The same point applies to broader discussions about poverty, which can be measured in two very different ways: 1) relative poverty or 2) absolute poverty. Relative measures of poverty, like the one cited by the Times, can be misleading if the presenter does not answer the question: “Poor compared to whom?” Absolute measures, like the number of people with income below a certain level, are more straightforward and enlightening.
Unmeasured income and benefits
To accurately compare living standards across or within nations, it is necessary to account for all major aspects of material welfare. None of the data above does this.
The OECD data is particularly flawed, because it is based on “income,” which excludes a host of non-cash government benefits and private charity that are abundant in the United States. Examples include but are not limited to:
- healthcare provided by Medicaid, free clinics, and the Children’s Health Insurance Program (CHIP);
- nourishment provided by food stamps, school lunches, school breakfasts, soup kitchens, food pantries, and the Women’s, Infants’ & Children’s program (WIC); and
- housing and amenities provided through rent subsidies, utility assistance, and homeless shelters.
The World Bank data include those items but are still incomplete, because they are based on government “household surveys,” and U.S. low-income households greatly underreport both their income and non-cash benefits in such surveys. As documented in a 2015 paper in the Journal of Economic Perspectives titled “Household Surveys in Crisis”:
- “In recent years, more than half of welfare dollars and nearly half of food stamp dollars have been missed in several major” government surveys;
- There has been “a sharp rise” in underreporting of government benefits received by low-income households in the United States; and
- This “understatement of incomes” masks “the poverty-reducing effects of government programs” and leads to “an overstatement of poverty and inequality.”
Likewise, the U.S. Bureau of Economic Analysis explains that such surveys “have issues with recalling income and expenditures and are subject to deliberate underreporting of certain items.” The U.S. Census Bureau says much the same, writing that “for many different reasons there is a tendency in household surveys for respondents to underreport their income.”
There is also a wider lesson here. When politicians and the media talk about income inequality, they often use statistics that fail to account for large amounts of income and benefits received by low- and middle-income households. This greatly overstates inequality and feeds deceptive narratives.
Relevant, reliable data
The World Bank’s “preferred” indicator of material well-being is “consumption“ of goods and services. This is due to “practical reasons of reliability and because consumption is thought to better capture long-run welfare levels than current income.” Likewise, a 2003 paper in the Journal of Human Resources explains that:
- “research on poor households in the U.S. suggests that consumption is better reported than income” and is “a more direct measure of material well-being”; and
- “consumption standards were behind the original setting of the poverty line,” but governments now use income because of its “ease of reporting.”
The World Bank publishes a comprehensive dataset on consumption that is not dependent on the accuracy of household surveys and includes all goods and services, but it only provides the average consumption per person in each nation – not the poorest people in each nation.
However, the U.S. Bureau of Economic Analysis published a study that provides exactly that for 2010. Combined with World Bank data for the same year, these datasets show that the poorest 20 percent of U.S. households have higher average consumption per person than the averages for all people in most nations of the OECD and Europe:
The high consumption of America’s “poor” doesn’t mean they live better than average people in the nations they outpace, like Spain, Denmark, Japan, Greece, and New Zealand. This is because people’s quality of life also depends on their communities and personal choices, like the local politicians they elect, the violent crimes they commit, and the spending decisions they make.