Poverty Lecture 4

Schiller, Chapter 3:

Counting the Poor

Broad Outline, Chapter 3

• Poverty: Drawing A Line--where should the line separating the poor from the nonpoor be drawn?– The Absolute Approach (p. 37)– The Relative Approach (p. 39)

• The Fuchs Point• Whose Standard?

Broad Outline, Chapter 3

• The Official Poverty Line (p. 42)– The Concept of Minimum Needs (p. 42)– Monetary Measures--translating generic

standards into dollars (p. 43)– Hardship Indexes (p. 44)

Broad Outline, Chapter 3

• Poverty Thresholds (p. 45)– The CEA Line (p. 45)

• Family Size

– The SSA Index (p. 46)• equivalence scales: a means to allow for

comparisons of the poverty status of families of different sizes and compositions

• http://www.irp.wisc.edu/research/method/oakvos.htm

Broad Outline, Chapter 3

– The Official Poverty Index (p. 47)• Inflation Adjustments (p. 47)• Declining Relative Adjustments (p. 48)

– What standard of living is implied by the official poverty budgets (lines)?

• Hard Choices (p. 49)– Schiller’s answer to the above question: “Every day a poor

person or family must choose between an adequate diet of the most economic sort and some other necessity because there is never enough money to have both.”

• Cultural Context (p. 50)– “The Official Poverty Line express only a common and

contemporary view of what is too little.”

.

Enrichment: Calculating World Bank’s $1 a day Poverty Measure

1. Stipulate the level of a poverty line, defined in terms of the purchasing power that some specific country’s currency had in this country in some specific base year

--$1.08 per person per day in the US in 1993

2. Calculate, for the chosen year, the equivalent amounts in the currencies of other countries, using the official purchasing power parity conversion factors (PPPs) of the base year.

3. Convert any country’s base-year amount into its equivalents for other years on the basis of that country’s consumer price index (CPI).

4. These three steps yield national-currency poverty lines for any country-year combination that are then used to judge whether any given household in any particular country and year is poor or not.

Critique of World Bank’s $1 a day Poverty Measure

– benchmark chosen by the Bank is too low: According to the USDA, the least cost of home cooking, meeting a minimal calorie constraint and a set of other minimal nutrient constraints, was around $3 per person per day in the US in 1993, not $1.08.

– conversion from US-Dollar benchmark into foreign-currency equivalents should use exchange rates, not PPPs. PPPs overstate the purchasing power of $1.08 per day.

– the poverty estimates it produces depend not only on the empirical data but also, and very substantially, on the chosen PPP base year.

Conclusion regarding the World Bank’s $1 a day Poverty Measure

• “The national poverty lines the World Bank applies to poor countries are too low to be credible. . . .The estimates are so poorly derived as to be essentially worthless, even as very rough indicators to the global poverty problem and its evolution over time.”

• Source: Thomas W. Pogge, The First UN Millennium Development Goal, http://www.globalpolicy.org/socecon/develop/2003/pogge.pdf

Broad Outline, Chapter 3

• The Number of Poor People (p. 51)– The Official Poverty Count – The Poverty Rate--can you calculate it?– How Poor?--The Poverty Gap (p. 52)

Broad Outline, Chapter 3

• Measurement Problems (p. 53)– Too Low a Standard?

• poverty line for a family of 4/median income– 1963: 50 percent– 2001: 34 percent

• Food multiplier should be 5, not 3.

– Too High a Standard (p. 54)• In-Kind Income• Is a dollar of in-kind transfers equal to a $1

Broad Outline, Chapter 3

– Underreporting (p.56)• How should we value the material possessions of the

poor?

– Income Mobility (p. 57)• Is the accounting period too long or too short?

– The Uncounted Poor (p. 58)– Latent Poverty (p. 59)

• The number of poor removed from poverty by any one transfer program is dependent on the order in which transfers from various sources are added to income.

– The Call for Revision• NAS measure changed the composition of the poor

Questions from Chapter 3 in Schiller

1. What is the practical, policy importance of Schiller’s statement on p. 41, “In reality, one’s choice of a relative standard is likely to be influenced by the absolute standard of living implied, just as the choice of an absolute standard is likely to be affected by the degree of inequality and the general standards of living we observe”?

Questions from Chapter 3 in Schiller

2. In what way, if at all is the Official Poverty Line a relative poverty line?

3. What standard of living is implied by the official poverty budgets (lines)?

4. Could we eliminate poverty by transferring to each poor family an amount equal to it’s poverty gap? Explain

5. The NAS revised measure of poverty includes in-kind transfers and allows for child care expenses. How would these changes affect the composition of the poor?

Sen’s Capability Deprivation

• “What the capability perspective does. . . . is to enhance the understanding of the nature and causes of poverty and deprivation by shifting primary attention away from the means [income] . . . . to ends and . . . . And to the freedom’s to be able to satisfy these ends.” (p. 90) – Why is measuring “lowness of income” inadequate as a

measure of poverty?

– How would Sen respond to the claims of some that by world standards, no Americans are poor?

– What are the implications of Sen’s analysis for the formulation of policies to aid the poor?

Bane and EllwoodConclusions of “Slipping Into and Out of Poverty”

1. Most of those who ever become poor will have a short stay in poverty.

2. The majority of those who are poor at a given time will have very long spells of poverty.

3. Most people use aid programs briefly.

4. The bulk of aid goes to a small group that has very long stays in poverty.

5. Changes in family structure and life cycle events explain nearly one-half of spell beginnings.

6. A fall in the head’s earnings explain a small minority of beginnings.

7. Increase earnings of all household members is the primary route out of poverty.

8. The poverty population is extremely heterogeneous.