No Such Thing as a Free Lunch: Principles of Economics (Part 83)

“Used to the conditions of a capitalistic environment, the average American takes it for granted that every year business makes something new and better accessible to him. Looking backward upon the years of his own life, he realizes that many implements that were totally unknown in the days of his youth and many others which at that time could be enjoyed only by a small minority are now standard equipment of almost every household. He is fully confident that this trend will prevail also in the future. He simply calls it the American way of life and does not give serious thought to the question of what made this continuous improvement in the supply of material goods possible.”

― Ludwig Von Mises, Economic Freedom and Interventionism: An Anthology of Articles and Essays

Income Distribution and Poverty (Part C)

by

Charles Lamson

Poverty

Most of the government's concern with income distribution and redistribution has focused on poverty. Poverty is a very complicated word to define. In simplest terms, it means the condition of people who have very low incomes. The dictionary defines the term simply as "lack of money or material possessions," but how low does your income have to be before you are classified as poor?

The Problem of Definition Philosophers and social policy makers have long debated the meaning of "poverty." One school of thought argues that poverty should be measured by determining how much it costs to buy the "basic necessities of life." For many years, the Bureau of Labor Statistics published "family budget" data designed to track the cost of specific "bundles" of food, clothing, and shelter that were supposed to represent the minimum standard of living.

Critics argue that defining bundles of necessities is a hopeless task. While it might be possible to define a minimally adequate diet, what is a "minimum" housing unit? Is a car a necessity? What about medical care? In reality, low-income families end up using what income they have in an enormous variety of ways.

Some say poverty is culturally defined and is therefore a relative concept, not an absolute one. Poverty in Bangladesh is very different from poverty in the United States. Even within the United States, urban poverty is very different from rural poverty. If poverty is a relative concept, the definition of it might change significantly as a society accumulates wealth and achieves higher living standards.

Although it is difficult to define precisely, the word poverty is one that we all understand intuitively to some degree. It conveys images of run-down, overcrowded, rat-infested housing, homeless people, untreated illness, and so forth. It is also a word that we have been forced to define formally for purposes of keeping statistics and administering public programs.

The Official Poverty Line In the early 1960s, the U.S. government established an official poverty line. Because poor families tend to spend about one-third of their incomes on food, the official poverty line has been set at a figure that is simply three times the cost of the Department of Agriculture's minimum food budget.

Each year the Department of Agriculture sets out a nutritionally sound minimum food bundle. For example, a week's food for a woman between 20 and 34 years old includes 4 eggs; one and a half pounds of meat, fish, or poultry; 3 pounds of potatoes; 12 ounces of dark green or yellow vegetables; 3 pounds of other vegetables; and 8 ounces of fat or oil. In March 2021, the department estimated that such a bundle for a family of four with children 6-8 and 9-11 years old would cost $156.20 per week [(USDA Food Plans: Cost of Food Reports (monthly reports)]. Multiply that times 52 weeks for a total of $8,122.40 per year; triple that, and you have a poverty line for a family of four set at $24,367.20.

Poverty in the United States since 1960 In 1960 Michael Harrington published The Other America: Poverty in the United States, a book that woke the American people to the problem of poverty and stimulated the government to declare "war on poverty" in 1964. In 1960, official figures had put the number of the poor in the United States at just under 40 million, or 22 percent of the total population. In his book, Harrington argued that the number had reached over 50 million.

By the late 1960s, the number living below the official poverty line had declined to about 25 million, where it stayed for over a decade. Between 1978 and 1983, the number of poor jumped nearly 45 percent, from 24.5 million to 35.3 million, the highest number since 1964. The figure stood at 32.9 million in 2001. As a percentage of the total population, the poor accounted for between 11 percent and 12.6 percent of the population throughout the 1970s. That figure increased sharply to 15.2 per cent between 1979 and 1983. From 1983 to 1989, the rate dropped to 12.8 percent, rising back to 14.5 percent in 1995. The rate fell to 11.7 in 2001 (Case & Fair, 2004). The official poverty rate in 2019 was 10.5 percent, down 1.3 percentage points from 11.8 percent in 2018 (census.gov).

While the official 2019 figures put the poverty rate at 10.5% of the population, they do not show that some groups in society experience more poverty than others. One of the problems with the official count is that it considers only money income as defined by the census and is therefore somewhat inflated. Many federal programs designed to help people out of poverty include noncash benefits (sometimes called in-kind benefits) such as food stamps, public housing, and so forth. 

*CASE & FAIR, 2004, PRINCIPLES OF ECONOMICS, PP. 338-341*

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