Recalibrating the poverty line

This year marks the 50th anniversary of the landmark paper that helped delineate the federal poverty line. A huge leap forward in its day, the poverty line established credible criteria for what constituted an acceptable standard of living. It continues to be the official measure used, for example, to determine who will get what subsidies under assistance programs such as food stamps, housing assistance and Medicaid.

However, like anything half a century old, it could use a little updating. By its standards, only 15% of Americans fall below the poverty benchmark. Yet more than 35% of us hold jobs paying less than a living wage or are unemployed and trying to find a job, and another 1 in 10 receives just above a living wage. The out-of-whack poverty line carries huge repercussions for the poor, near poor and, indeed, the entire economy.

Here’s the background. Mollie Orshansky, an economist and statistician with the Social Security Administration, devised the poverty line in the 1960s. She used the average family budget and the cost of food. Because the average family spent one-third of its budget on food in 1955, Orshansky set the poverty threshold at three times the minimum cost to purchase an adequate food diet. Her formula took a basic minimum (the food budget) and related it to the overall prevailing standard of living (its proportion in the total budget of the average family). She described it as an acceptable minimum social standard according to the custom of the day. It was not an absolute measure of poverty.

But that’s essentially how the federal government treated it. It adjusted Orshansky’s poverty line every year thereafter, accounting solely for the cost of inflation.

How out of whack is it? Food, Orshansky’s key budget item, has now fallen to about one-sixth of the average family budget, no longer one-third as it was then and essentially still is in today’s index. So if we were to use Orshansky’s logic, the poverty threshold would require us to take the minimum food cost for an average family and multiply it times six in order to tie it to the current standard of living. For a four-person household in 2013, that comes to about $41,000, not $23,500, which is the approximate poverty line the federal government uses.

Most Americans agree with the adjusted figure. In 2007, Gallup found that $40,000 to $45,000 is the annual income Americans considered “the smallest income a family of four would need to get along in your local community.” Based in part on budgets and living costs from the U.S. Bureau of Labor Statistics, it in fact requires about $40,000 for a family of two adults and two children to be able to rent a minimal two-bedroom apartment and to afford $1.50 per person per meal each day, given the cost of other necessities.

It’s a genuinely bare-bones budget. It takes a wage of nearly $12 an hour earned by 1 2/3 full-time workers to reach an income of $40,000 a year for a family with two adults and two children. More than 50 million workers receive less than that pay or are unemployed and trying to find work.

To be sure, there have been increases in wages over the years, but they have gone mostly to the very top. Even for the American worker right in the middle, pay has risen by barely 10% in real terms over the last 40 years, according to the Economic Policy Institute. Contrast that with the near tripling of pay for the top 1%.

Disparities of that magnitude have left tens of millions of Americans who are classified as middle income actually at or near poverty, involving an alarming cost to the entire economy.

With the average worker’s productivity up by 80% since the 1970s but pay essentially flat, the broad American middle class can no longer buy what it produces, unless it borrows heavily. Households at the top, with far lower propensities to consume, come nowhere close to replacing the demand despite receiving the lion’s share of the pay hikes. The amount of demand drained from the economy by the preponderance of low pay levels amounted to up to $1 trillion annually in the 2000s and contributed mightily to the Great Recession.

We need to recalibrate the poverty measure to make it true to Orshansky’s measure.

An honest poverty line would clarify how many Americans are poor and yet ineligible for assistance that would allow them to afford the very basics that the assistance programs were intended to provide. It would show that a far higher proportion of the poor than politicians or the public are aware of are hard workers; many millions of them are already in year-round full-time jobs. And perhaps most important, the large numbers of the poor, now and in relation to the past, would help us understand the serious harm inflicted on demand in the economy, which in turn limits business and contributes significantly to the economy’s sluggish growth.

Both for the sake of simple justice and to stop fooling ourselves, and causing great harm to the economy, we should celebrate the 50th anniversary of Mollie Orshansky’s calculation by doing it right in 2013.

John E. Schwarz is professor emeritus of government and public policy at the University of Arizona, senior distinguished fellow at Demos and the author of “Common Credo: The Path Back to American Success.”