and standards of living that have occurred since 1965. The official thresholds were approximately equal to half of median income in 1963–64. By 1992, one half median income had increased to more than 120 percent of the official threshold.
  • The current measure does not take into account variation in expenses that are necessary to hold a job and to earn income—expenses that reduce disposable income. These expenses include transportation costs for getting to work and the increasing costs of child care for working families resulting from increased labor force participation of mothers
  • The current measure does not take into account variation in medical costs across population groups depending on differences in health status and insurance coverage and does not account for rising health care costs as a share of family budgets.
  • The current poverty thresholds use family size adjustments that are anomalous and do not take into
    account important changes in family situations, including payments made for child support
    and increasing cohabitation among unmarried couples.
  • The current poverty thresholds do not adjust for geographic differences in prices across the nation, although there are significant variations in prices across geographic areas.\”

Over the last few years, the Census Bureau has been rethinking what it means to be \”poor,\” and developing an alternative measure of poverty that addresses many of these issues. It starts with a dollar threshold of what is needed in a certain geographic area to buy a basic set of goods, including food, housing, shelter, and utilities. It attempts to include in income the value of anti-poverty programs that offer in-kind benefits, like food stamps, and those that work through the tax code, like the earned income tax credit. It also includes expenses for income taxes, payroll taxes, childcare expenses, transportation-to-work expenses, and out-of-pocket medical care costs. Instead of looking at a \”household\” as defined by family dies of birth, marriage, and adoption, the new measure basically looks at everyone living in a \”consumer unit\” at the same address, regardless of whether they are related.

When all this is done, what picture of poverty in the United States emerges? How does that picture of poverty differ from the official existing poverty rates? Here are some main themes:

The absolute number of people below the poverty line is much the same, but slightly higher. In 2010, there were 46.6 million people below the official poverty line, for a poverty rate of 15.2%; with the new Supplemental Poverty Measure, it would have been 49.1 million people below the poverty line, for a poverty rate of 16.0%. In this sense, my quick reaction is that the existing poverty line has held up fairly well. However, the Supplemental Poverty Measure identifies a somewhat different group of people as poor.

One striking difference is poverty rates by age. Under the official poverty rate, it has long been true that poverty rate for those age 18 and younger is much higher than the poverty rate for those 65 and older: in 2010, the official \”under 18 years\” poverty rate was 22.5%, while the \”over 65\” poverty rate was 9.0%. However, under the new Supplemental Poverty Measure, the \”under 18\” poverty rate would be lower at 18.2%, while the \”over 65\” poverty rate would be 15.9%. Part of the reason here is that the official poverty rates have a different standard for the over-65 group, while the SPM does not. Food stamps and the earned income tax credit and looking at shared \”consumer units\” tends to reduce poverty rates among children, while taking out-of-pocket medical care expenses into account tends to increase poverty rates among the elderly.

Other differences emerge as well. Although the overall poverty rate would be higher under the Supplemental Poverty Measure, for certain groups the Supplemental Poverty Measure rate would be lower. For example, the official poverty rate for blacks in 2010 was 27.5% under the official measure, but 25.4% under SPM. The poverty rate for renters was 30.5% under the official measure, but 29.4% under the SPM. The poverty rate for those living outside metropolitan statistical areas was 16.6% with the official measure, but would be 12.8% under the SPM. The poverty rate in Midwestern states was 14.0% with the official measure in 2010, but would be 13.1% under the SPM.

At present, the Census Bureau treats the Supplemental Poverty Measure as \”a research operation,\” and says that it will \”improve the measures presented here as resources allow.\” The official poverty line will remain the line that is used in legislation and as a basis for eligibility for various government programs. This seems wise to me. One great virtue of the existing poverty line is that it isn\’t changing each year in response to research or political calculations, so it serves as a steady, if imperfect, standard of comparison over time.

