The mismeasurement of wealth and poverty in America.
May 4, 2009, Vol. 14, No. 31 • By JOEL SCHWARTZ
Thus, correcting for consumers' ability to substitute, and for the introduction of new and better products, Broda and Weinstein maintain that, far from being stagnant, "real wages at the 10th percentile have increased by fully 30 percent since 1979," which means that "the well-being of the poor is substantially greater today than it was 25 years ago." They estimate that, properly calculated, the poverty rate can be said to have "fallen by 60 percent since 1970."
How persuasive is their argument? On one level, it seems compelling. Given all of the material improvements in American life in the last four decades, on a common sense basis it is hard to believe that poverty today is just as serious as it was in the early 1970s. Consider a statement by Nicholas Eberstadt, himself the author of another recent study of poverty: "A wealth of evidence shows that those who are counted as poor today have dramatically higher living standards than their counterparts in the 1960s." Specifically, poor Americans now spend only one-sixth of their money on food, as opposed to a third in the 1960s--even as obesity has replaced hunger as the main nutritional problem of the poor. Only six percent of America's poor now inhabit what are defined as "crowded" dwellings, versus 25 percent in 1970. And children in poor families today are more likely to have an annual medical checkup than were nonpoor children only 20 years ago.
By depicting poverty as a condition that appears not to have changed (and, in fact, to have worsened slightly) since 1970, the official poverty rate blinds us to real and obvious improvements in the material conditions of the poor. Broda and Weinstein are to be commended for calling to our attention an important piece of evidence that helps account for these improvements.
At the same time, their presentation of poverty is limited in various respects. Let me mention three. First, on a purely economic matter, I have already noted the contention that poor people pay less for the same goods than do rich people. There is, however, a counterargument. It can plausibly be claimed that the poor often pay more than the rich. Poor people, or at least some poor people, lack the funds to buy in bulk, have to pay interest on big-ticket items that they can buy only on the installment plan, or lacking transportation, purchase goods from local stores that charge more than
I am willing to believe that the poor who buy at Wal-Mart more than compensate, on balance, for the poor who pay more for the reasons that I have just stated. Still, it would have been nice if Broda and Weinstein had developed their argument by responding to this obvious objection.
The other two limitations point to considerations that economists are less likely to address than other social scientists, an occupational blind spot that was usefully analyzed in Steven Rhoads's excellent The Economist's View of the World. Thus Broda and Weinstein assume that the poor are rational economic actors, who "can switch their consumption [from more expensive goods] to those categories of goods whose relative price has fallen." They certainly can, but how many do? No doubt many poor people carefully husband their resources by spending prudently; but it is surely also the case that at least some poor people are poor--or, to be more precise, exacerbate their poverty--because they consume irrationally, spending money on goods that they don't need and spending less than they should on goods that they do need.
Furthermore, the same mental or emotional problems that make someone an irrational consumer would also tend to make him an undesirable employee, lessening if not eliminating his earned income. That consideration is not, however, addressed by Broda and Weinstein. Still more fundamentally, they present (not surprisingly) an exclusively economic picture of poverty which looks only at the material consumption of the poor. "The poor have access to new and better goods," a fact, as they rightly note, that isn't captured by "the observed stability of the official poverty rate."
That argument is both true and important. Still, it is not the entire truth. Man does not live by bread alone, so when we think about poverty in America today, we should be concerned about things other than the material consumption of the poor. To quote again from Eberstadt, who is very much aware of the material improvements in the lives of the poor, the United States can be described as "a country inhabited by large numbers of prosperous paupers" since "crime, dependency, and family breakdown were far more acute" in the early 1990s "than they had been during the Great Depression, when general income levels, and general levels of schooling, were so much lower."