Moneybox

The White House Says America Has Defeated Poverty. That’s Absurd.

Kevin Hassett takes questions in the White House briefing room.
Council of Economic Advisers Chairman Kevin Hassett.*
Alex Wong/Getty Images

Last week, the Trump administration declared that poverty was no longer a serious problem in the United States. “Based on historical standards of material wellbeing and the terms of engagement, our War on Poverty is largely over and a success,” the White House Council of Economic Advisers explained in a lengthy report published Thursday. The problem, its authors argued, was that too many Americans had become dependent on government benefits like Medicaid and the Supplemental Nutrition Assistance Program (aka food stamps), which need new work requirements to keep people off the dole.

This was all quite a curveball. For decades, Republicans have claimed that America’s welfare state needed to be reformed because it had failed to fix poverty. Ronald Reagan famously quipped that “the Federal government declared war on poverty, and poverty won.” In 2013, now–House Speaker Paul Ryan said much the same, without the wit. “When I look at the money spent, when I look at the programs created, when I look at the miserable outcomes and the high poverty rates, as a policy maker, (I say) ‘We can do better than this and we need to figure out how.’ ” Trump’s economists now say it’s OK to put more limits on food stamps in part because so few people are going hungry anyway.

Of course, both the White House and Ryan have the same goal: forcing more Americans to work or give up their government aid. The fact that they arrive at the same policy preferences from completely opposite directions might be evidence that Republicans engage in some crude, motivated reasoning from time to time. But leaving all of that aside, the CEA report raises an important question: Has the U.S. quietly vanquished poverty?

The answer is almost certainly no.

The Census Bureau reports that 12.7 percent of all Americans—about 40.6 million individuals—lived below the official poverty line in 2016. According to a more nuanced metric the bureau produces, called the Supplemental Poverty Measure, 14.5 percent of Americans were impoverished. There are many differences between these two measures, but both are based on how much income families bring in. (The official poverty rate doesn’t include non-cash government benefits like food stamps or housing assistance, while the SPM does.) The White House argues that measuring poverty using income data is inaccurate, however, because poorer households tend to underreport how much they actually earn or receive from the government. Instead, its economists borrow a poverty measure based on consumption, produced by the University of Chicago’s Bruce Meyer and Notre Dame’s James Sullivan. The theory behind it is that households are basically better at telling interviewers how much they spend on food and rent than what they earn, and total purchasing power is a better way to measure whether people are actually facing economic deprivation, since households without much income might be able to cover their expenses with savings or help from family.

Measuring impoverishment this way makes it virtually disappear. As shown on the red line below, the rate falls from 30 percent in the 1960s to just over 3 percent today—a nine-tenths drop. This, the CEA argues, is why it’s time to hang a mission accomplished banner for LBJ’s War on Poverty.

Consumption poverty
CEA

If that decline sounds too good to be true, well, it might be. Look closely at the CEA’s chart, and you might notice that it suggests the poverty rate was actually higher during the flush 1990s tech boom than during the economic bloodbath of the Great Recession, when joblessness spiked to highs not seen in decades. In other words, it tells us that Americans were better able to afford life’s necessities when 700,000 people were getting fired a month than during a period when America literally had more money than it knew what to do with. Now, that could be a testament to the power of the safety net, which expanded quickly amid the downturn. But it could also mean that the yardstick Meyer and Sullivan created doesn’t actually track the financial hardship families face all that well. Which is it? Thankfully, someone recently put that question to the test.

In a recently updated working paper, Luke Shaefer and Joshua Rivera of the University of Michigan looked at how well Meyer and Sullivan’s consumption-based poverty measure tracks other, more direct signs that families are facing economic adversity, including the share of Americans reporting they’ve had trouble paying for food, utility bills, rent, or medical care. It turns out the official poverty rate and the SPM produced by the Census Bureau have mirrored these things fairly well in recent years. The consumption-based rate poverty rate that the White House prefers has not; it shows that poverty was supposedly in decline, even as more households claimed to be having difficulty covering the cost of meals or shelter.

Which poverty rate works best.
Shaefer and Rivera, 2018

Why is the consumption data painting such an unrealistically rosy picture? One issue could be that a lot of Americans are financing their spending with debt—whether it be a payday loan or a second mortgage that they can’t really afford to pay off. If so, consumption habits may hide the terrible distress some families face. Measuring impoverishment via consumption could obscure Americans’ financial burdens in other ways, too. Nobody would call paying more than you can afford in rent a sign of financial health, for instance. But doing so could push a household above the consumption-poverty line.

A more technical but nonetheless important problem may have to do with how Sullivan and Meyer adjust their poverty line for inflation each year. They think the cost of living in America is rising much more slowly than the official Consumer Price Index suggests and tweak their numbers accordingly. This makes household spending look as if it’s growing much faster by comparison, and pushes a lot of families above the poverty line.1 Or, to put that in English, one could argue they’ve made America’s problem with need disappear by getting creative with inflation accounting.

Long story short, the measure of poverty the White House has chosen to embrace almost certainly understates the extent of real material need in this country. If you look at more realistic studies of how poverty has evolved over time, they suggest that America has made great progress since the 1960s but also has a long way to go before everyone actually has economic security. The welfare state has worked, but not well enough.

On the bright side, this could all be considered sign of progress. Republicans in power used to argue that we’d failed to put any kind of dent in material poverty. Now they’re overstating our success at doing so. Even officials in the Trump administration can admit that the safety net does some good. Now if only they’d stop trying to demolish it.

1 For the 10 people reading this article who care about arguments over inflation adjustments, they use the CPI-RS, then subtract 0.8 percentage points each year.

Correction, July 18, 2018: The caption on this post originally misspelled Kevin Hassett’s last name.