Page 437 - The Principle of Economics

CHAPTER 20 INCOME INEQUALITY AND POVERTY 445
IN THE NEWS
Measuring Poverty
HOW MANY PEOPLE LIVE IN POVERTY? THE answer is a topic of continuing debate.
Devising New Math to Define Poverty
BY LOUIS UCHITELLE
The Census Bureau has begun to revise its definition of what constitutes poverty in the United States, experimenting with a formula that would drop millions of
more families below the poverty line. The bureau’s new approach would in effect raise the income threshold for living above poverty to $19,500 for a
family of four, from the $16,600 now considered sufficient. Suddenly, 46 mil- lion Americans, or 17 percent of the pop- ulation, would be recognized as officially below the line, not the 12.7 percent an- nounced last month, the lowest in nearly a decade. . . .
Fixing a poverty line has always been a subjective endeavor. The current for- mula was created for President Lyndon B. Johnson to keep score on his “war on poverty” and has remained unchanged since 1965 except for adjustments for in- flation. . . . The Census Bureau’s new Ex- perimental Measures are an effort to determine what poor people must spend on food, clothing, housing, and life’s little extras.
“There is no scientific way to set a new poverty line,” said Rebecca M. Blank, dean of the School of Social Pol- icy at the University of Michigan. “What there is here are a set of judgment calls, now being made, about what is needed to lift people to a socially acceptable standard of living.” . . .
Ordinary Americans, in opinion polls, draw the poverty line above $20,000, saying it takes at least that much, if not more, to “get along in their community,” to “live decently,” or to avoid hardship.
But a higher threshold means gov- ernment spending would rise to pay for benefits tied to the poverty level, like food stamps and Head Start. That would require an incursion into the budget sur- plus that neither Republicans nor De- mocrats seek.
Not surprising, the White House, which would have to authorize a change in the poverty formula, is proceeding cautiously. “We have at least a couple of years more work to do,” an Administra- tion official said, passing the decision for redefining poverty to the next adminis- tration.
SOURCE: The New York Times, October 18, 1999, pp. A1, A14.
Florida frost drives up the price of oranges, and California orange growers see their incomes temporarily rise. The next year the reverse might happen.
Just as people can borrow and lend to smooth out life cycle variation in in- come, they can also borrow and lend to smooth out transitory variation in income. When California orange growers experience a good year, they would be foolish to spend all of their additional income. Instead, they save some of it, knowing that their good fortune is unlikely to persist. Similarly, the Florida orange growers re- spond to their temporarily low incomes by drawing down their savings or by bor- rowing. To the extent that a family saves and borrows to buffer itself from transitory changes in income, these changes do not affect its standard of living. A family’s ability to buy goods and services depends largely on its permanent in- come, which is its normal, or average, income.
To gauge inequality of living standards, the distribution of permanent income is more relevant than the distribution of annual income. Although permanent in- come is hard to measure, it is an important concept. Because permanent income excludes transitory changes in income, permanent income is more equally distrib- uted than is current income.
permanent income
a person’s normal income