Interesting stuff from “Consider the Evidence,” Lane Kenworthy’s blog (via Marginal Revolution):
February 19, 2008
No, it isn’t.
Poverty comparisons across affluent nations typically use a “relative” measure of poverty. For each country the poverty line — the amount of income below which a household is defined as poor — is set at 50% (sometimes 60%) of that country’s median income. In a country with a high median, such as the United States, the poverty line thus will be comparatively high, making a high poverty rate more likely. Measured this way, the U.S. does indeed have the most poverty among the rich nations. That leads to statements such as Paul Krugman’s in his otherwise insightful op-ed in Monday’s New York Times: “Poverty rates are much lower in most European countries than in the United States.” (See also here and here.)
Though widely used, and not without merit, a relative measure should not be the principal basis for poverty comparisons. It focuses too heavily on the distribution of income and too little on the absolute income level of those at the bottom. Using a relative measure, the U.S. poverty rate is higher than Romania’s and only slightly lower than Mexico’s (see here). Similarly, Mississippi’s relative poverty rate is the same as Connecticut’s.
Measured in the relative fashion, the U.S. would still have high rates of “poverty” even if the purchasing power of the poorest American were $1 million a week.
Poverty figures are among the most abused stats in journalism, and they turn up everywhere–including journals that should know better. In his great Economic Facts and Fallacies, Thomas Sowell chronicles the abuse of statistics when comparing household incomes. The usual practice is to compare the poorest 20 percent of all households with the richest 20 percent, but the statistical gaff is that richer households have more people–and, specifically, more employed people–in them. In fact, the richest 20 percent of all U.S. households have tens of millions more people in them than the poorest 20 percent, and many, many millions more full-time workers. Of course their income is substantially higher. But the comparison is meaningless in terms of actually understanding the economics of poverty.
Sowell gave a great example in an interview with Bill Steigerwald:
For example, for the flesh-and-blood people who were in the bottom 20 percent of taxpayers in income in 1996, their average increase of income over the next decade was 91 percent — so they almost doubled their incomes. Meanwhile, for the people in the top 1 percent — presumably the rich who are getting richer — their average income declined 26 percent. That’s diametrically the opposite from what we’re hearing from nearly every newspaper and practically every political platform.
But of course it’s also true that if you look at the income tax brackets, the distance of the top bracket from the lowest bracket has increased. One reason is that the very lowest bracket is zero, so it can’t go any lower. So as you pay people more and more money and as the economy grows and skills become more sophisticated, obviously the ratio from the top and the bottom is going to increase.
