Poverty in the Mid-Valley: Where Can We Help?June 3, 2020 Why does society try to define poverty? One reason might be found in the words of U.S. Vice President Hubert Humphrey: “The moral test of government is how that government treats those who are in the dawn of life, the children; those who are in the twilight of life, the elderly; those who are in the shadows of life; the sick, the needy and the handicapped.”
While this moral imperative is crucial, there are also economic reasons to help those in need. If impoverished people can be given opportunities to engage in more productive employment, society as a whole is better off. First, society spends less on supporting underutilized populations. These resources are freed up to use in other ways. Second, the newly productive populations have more resources. When these resources are spent, they generate more economic activity.
Defining the Problem
The definition of poverty used by the federal government was first developed in the 1960s. At that time, it was determined that the average household spent approximately one-third of its income on food. The poverty level was set at three times the cost of a minimum food diet. The poverty level, or threshold, is adjusted for family size, increasing as family size increases. To account for changes in prices over time, the threshold amount is adjusted using the Consumer Price Index for urban areas (CPI). As prices rise, the poverty threshold is increased. This is the basic framework used to calculate the poverty level today.
By this measure, the poverty rate in Oregon was 14.1 percent in 2018, as can be seen in the figure below.
Problems with Poverty Measures
The definition of poverty developed in the 1960s, while useful, is flawed. Evidence of this can be seen in the fact that government agencies that use poverty thresholds to determine eligibility for programs often use multiples of the poverty threshold. The federal government has debated and studied other measures for some time. So what are these flaws? The most obvious are: changes in spending patterns, flawed price adjustments, and location differences.
Since the 1960s, food prices have fallen relative to other costs, mainly housing and energy costs. The average modern consumer spends about one-seventh of their income on food. The further away from the starting point of the poverty threshold (households spending one-third of their income on food in the 1960s), the less the poverty threshold reflects a true measure of a basic income requirement.
Price adjustments have also distorted the standard estimate of poverty. Using the CPI to adjust prices over time does not take into account the types of items purchased by different income level households. Lower-income households spend a larger portion of their income on necessities like childcare, food, housing, transportation, and energy. The CPI uses a broad basket of goods when looking at changing prices, thus underweighting the importance of necessities for the poor.
Finally, the cost to live can be vastly different from place to place. Housing costs in Portland are much different than housing costs in Dallas City. The current poverty threshold uses one cost of living standard for the entire country, with the exception of Alaska and Hawaii, when the reality is cost of living varies from state to state, county to county and city to city.
Building a Better Mousetrap
Several groups have proposed new measures of poverty which address flaws in the current estimate. Once such organization is United For ALICE (Asset Limited, Income Constrained, Employed). The ALICE estimate attempts to adjust cost of living for location (down to the county level), uses necessity price changes instead of overall prices changes, and adjusts income for public and private assistance. According to this measure, in 2016 approximately 41 percent of Oregon households have income below a survival budget level.
From the chart above, it can be seen that while the poverty level was trending down from 2012 to 2016, the percentage of Oregon’s population living below the ALICE threshold was increasing.
Our society, for a variety of reasons, has decided it is worthwhile to spend resources trying to help our citizens when they are in need. In doing so, it is necessary to determine who receives this aid. The poverty threshold does this to a certain extent, but also provides a false sense of the scope and depth of the problem. Developing a more accurate measurement will help decision makers understand the contours of the task they are undertaking.