No, the Poverty Threshold Is Not $140,000 (Good Grief)

Portfolio manager Michael W. Green begins his much-discussed essay in the Free Press:

For my whole career in finance, I have distrusted the obvious. And yet, for many years there was one number I assumed was an actuarial fact: the U.S. poverty line. Yes, I saw Americans feeling poorer every year, despite economic growth and low unemployment. But ultimately, I trusted the official statistics. Until I saw a simple statement buried in a research paper.

And I realized that number—created more than 60 years ago, with good intentions—was a lie.

Well. Where to start? Herewith, six points of response.

1. Green engages in a series of calculations that would earn a D in my master’s class. He concludes: “So when I say the real poverty line is $140,000, I’m being conservative.” Of course, poverty thresholds are inherently arbitrary. You’re free to argue that three-quarters of households are living in poverty — but that argument is absurd on its face.

Why? Because any poverty threshold that finds most households living in poverty is not analytically serious or practicable. The economist Ernie Tedeschi computes that around 75 percent of households earn less than $140,000. Moreover, as Tedeschi shows, if that’s your threshold, then you should be feeling good about the nation’s progress!

2. Though Green presents his concerns with the “lying” statistic as novel, he is at least 40 years behind the discussion actual experts have been having about poverty measurement.

In 1995, the National Academy of Sciences released a report on poverty measurement motivated in part by concern from scholars and commentators about the inadequacy of the official measure. Three decades ago, they “concluded that revisions to the current poverty measure” — the one Green discusses — “are long overdue.” In 2009, the government formed an interagency working group to craft a better measure of poverty. It released its report in 2010. Since 2011, the U.S. Census Bureau has released both measures every year. When citing government poverty statistics, nearly all serious economists and social scientists rely on the supplemental poverty measure (SPM) and not the official measure.

3. The social scientist Scott Winship did the heroic work of replicating Green’s calculation. Winship shows that applying more reasonable data to Green’s equation can compute a poverty threshold as low as $24,470, far lower than Green’s choice of $140,000.

But again, Green’s equation demonstrates breathtaking ignorance of the body of research on poverty measurement.

4. No serious analyst would argue that the poverty threshold is the boundary of the middle class, as Green implies.

5. The U.S. has made substantial progress reducing poverty. According to the official poverty measure, poverty fell from 19.5 percent in 1963 to 10.5 percent in 2019.

Analysis by the economists Richard V. Burkhauser, Kevin Corinth, James Elwell, and Jeff Larrimore shows that poverty fell much further when broader definitions of income were used and when inflation was more accurately measured, falling from nearly 20 percent in 1963 to below 4 percent in 2019.

Standard economic analysis suggests that we should care more about consumption poverty than income poverty. The team of economists finds that consumption poverty fell from above 30 percent in the early 1960s to 2 percent in 2019.

6. It is easy to point to middle-class goods and services that have increased substantially in price over the past few decades, like health care and higher education. But in assessing affordability or the broad economic trends facing the middle class, it is bad analysis to ignore the categories of goods and services that have not shot up in price. Instead, dispassionate analysis should use a representative basket of goods and services for typical households and to compare its growth to nominal wages and income. While more progress is needed and we should not be complacent, the picture looks closer to good than to dire.

Tens of thousands of years ago, an approaching predator could end our lives. Perhaps because of that, we are hardwired to place greater psychological weight on risk than on safety. This may be why bad news sells and headlines never read “Airplane Lands Safely.”

But planes land safely every day. And the American dream is not dead — no matter how often low-quality analysis “demonstrates” that it is.