Let's face it: lots of things in society are outdated and the poverty rate is no exception. 51 years ago, Lyndon Johnson and his administration declared a "war on poverty." The absolute poverty line was set up to be the absolute standard of what households need to meet their basic needs. Theoretically, it sounds like a good, logical decision.
Here's why it's not:
The official poverty line came about more due to convenience rather than meticulous and thorough analysis. Economist Mollie Orshansky was working for the Social Security Administration when she developed the current basis for the the poverty rate in 1963. Orshansky decided that the poverty rate would be set at three times the cost of a basic diet because most families spent a third of its income on food and called it the "Orshansky Poverty Threshold." Her calculations came at an opportune time and the Johnson administration adopted the threshold a couple years later.
The family that the poverty line was designed around is quickly disappearing. A writer for The Atlantic found an excerpt from a report by the Social Security Administration described the ideal family living under the poverty line should be able to cut back on kitchen spendings, so long as "the housewife will be a careful shopper, a skillful cook, and a good manager who will prepare all the family's meals at home."
Despite how dated the doting housewife stereotype may be, this report is not from 1960s as you may believe, but actually from 1992. Furthermore, this type of family is no longer prominent. The poverty rate does not take into account the changing family structure or the nature of the population. Single-person households are becoming more popular, as are single-parent families. The housewife-chef-maid trope is being replaced by a hard-working, employed individual who may or may not be female. It also doesn't take into account the ages of these households. The majority of these single-person households consist of either young or elderly persons, which have extremely different spending habits.
The threshold has hardly changed since it was adopted in 1965. It mostly has been adjusted for inflation, rather than spending habits.Whereas the average family used to spend half of the family budget in 1900 on food and clothing, they now only spend less than a fifth of the budget on those. Families now spend more on healthcare and services than food and clothes. But the poverty line doesn't reflect these consumer statistics.
The poverty rate is based on a pre-tax income and doesn't take into account non-cash benefits, such as Social Security payments. So things like housing subsidies and food stamps, which families spend like cash are ignored, even though they greatly benefit the poor.
These are only some of the problems associated with the outdated poverty line. However, it just shows how hard it is to define and measure such an abstract and broad concept as "poverty." The holes in the equation are so prominent that the Census Bureau has begun publishing a "supplemental poverty measure" or SMP, which is essentially the poverty rate but accounts for additional expenses such as the geographical cost-of-living and medical care. It also considers government benefits, such as food stamps. The number isn't that different than the official poverty rate -- it usually ends up being less than a percentage point higher.
When a group of researchers from Columbia University applied these SMP standards to history, they found that the United States has actually done better than the original rate lets on when it comes to fighting poverty. The group also found that without these government benefits, the poverty line would have risen from 25 percent to 31 percent from 1967 to 2012 rather than falling from 19 percent to 16 percent.
Sure, 16 percent still isn't good. In fact, it's actually pretty bad. There's no doubt about it - the poverty rate needs to be reevaluated, but these numbers show the progress we've made since 1965 when President Johnson began this initiative. However, it also shows that this war is far away from being won.
Although the U.S. economy has a few problems, it is still miles ahead of other countries'. Here's five reasons why the United States economy is beating the rest of the world:
5 reasons the US economy is beating the rest of the world
The family that the poverty line was designed around is quickly disappearing
5. AN AGGRESSIVE CENTRAL BANK
"The Federal Reserve acted sooner and more aggressively than other central banks in keeping rates low," says Bernard Baumohl, chief global economist at the Economic Outlook Group.
In December 2008, the Fed slashed short-term interest rates to near zero and has kept them there. Ultra-low loan rates have made it easier for individuals and businesses to borrow and spend. The Fed also launched three bond-buying programs meant to reduce long-term rates.
By contrast, the European Central Bank has been slower to respond to signs of economic distress among the 18 nations that share the euro currency. The ECB actually raised rates in 2011 - the same year the eurozone sank back into recession.
It's worth keeping in mind that the Fed has two mandates: To keep prices stable and to maximize employment. The ECB has just one mandate: To guard against high inflation. The Fed was led during and after the Great Recession by Ben Bernanke, a student of the Great Depression who was determined to avoid a repeat of the 1930s' economic collapse.
Janet Yellen, who succeeded Bernanke as Fed chair this year, has continued his emphasis on nursing the U.S. economy back to health after the recession of 2007-2009 with the help of historically low rates.
(AP Photo/J. Scott Applewhite)
4. STRONGER BANKS
The United States moved faster than Europe to restore its banks' health after the financial crisis of 2008-2009. The U.S. government bailed out the financial system and subjected big banks to stress tests in 2009 to reveal their financial strength. By showing the banks to be surprisingly healthy, the stress tests helped restore confidence in the U.S. financial system.
Banks gradually started lending again. European banks are only now undergoing stress tests, and the results won't be out until fall. In the meantime, Europe's banks lack confidence. They fear that other banks are holding too many bad loans and that Europe is vulnerable to another crisis. So they aren't lending much.
In the United States, overall bank lending is up nearly 4 percent in the past year. Lending to business has jumped 10 percent.
In the Eurozone, lending has dropped 3.7 percent overall, according to figures from the Institute of International Finance. Lending to business is off 2.5 percent. (The U.S. figures are for the year ending in mid-June; the European figures are from May.)
(AP Photo/Steven Senne)
3. A MORE FLEXIBLE ECONOMY
Economists say Japan and Europe need to undertake reforms to make their economies more flexible - more, in other words, like America's.
Europe needs to lift wage restrictions that prevent employers from cutting pay (rather than eliminating jobs) when times are bad. It could also rethink welfare and retirement programs that discourage people from working and dismantle policies that protect favored businesses and block innovative newcomers, the Organization for Economic Cooperation and Development has argued.
Prime Minister Shinzo Abe has proposed reforms meant to make the Japanese economy more competitive. He wants to expand child care so more women can work, replace small inefficient farms with more large-scale commercial farms and allow more foreign migrant workers to fill labor shortages in areas such as nursing and construction.
Yet his proposals face fierce opposition.
"Europe and Japan remain less well-positioned for durable long-term growth, as they have only recently begun to tackle their deep-rooted structural problems, and a lot remains to be done," says Eswar Prasad, a professor of trade policy at Cornell University.
China is struggling to manage a transition from an economy based on exports and often wasteful investment in real estate and factories to a sturdier but likely slower-growing economy based on more consumer spending.
(AP Photo/J Pat Carter)
2. LESS BUDGET-CUTTING
Weighed down by debt, many European countries took an ax to swelling budget deficits. They slashed pension benefits, raised taxes and cut civil servants' wages. The cuts devastated several European economies. They led to 27 percent unemployment in Greece, 14 percent in Portugal and 25 percent in Spain. The United States has done some budget cutting, too, and raised taxes. But U.S. austerity hasn't been anywhere near as harsh.
(AP Photo/Pablo Martinez Monsivais)
1. A ROARING STOCK MARKET
The Fed's easy-money policies ignited a world-beating U.S. stock market rally. Over the past five years, U.S. stocks have easily outpaced shares in Europe, Japan and Hong Kong. That was one of Bernanke's goals in lowering rates. He figured that miserly fixed-income rates would nudge investors into stocks in search of higher returns. Higher stock prices would then make Americans feel more confident and more willing to spend - the so-called wealth effect.