Monday, March 12, 2012

A New Face of the Poor

I came across a World Bank study last week that tracks extreme poverty in the developing world and its results, driven by China’s amazing 30 year economic run, got me thinking and reading about measuring poverty. 

The World Bank has been tracking extreme poverty in the developing world since 1981 and has created a measurement, surviving on less than $1.25/day, as its threshold measure.  The World Bank’s policy goal when it started was to reduce extreme poverty by half in the year 2015.  It appears to be ahead of schedule and may, with these results, have achieved its goal. 

It was astounding to learn that since 1981, China has moved nearly 700 million people out of the extreme poverty definition used by the bank.  The percentage of people living in extreme poverty in China during that time has gone from 84% of the population in 1981 to just 13% in 2008.  In fact, China has moved nearly as many people beyond a $2.00/day threshold in that time.  Other countries in that region which includes Malaysia, the Philippines, Indonesia and Vietnam, as well as India next door, showed remarkable movement as well, pushing hundreds of millions of the poorest of the poor into a slightly more stable life. 

Brazil and the relative economic health across South America is also a good story for the very poor.  In fact, for the first time, extreme poverty rates fell in all regions of the globe, even in sub-Saharan Africa, now the world’s greatest basket case.  Its poverty rate declined slightly.  Among several pieces of news in the World Bank release are these:

1.   The World Bank’s goals of reducing extreme poverty by half in the year 2015 have likely been met.

2.   The Great Recession, against conventional thinking, has not impeded the reduction of extreme poverty between 2008 and 2010.

3.   A separate goal, shared by the World Bank and the United Nations, has it that nearly 2 billion people gained access to better drinking water between 1990 and 2010.

In a certifiably crazy world, it is good to see a measurement that brings, even in small increments, some good news. 

Mollie Orshansky
Social Security Administration
Reading about poverty measurement in the United States brought me to Mollie Orshansky.  She started her professional life as an economist when the measurements for well-being in this country were off-the-charts-low, in 1935.  Unemployment was just over 21%.  The Gross Domestic Product of the country was coming back from its low of 50% of pre-depression levels in 1933 to 30% in 1935.  Perhaps she had a slight burst of pleasure at that news, but I doubt it.

Even if you thought, in 1935, that women had an important place in the workforce, a single professional woman looking for work then was competition to the out of work head of household breadwinner, even if the woman was an economist and the head of household a plumber.  For many people, something was just not right about it and that led a lot of talented women like Mollie to the Department of Agriculture and the brand new Social Security Administration, where as an analyst, she was present at the creation of today’s modern poverty line. 

Her statistical analysis provided the background for the Johnson Administration’s most basic policies dealing with the poor.  The timing of her work, coming as the new Johnson Administration was embarking on its War on Poverty initiative, could not have been better.  Sargent Shriver, head of the Office of Economic Opportunity, and Joe Califano, Secretary of Health and Human Services, were the leading generals of the War on Poverty and were looking for ammunition that would feed the onslaught of legislation Lyndon Johnson had in mind.  Then, one day, these giants of the administration came across a modest looking Social Security Bulletin, produced by Orshansky, called “Children of the Poor.” 

She based her numbers measuring poverty on the monthly diets developed by the US Department of Agriculture beginning in the thirties.  By the 1950s, she was finding a statistically important mark, how much poor people spent on food. The concept of the food basket she worked on then presumed four levels of food consumption based on the economic standing of the presumed purchaser.  These food baskets gave direction to people who sought a nutritious diet, whatever their income.  People with higher incomes purchased the Liberal Plan, lower incomes the Moderate Plan, the third Low Cost and the fourth, Thrifty, a diet that would reflect very tight times that could be survived, with the bare necessities, over short periods. 

These market baskets had a role in determining a fair amount of public policy having to do with the distribution of crop surpluses, relief, guidelines for other social service agencies, the introduction of food stamps in 1961 and other programs across the country providing a safety net under the very poor.

Other parts of sustaining a minimal life for poor Americans were not as fact-based as the nutritious market basket consumed by all levels of society.  How much clothing do people need?  How much transportation?  How much housing? 

Lacking consensus information about these features of life, Orshansky stuck with what she knew, the food basket.  She had shown, in the fifties, that low income people spent one third of their after tax income to purchase food and that the amount of food and its cost vary with the size and age of the families. What food would an elderly woman purchase?  What would a family of four with two children need?  What is the cost to a single mother with two toddlers?  Using her food expense information as a base, she created a multiplier to become a proxy for those other, ill-defined needs like clothing and housing.  Applying a multiplier to the food cost produced a dollar value for the annual cost to many different types of families.  In 1964, Orshansky’s calculations resulted in a cost of $3,135 annually for a father, mother and two children.  That became the poverty line for that demographic.  She actually built out some fifty different demographic scenarios and created a set of scenarios distinguising between farm families and urban families. 

