A Better Way to Measure Poverty

The newly released poverty statistics paint a grim picture. Last year 43.6 million Americans — more than 14 percent — had income below the federal poverty line. But those numbers only give a partial picture of the problem.

That’s because real poverty is not just about income, but also consists of assets and liabilities. The official poverty numbers look only at income and use an unrealistically low estimate for what it takes to make ends meet.

It’s time to take assets into account when measuring poverty.

As Nobel laureates Joseph Stiglitz and Amartya Sen, along with economist Jean-Paul Fitoussi, write in their new book Mis-measuring Our Lives, “Income and consumption are crucial for assessing living standards, but in the end they can only be gauged in conjunction with information on wealth.” This point is just as relevant to poverty measurement as it is to other measures of living standards.

To understand why this is the case, consider two families: one had an income that puts them a few thousand dollars below the poverty line, which was $22,050 for a family of four in 2009; the other has an income a few thousand dollars above the line. Looking only at income, the first family is worse off than the second.

Now add what the family owns and owes into the mix. Let’s say the first family has substantial net equity in its home and moderate liquid savings for a “rainy day,” while the latter has no liquid savings or, as is becoming too common these days, has liabilities that dwarf their assets such as an “underwater” mortgage. Using this more comprehensive method, the latter family, despite a modestly higher income, is actually the poorer one.

Recent Urban Institute research looks at the role liquid assets play in reducing material hardship. Among both low- and middle-income families the research showed that those with low levels of liquid assets experience considerably more economic hardship — including food insecurity, trouble paying bills, and other kinds of deprivation.

Other research by scholars at Washington University, the University of Kansas, and elsewhere, suggest that liquid assets can facilitate economic opportunity by raising expectations for a better future, increasing access to education, and, if used prudently, enabling families to obtain other assets that may appreciate in value over time.

In this year’s budget, the Obama administration included a request for funding that would allow the Census Bureau to produce a Supplemental Poverty Measure (SPM) to complement the current measure. If Congress appropriates the modest funding requested, Census will release the first SPM in 2011, which will improve the current measure in several respects. Most importantly, it would take into account important benefits, including the Earned Income Tax Credit and nutrition assistance, and significant non-discretionary expenses, including for health care and child care.

But, the proposed SPM, like the official measure, is still an income-only measure of poverty, and thus fails to capture the vital role that assets play in economic security. Moreover, since assets and income don’t exist in separate “silos” in the real world, the Census Bureau should integrate assets and savings directly into the SPM.

A new approach to measuring poverty adopted this year in the United Kingdom — with support from conservatives and liberals — is worth looking at as a model. Britain’s approach uses two distinct measures of poverty: an income poverty measure and a measure of material hardship.

Unlike the current U.S. measure or the proposed SPM, both of Britain’s poverty indicators take some important asset- and savings-related factors into account. In the income-poverty measure, both savings to retirement accounts and student loan repayments are subtracted from the income that is compared with the poverty threshold to determine whether someone is living below the poverty line.

Britain’s material-hardship indicator of poverty measures economic deprivation similar to how the Urban Institute does as well. A family is considered poor if it experienced two or more forms of material hardship. The items included on the index are ones that the majority of British believe are contemporary living necessities such as the ability to regularly save at least £10 (about $15) a month for rainy days or retirement, which roughly two-thirds of the British view is necessary. This approach better captures the overall effect that both income and assets have on poverty.

In effect, the new British poverty measures treat basic savings as a necessity rather than a luxury. To get a better picture of poverty, the United States should do the same.

STEPHEN CRAWFORD, vice president for policy and research at the Corporation for Enterprise Development, is a non-resident senior fellow at the Brookings Institution.

Shawn Fremstad is the director of the Inclusive and Sustainable Economy Initiative at the Center for Economic and Policy Research.