Poorer and richer

Author: Gene Stowe

In the wake of the economic meltdown, the poverty rate in the United States shot up last year to its highest level in half a century, with one in seven Americans, some 44 million people, falling below the poverty line. However, James X. Sullivan, Notre Dame associate professor of economics, argues that the long-term news may not be quite as grim as it seems because the conventional income-based measures of poverty used by the U.S. Census Bureau tell only part of the story.

Although the current recession has taken a considerable toll on many families, Sullivan says consumption data actually show a decrease in poverty over the last 50 years.

The ND economist contends that tracking consumption offers a more accurate picture of progress toward well-being because income-based measures don’t capture long-term improvement in living standards. For instance, the poor, as well as the wealthy today, have access to such things as microwave ovens, cell phones, email, and DVDs — things that didn’t exist 50 years ago.

“Current income doesn’t necessarily reflect your well-being,” Sullivan argues. “Consumption is more naturally a measure of well-being. It incorporates your expectations about future income. Consumption tends to reflect one’s long-run resources as opposed to current resources.”

The Notre Dame economist’s research shows that people in the bottom 10 percent of income distribution actually consume more than three times their reported income, even though they have few assets and little access to credit.

That’s partly because the poor tend to receive income from many sources that are difficult to measure. Also, traditional income measures do not count food stamps, housing subsidies, Medicaid and the Earned Income Tax Credit, which distributes $40 billion to working poor people — more than Temporary Assistance for Needy Families (TANF), the large federal cash assistance program.

“The consumption measure shows very clear evidence of a decline in poverty over a long period of time,” Sullivan says. “Consumption tells us there has been some success in the government programs.”