Using a completely different methodology, the Johnson era Council of Economic Advisers came up with a similar figure of $3,000 a year, but it had no demographic flexibility.  According to their measure, a single person living on $2,900/year would be classified poor while a family of five living on $3,100/year would not be.  Orshansky’s work made things fairer and was enthusiastically adopted by the War on Poverty.

For thirty years, the government struggled to find another basis for calculating its poverty index by adding specific assumptions about clothing, shelter, utilities, plus other needs like household supplies and non-work-related transportation.   Finally, the new base case poverty index was ready in 1990 and used a percentage, somewhere around 75%, of an average cost of living for middle class family of two children and two parents.  It did not include all things – health insurance and medical care among them. 

Using the revised structure, a little over 13% of the population, about 40 million people, are classified as poor and have access to various low income benefits provided by federal, state and local governments.   

At the end of last year, however, the Obama Administration made another effort to define “poor.”  The Bureau of the Census updated the poverty thresholds by adding in more “modern” costs – particularly medical costs, which had been ignored by the 1990 update and which have a disproportionate effect on seniors.  The sum of it all is that the level of poverty has grown to nearly 16% or slightly more than 47 million Americans.  While the figures from the Census Bureau increase the rate of poverty we recognize, the numbers are not used for calculating benefits, that’s done over at Health and Human Services, which will continue to use the previous guidelines for the time being.  However, the push and pull between the Census Bureau trying to get things right and the Department of Health and Human Services trying to do the possible is an interesting and healthy tension and one that at least strives to be fair.

Analysts like numbers that show the dynamics of the time they are trying to measure.  Measurements like the unemployment rate or inflation rates produce useful information but don’t offer the kind of three dimensional views that show more clearly how the economy is affecting people’s lives. 

Efforts to combine information have produced numbers like the “Misery Index,” a combination of unemployment rates and inflation that surfaced in the late seventies.  While showing the dynamic of a weak economy buffeted by inflation, it was really a political tool, not an economic one. 

Recently, a new measure of the Great Recession’s misery, the Economic Security Index, was unveiled by the Rockefeller Foundation and a prestigious group of scholars assembled by the foundation.  Its policy purpose is to raise the issue of economic security among policy makers and thought leaders.  The foundation thinks that many Americans are walking along the edge of the economy and wants to know just how many there are on that precipice, who they are and what policies can we think about that might make their lives and the lives of their families less perilous. 

They idea is to measure what happens to Americans whose household income is falling dramatically and, at the same time, they are faced with high medical bills or some other calamity and their savings are insufficient to offset the sudden storm.  With this index, the foundation can tell us that the proportion of Americans economically insecure has been higher in 2009 and 2010 than at any time in the previous 25 years. 

The premise is that bad news comes in bunches.  The scholars define bad news as the loss of more than 25% of existing annual income, either through loss of work or medical costs or both and with no savings to replenish the loss.  Having put the Economic Security Index together, the scholars can now go back, apply historical data, and get a picture of insecurity over time. 

Their analysis shows that economic insecurity has risen quite dramatically over the last 25 years.  In 1985 the ESI Index showed that 12.2% of Americans experienced a major economic loss that would classify them as insecure.  At the beginning of the 2000s, 17% suffered the loss of at least 25% of their income in a year.  Before the most recent downturn, in 2007, it reflected the better economic times, dropping to about 14%.  The first two years of the Great Recession propelled the index over 20% in ‘08 and ’09.

Comparing the ESI Index to the Poverty Index and the Unemployment Rate shows that economic insecurity is still highly significant even when times are very good, say in the years between 1997 and 2007.  Also, their data shows that the size of the losses over 25% has increased steadily over the past 25 years, meaning the losses are significantly more severe.

Also telling is the percentage of demographic groups most affected by the big loss of income in a given year.  The single individual without children does best and doing poorly are people with children and single parents. 

There’s something about this measurement that is particularly compelling to me.  It captures an intuition from this recession that there is a thin line between being middle class and falling out of of the middle class into near poverty or worse.  Anecdotal information from people who run food banks, manage low income housing and run a variety of charities seems to confirm the idea of the Economic Security Index, that being middle class is far from a permanent status and that new faces are showing up where the poor gather.

World Bank Extreme Poverty Update

Rockefeller Foundation Economic Security Index

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