But the Supplemental Poverty Measure as it develops seems sure to become part of our national conversation about poverty, because the way it is calculated raises questions about what it means to be for a \”consumer unit\” to be poor, and what it means to define poverty across a large country with many local and regional differences.

conversableeconomist

How Does Inequality Affect Economic Growth?

Historically, many economists believed that a healthy degree of economic inequality was good for economic growth. Branko Milanovic explains in \”More or Less\”:

\”The view that income inequality harms growth—or that improved equality can help sustain growth—has become more widely held in recent years. … Historically, the reverse position—that inequality is good for growth—held sway among economists. The main reason for this shift is the increasing importance of human capital in development. When physical capital mattered most, savings and investments were key. Then it was important to have a large contingent of rich people who could save a greater proportion of their income than the poor and invest it in physical capital. But now that human capital is scarcer than machines, widespread education has become the secret to growth. And broadly accessible education is difficult to achieve unless a society has a relatively even income distribution. Moreover, widespread education not only demands relatively even income distribution but, in a virtuous circle, reproduces it as it reduces income gaps between skilled and unskilled labor. So economists today are more critical of inequality than they were in the past.\”

The economic literature on the possible causal relationship between inequality and growth seems to have gone from arguing for such a connection in the 1980s and early 1990s, to arguing that the connection wasn\’t so important in the mid-1990s, and now back to arguing that it may be important.

In \”Why Aren\’t All Countries Rich?\”, Jessie Romero of the Richmond Federal Reserve discusses some patterns in this literature. As this figure shows, the Latin America and the Sub-Saharan Africa regions have consistently had the greatest degree of inequality.

Thus, given the relatively slow growth rates in these regions in the 1980s and 1990s, and the comparatively fast growth rates in more-equal Asia, economic research at that time had often claimed a connection between greater inequality and slower growth. However, in 1996, Klaus Deininger and Lyn Squire (\”A New Data Set Measuring Income Inequality\”, World Bank Economic Review, 10(3): 565-91, 1996) pointed out that this kind of comparison across countries didn\’t control sufficiently for other factors that could vary across regions and countries, like variations in political and social institutions or in initial level of development. In their analysis, with these kinds of factors taken into account, the degree of economic inequality didn\’t seem to influence subsequent growth.

More recently, Andrew G. Berg and Jonathan D. Ostry have been taking a look at the relationship between inequality and the length of periods of economic growth, and their readable summary of their results is here. They write (citations and references to charts have been cut):

\”Most thinking about long-run growth assumes implicitly that development is something akin to climbing a hill, that it entails more or less steady increases in real income, punctuated by business cycle fluctuations. …  The experiences in developing and emerging economies, however, are far more varied. In some cases, the experience is like climbing a hill. But in others, the experience is more like a roller coaster. Looking at such cases, Pritchett and other authors have concluded that an understanding of growth must involve looking more closely at the turning points—ignoring the ups and downs of growth over the horizon of the business cycle, and concentrating on why some countries are able to keep growing for long periods whereas others see growth break down after just a few years, followed by stagnation or decay. A systematic look at this experience suggests that igniting growth is much less difficult than sustaining it. Even the poorest of countries have managed to get growth going for several years, only to see it peter out. Where growth laggards differ from their more successful peers is in the degree to which they have been able to sustain growth for long periods of time.\”

In their work, interestingly enough, income inequality and trade openness are major factors in determining how long periods of growth will last, while political institutions and foreign direct investment are of intermediate importance, and external debt and exchange rate competitiveness are of little importance.

conversableeconomist

U.S. Poverty by the Numbers

Each September the U.S. Census Bureau releases an annual report on the U.S. poverty rate. Each year, the report is grist for the media mill for a few days, with arguments that the official poverty rate overstates or understates \”true\” poverty. But at least in the days right after the poverty numbers come out, I prefer not to perform in this annual dance of the definitions. Here, I\’ll make four more basic points, with minimal editorializing: 1) Show the 2010 poverty thresholds and trends over recent decades; 2) Show how poverty has come to affects the young more than other age groups; 3) Show the drop in median household income not just since the start of the recession in 2007, but back to 1999; and 4) Preview an argument about definitions of poverty that is coming next month. 

