Vol. 73/No. 38      October 5, 2009

The report, titled “Income, Poverty, and Health Insurance Coverage in the United States: 2008,” is based on data collected in spring 2008, a few months after the official start of the recession in December 2007—in reality the opening stages of a worldwide economic depression.

According to the report, median household income declined by 3.6 percent between 2007 and 2008, to about $50,300. For Hispanics it dropped by 5.6 percent to $37,900, reflecting a sharp decline in construction and other sectors with concentrations of immigrant labor. Median household income for Blacks remains the lowest in the country, falling to $34,200.

Those living below the official poverty line—set at about $22,000 for a household of four in 2008—rose from 12.5 percent in 2007 to 13.2 percent. The rate for Blacks and Hispanics is nearly double the national rate.

Between March 2008, when the data was collected, and August 2009, the most recent available statistics, bosses have cut more than 6.4 million jobs, increasing the downward pressure on wages. During this period the combined percentage of those forced into part-time work and the total unemployed—including those the government doesn’t count because they haven’t looked for work in the last month—rose from 9.1 percent to 16.8 percent.

Given the sharp rise in joblessness alone, the income and living standard of working people has already fallen much more since the period covered in the report.

The poverty threshold set by the Labor Department is an arbitrary figure adjusted annually according to the official inflation figures as measured in the Consumer Price Index. The CPI itself is calculated to mask the real impact of rising prices on workers standard of living and to justify lower Social Security payments.

While the rise in the poverty rate gives some indication of what is happening to the working class under the initial impact of the economic crisis—limited and distorted as that figure is—a closer look at how the government defines poverty is perhaps more revealing. Particularly when you consider the government uses this definition as a means test to restrict access to various social benefits.

The poverty threshold was first set by the Social Security Administration in the mid-1960s. It was based on the “economy food plan,” the cheapest of four such plans devised by the Department of Agriculture. It was considered to be the minimum necessary for sustenance and “designed for temporary or emergency use when funds are low.”

Based on other survey data that showed the average family of three spends one-third of its income on food, the poverty threshold was set at three times the “economy food plan” budget. Since 1969 the poverty line has been indexed to the official CPI. This has resulted in a lower-income definition of poverty than would result if some version of the original method was used, as interagency committees began recommending in 1973.

Among the methods used to keep the CPI low are two changes approved by the Clinton administration in 1997 that have kept down the official inflation figure.

The first is “consumer substitution,” which takes into account “the fact that consumers shift their purchases toward products that have fallen in relative price.” The Bureau of Labor statistics (BLS) has been using this calculation since 1999. In one commonly cited example, hamburger meat is substituted for steak when the price of steak rises too high. The BLS denies that it applies this specific substitution.

The second is use of the “hedonic quality adjustment.” This factor, in use since 1998, attempts to account for a supposed increased “pleasure” derived from more technologically advanced versions of similar products. In one example cited by the BLS, the price of newer televisions is artificially lowered to reflect what a comparable older television model would cost if it had a larger, better screen like that of newer models.

As a result, the CPI increased by only 3.2 percent in late 2007 over the previous year. Without the substitution or hedonics factors it would have increased by 7 percent.

The Labor Department continues to devise schemes to push the CPI down. For example, the BLS intends to refigure the CPI in late September based on an artificial drop in car prices by $4,500 as a result of the government’s “Cash for Clunkers” subsidy to 800,000 auto buyers.

In 1992 Congress established a panel of the National Academy of Sciences (NAS) that made a number of recommendations on how to set the poverty line. The NAS said its proposed changes would more accurately reflect the condition of “poverty” as it was originally defined. But these adjustments would have raised the poverty threshold, and thereby the poverty rate. Not surprisingly, none of the NAS recommendations have been implemented.

Last year the NAS published alternative figures for 1999-2007, taking into account its recommendations.

Two adjustments made by the NAS in particular are worth noting. One is use of the Consumer Expenditure Survey (CES) in place of the official CPI. The CES collects data on what households actually spend, reflecting the rising relative costs of child care, transportation, communications, rent, etc. Some of the CES data is selectively used as a basis for the CPI.

The second takes into account an estimate of the rising out-of-pocket medical expenses for low-income households.

With these two adjustments the poverty rate, instead of dropping from 12.8 to 12.5 percent between 2004 and 2007, for example, would have increased from 14.1 percent to 16 percent—and this is well before the current crisis officially began.  
 
 
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