This commentary was originally featured in Forbes on August 22, 2017.
By the official definition of poverty in America, New Mexico has the nation’s highest poverty rate, 21.8 percent, while New Hampshire has the lowest, 6.6 percent. But a newer, more comprehensive measure of poverty by the U.S. Census Bureau tells a different story, with California having the highest poverty rate among the states at 20.6 percent.
Why do two government poverty yardsticks generate very different results?
Poverty defies simple explanation. We do not even have a common benchmark to measure poverty. The Official Poverty Measure, in use for a little more than 50 years, has its roots in a 62-year-old U.S. Department of Agriculture food consumption survey. That survey determined a subsistence diet and budget. The Official Poverty Measure builds off this, taking the cost of a subsistence diet and multiplying it by three with the rationale being that the provision of food uses about one-third of the poor’s income.
Thus, in 2016, a family of four making less than $24,250 was considered below the poverty line in the 48 contiguous states. Alaska and Hawaii have different, higher, poverty thresholds, reflecting those states’ higher cost of living.
Returning to New Mexico, the Official Poverty Measure calculates that state’s poverty rate at 21.8 percent, as averaged over 2013 to 2015. Using this measure, California has the nation’s 17th-highest poverty rate, 14.9 percent, just above the national average of 14.4 percent. However, the cost of living in California is about 20 percent higher than it is in New Mexico, according to the U.S. Bureau of Economic Analysis’ Regional Price Parity calculation. The Official Poverty Measure takes no account of this fact. In July, the average monthly rent for a two-bedroom apartment in Albuquerque, New Mexico was $963. In Los Angeles, a similar apartment rents for $2,904. Clearly, the cost of living matters, especially for the poor.
A practical example helps illuminate the Official Poverty Measure’s cost-of-living shortcomings. The average annual wage for food preparers and servers was $27,380 in California, $3,130 above the poverty line. But the cost of living in California is about 13 percent higher than the national average, according to the U.S. Bureau of Economic Analysis. This means that the average food service worker makes an effective annual wage of $24,145 in California—below the poverty line for a family of four.
The U.S. Congress has been aware of the Official Poverty Measure’s cost-of-living weaknesses since 1974. By 1995, specific improvements to the poverty threshold methodology were recommended and by 2010, 36 years later, the U.S. Census Bureau and the Bureau of Labor Statistics were charged with developing the Supplemental Poverty Measure (SPM). Unlike the Official Poverty Measure, the SPM wasn’t intended to determine eligibility for government benefits—it would be too controversial—rather, it was developed to advance our understanding of poverty.
The SPM differs from the Official Poverty Measure in four key respects:
- It accounts for regional cost of living differences;
- It includes the value of non-cash assistance to the poor, such as Supplemental Nutrition Assistance Program (SNAP, formerly known as Food Stamps) and Section 8 Housing vouchers;
- It calculates expenses incurred by the working poor, such as transportation and childcare as well as out-of-pocket medical costs; and,
- It is a relative measure of poverty, based on the 33rd percentile of national expenditures on necessity items vs. an absolute measure of poverty.
California, Texas, Florida, New York and Illinois have widely varying poverty rates and are demographically diverse. Before accounting for the value of all government benefits, expenses incurred by the working poor, and the cost-of-living, Texas has the highest Official Poverty rate among the big five states. But, once these factors are included, California moves firmly into the top—and, in fact, has the highest poverty rate among all states—while Texas moves to the second-lowest rate among the most-populous states, 14.9 percent.
|Official Poverty Measure, 2013-15
||Supplemental Poverty Measure, 2013-15
|16.0% – Texas
||20.6% – California
|15.9% – Florida
||19.0% – Florida
|15.2% – New York
||17.9% – New York
|14.9% – California
||15.1% – U.S. Average
|14.4% – U.S. Average
||14.9% – Texas
|12.7% – Illinois
||13.7% – Illinois
For in-depth studies on poverty, see the following two new papers from the Texas Public Policy Foundation: “Re-examining Poverty Rates: A First Step in Reforming Anti-Poverty Programs” by the author and “Poverty Rates, Demographics, and Economic Freedom Across America: A Comparison of Nationwide Poverty Measures” by Courtney A. Collins, Ph.D.