1) The 2010 poverty thresholds and trends over recent decades

The poverty rate is based on money income. As the report explains: \” If a family’s total money income is less than the applicable threshold, then that family and every individual in it are considered in poverty. The official poverty thresholds are updated annually for inflation using the Consumer Price Index (CPI-U). The official poverty definition uses money income before taxes and tax credits and excludes capital gains and noncash benefits (such as Supplemental Nutrition Assistance Program benefits and housing assistance). The thresholds do not vary geographically.\” The poverty thresholds are adjusted for household size and for number of children in the household. Here they are for 2010:

As an economist, I lack any talent for drama. But I do sometimes try to give a little life to the poverty thresholds by pointing out that the poverty line for a three-person household with two children is $17,568. Divide that by 365 days in a year, and by three people per meal. It\’s about $16 in total consumption per person per day. There are high-end restaurants in most U.S. cities where $16 will buy you a fancy appetizer. The share of the population below this poverty line–the \”poverty rate\”– dipped in the 1960s, but since the 1970s has hovered between about 12-15% of the population.

2) How poverty has come to affects the young more than other age groups

In the early 1960s, poverty was more prevalent among the elderly. But in the early 1970s, the poverty rate for the elderly dropped below that for those in the under-18 age group. From the mid 1980s up to about 2000, poverty rates for the elderly were similar to those for the age 18-64 population. Since about 2001, poverty rates for the elderly have been below those for the 18-64 age group. Currently, the poverty rate for those over 65 is 9.3%; for the 18-64 age group, 13.7%; for those under 18, 22%. As we discuss the problems of our aging society and how we have set up Social Security and Medicare systems whose current financing will not be able to deliver the promised benefits, it\’s worth remembering that more than a fifth of those under age 18 are living in households below the poverty line.

In fact, the closer you go to the poverty line, and below the poverty line, the more the under-18 population is overrepresented. Specifically, those under age 18 are 24.4% of the total population;  31.3% of the population with income below 200% of the poverty threshold; and 35.5% of the population below 100% of the poverty threshold.

3) Median household income has dropped not just since the start of the recession in 2007, but compared to 1999

The median household is the household where half of all households have more money income and half have less: that is, the household at the 50th percentile of the income distribution. Income gains for those at the top of the income distribution affect average income, but they do not affect median income. The report points out:  \”Real median household income was $49,445 in 2010, a 2.3 percent decline from 2009 … Since 2007, median household income has declined 6.4 percent (from $52,823) and is 7.1 percent below the median household income peak ($53,252) that occurred in 1999 …\” Here\’s the figure:

4) A Preview of a Coming Debate over the Supplemental Poverty Measure

The Census Bureau is of course perfectly aware of the disputes over how poverty should be measured, and has long offered alternative measures of poverty for those who took the time to read the fine print. Back in 1995, there was a big National Academy of Sciences report on ways of measuring poverty. In October, the Census Bureau is planning to come out with a measure of poverty that is more closely linked to actual consumption:

\”The official poverty measure, which has been in use since the 1960s, estimates poverty rates by looking at a family’s or an individual’s cash income. The Supplemental Poverty Measure will be a more complex statistic, incorporating additional items such as tax payments and work expenses in its family resource estimates. Thresholds used in the new measure will be derived from Consumer Expenditure Survey expenditure data on basic necessities (food, shelter, clothing, and utilities) and will be adjusted for geographic differences in the cost of housing. The new thresholds are not intended to assess eligibility for government programs. Instead, the new measure will serve as an additional indicator of economic well-being and will provide a deeper understanding of economic conditions and policy effects.\”