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Good news: Anti-poverty programs actually reduce poverty

The EITC does more to reduce poverty than any other cash assistance program, reducing the number of people in poverty by over 6 million (and 3 million kids).   Food stamps come in a close second, at 5 million.

In 1998, when I was Deputy Assistant Secretary for Tax Analysis at the听Treasury Department, I asked my staff expert on the Earned Income Tax Credit (EITC) how many people the EITC had lifted out of poverty. Her answer shocked me: technically, zero. Poverty statistics don鈥檛 account for the EITC or any other federal anti-poverty measure. Prior to today, the government could have given every poor household in the country $25,000 and the poverty measure wouldn鈥檛 have budged.

It鈥檚 indeed ironic that a measure originally created in 1963 to track progress in alleviating poverty ignored the effect of those programs on families鈥� economic well-being. In 1963, it might have sort of made sense since the big anti-poverty programs were yet to be enacted. In 2011, it doesn鈥檛. As poverty expert Rebecca Blank said in her听presidential address听for the Association of Public Policy and Management in 2008:

It is not too strong a statement to say that鈥μ�the poverty thresholds are听nonsensical numbers. They are based on data from 1955 and do not reflect any information related to current expenditures or needs. (Emphasis added.)

Now Becky is the top economist at the听Commerce Department听so it鈥檚 perhaps not surprising that today the Census Bureau (part of Commerce) announced a new supplemental poverty measure (SPM) that has better measures of both economic resources and living costs. A very nice听by Kathleen Short describes the new measure.

In addition to cash income, the new measure includes the EITC, supplemental nutrition assistance (food stamps), other nutrition assistance (school lunch program and WIC), and housing and energy subsidies. On the debt side are taxes (most notably, payroll taxes), work-related expenses including child care, medical out-of-pocket expenses, and child support payments.

The new poverty thresholds also attempt to measure living expenses more accurately. The original measure simply multiplied the cost of a subsistence food budget by 3 on the theory that, in 1955 (the year for which the original data were collected), food averaged about 1/3 of the typical household鈥檚 budget.听 The SPM is based on actual costs for food, clothing, shelter, and utilities. And there are geographic adjustments to account for the fact that it costs more to live in Manhattan than in Syracuse (for example) and more accurate adjustments for family size.

The overall estimate of the number of people in poverty actually increases as a result of all of these changes. While child poverty in 2010 declines from 16.8 million in the official measure to 13.6 million in the SPM, poverty rates among working age adults and the elderly increase by almost 6 million people. The poverty rate among seniors (15.9%) is actually slightly higher than among those aged 18 to 64 (15.2%) reflecting the fact that medical expenses increase dramatically in old age and older people usually don鈥檛 qualify for the largest cash assistance programs.听 Under the official measure, seniors have the lowest poverty rate at 9.0%.

The new measure shows that鈥攄rumroll please鈥攁nti-poverty programs actually reduce poverty.听 The EITC does more to reduce poverty than any other cash assistance program, reducing the number of people in poverty by over 6 million (and 3 million kids).听听 Food stamps come in a close second, at 5 million. The other subsidies are all under 3 million. Payroll taxes (FICA) and work expenses (primarily childcare) both add to the economic hardship of low-income people, each adding 4-5 million people to the poverty rolls. But the biggest hit to the economic well-being of the poor comes from unreimbursed medical expenses, which add a whopping 10 million people to the total. This suggests that health reform could have a very significant effect on the poverty rate鈥攂y expanding access to Medicaid and private health insurance for the poor and near poor and by closing the 鈥渄onut hole鈥� in Medicare鈥檚 prescription drug coverage.

Effect of Specific Adjustments to Income on Poverty Counts, 2010, in Millions
听	Age Group
听	All	Under 18	18-64	65+
EITC	-6.1	-3.1	-2.9	-0.1
SNAP (food stamps)	-5.2	-2.2	-2.5	-0.4
Housing subsidy	-2.8	-1.0	-1.3	-0.5
School lunch	-1.2	-0.6	-0.4	0.0
WIC	-0.3	-0.1	-0.2	0.0
LIHEAP (energy assistance)	-0.3	-0.1	-0.2	0.0
Child support paid	0.3	0.1	0.4	0.0
Federal income tax before credits	1.2	0.2	1.0	0.1
FICA	4.3	1.4	2.9	0.1
Work expense	4.6	1.5	2.9	0.1
Medical out-of-pocket expenses	10.1	2.1	5.4	2.9
听	听	听	听	听
Number of People in Poverty	49.1	13.6	29.2	6.2

Source:听and my calculations

Of course, this is still the alternative poverty measure. The official measure will continue to be used to determine program eligibility. But, just as CBO鈥檚 鈥渁lternative fiscal scenario鈥澨齣s the most accurate measure of our deteriorating fiscal health, the alternative poverty measure provides a much clearer picture of poverty and the effect of programs aimed at mitigating it.

By any measure, poverty in the US is too high, but it鈥檚 nice to finally have a semi-official measure that recognizes that anti-poverty programs raise the living standards of poor people.

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This was originally posted on blog.