Intro. [Recording date: April 20th, 2021.]
Russ Roberts: Today is April 20th, 2021, and my guest is economist Bruce Meyer with the McCormick Foundation, Professor of Public Policy at the Harris School at the University of Chicago. He was last here on EconTalk, talking about the middle-class poverty and inequality in October 2011.
I want to thank Plantronics for providing today’s guest with a Blackwire 5220 headset.
Bruce, welcome back to EconTalk.
Bruce Meyer: Pleasure to be here.
Russ Roberts: Our subject for today is poverty and, in particular, we’re going to start off talking about what is sometimes called extreme poverty, drawing on a recent paper you’ve written with Derek Wu, Victoria Mooers, and Carla Medalia in the Journal of Labor Economics. The title of that paper is “The Use and Misuse of Income Data and Extreme Poverty in the United States.” Extreme poverty is usually defined as what?
Bruce Meyer: So, the most common definition of extreme poverty is those who are living on less than $2 per person, per day. Others have used other definitions–less than $4 a day. And, others have accounted for taxes and in-kind benefits. The most standard definition really doesn’t.
Russ Roberts: All right, so we’re going to talk later about a distinction between what people earn–in income, say–in earnings, in income, in kind–that is, food rather than dollars.
But, I want to start about going back to a 2011 and then a 2013 study by a sociologist Kathryn Edin and Luke Shaefer, that got a lot of attention. And I want to read a couple of quotes. This came on my radar screen, I started hearing about how the United States, actually has something of a third-world country aspect to it. And this was part of a general argument that ‘Oh, sure: The overall economy has done well. But, the people at the bottom aren’t getting any of that. Only the rich are benefiting.’ There’s a whole bunch of different stories and so-called stylized facts. But, I want to share a couple of quotes, the kind of impact that these studies made.
The Edin and Shaefer study was the $2-a-day threshold you mentioned. There’s another study I’m going to mention that mentions the $4-a-day threshold that you also mention, because that corrects for standard of living–excuse me, cost-of-living differences maybe between the United States and other countries and it’s an attempt to make it comparable.
So, here’s the quotes. The first one’s from Slate Magazine Online; Jordan Weissmann wrote the article.
In a wildly influential 2013 study, two sociologists upended that assumption [about extreme poverty–Russ]: Kathryn Edin and Luke Shaefer showed that by 2011, there were 1.6 million U.S. households with children that for at least part of the year, had cash incomes that put them below the $2 per person mark. The number had risen from 636,000 in 1996–a 152.9% increase.
Edin and Shaefer later turned their paper into an acclaimed book, $2 a Day: Living on Almost Nothing in America.
Then, I’ll just add, that book was reviewed the New York Times by William Julius Wilson, a very respected sociologist, who called it ‘essential and a call to action.’
Then, Angus Deaton, Nobel Prize winner in economics, been a guest on the program, said,
According to the World Bank, 769 million people lived on less than $1.90 a day in 2013. Of these, 3.2 million live in the United States.
So, 3.2 million Americans are living on less than $2 a day. And then he goes on to write,
The Oxford economist, Robert Allen, recently estimated needs-based absolute poverty lines
that use the $4 a day measure. And then he wrote–Deaton writes–
When we compare absolute poverty in the United States with the absolute poverty in India or other poor countries, we should be using $4 to the United States, $1.90 in India.
Once we do this, there are 5.3 million Americans who are absolutely poor by global standards.
Are these numbers–when I heard these numbers, I was highly skeptical. But, I thought, ‘Well, it’s in the data.’ Should we believe them?
Bruce Meyer: No, you shouldn’t. And it’s hard to know where to begin with just how misleading those numbers are.
The problem is, if you look at the very tail of the distribution, there’s a good chance you’re looking at outliers, often errors. And that’s exactly what’s going on here.
So, in the end, what we argue is that you really shouldn’t be looking that low in the distribution because you’re very likely to be looking at errors.
We take the survey data that these authors, in fact, were using, and we link it to tax and government program data at the individual level. And we then look to see what income is recorded in tax records and government payment records from social insurance and welfare programs. And we see that a tiny fraction of these individuals can’t be ruled out as having much higher income–only a small fraction.
So, we start out reproducing the kinds of numbers that Edin and Shaefer and Angus Deaton reported that you described, Russ. And, you get numbers, something like 3% of people are below $2 a day when you just take the numbers at face value from the survey.
But, when you incorporate administrative data and you use the survey data more appropriately, you can see that the vast majority of these individuals really have much higher incomes. And, that’s confirmed by looking at other indicators of well-being like the quality of housing those individuals are living in, the appliance ownership, the difficulty paying bills. You see that many of the people that were previously classified as below $2 or below $4 a day, in fact, have characteristics in terms of their housing and ability to pay their bills that make them look more like middle-class.
Russ Roberts: So, let’s first get a feel for these magnitudes–because it’s not like, ‘Well, yeah the number is actually a little smaller.’ It’s actually a lot smaller.
So, I noticed in the first article that I quoted, the author is very careful to say that cash incomes put these people below the $2 per person mark. Now, it could be that those cash incomes are not measured accurately. But, your first point is simply that cash income isn’t the only thing that determines whether people live poorly. You care about what their consumption level is and that can be augmented by government welfare programs such as food stamps.
I’m going to push back on that claim, but for now let’s stick with that claim–that we should include food stamps and health care and other in-kind transfers from the government. When we just do that–because there’s also people lie about how much income they have or they misremember. But, when we just add in the in-kind transfers–food stamps and health care and other types of benefits–how much does that affect the measure of extreme poverty that we start with?
So, we started with–you said 3%? Three percent of the American people? That’s a very large number. That says that roughly 10 million Americans are living in extreme poverty, less than $2 a day. How much does that change when you just add in the food stamps and the other in-kind benefits?
Bruce Meyer: So, it goes down by more than half once you account for in-kind benefits. We only account for SNAP [Supplemental Nutrition Assistance Program] and housing benefits; we don’t account for health insurance. If you accounted for Medicaid and Medicare, that would reduce the number quite a bit. But, we don’t do that in our analysis.
It turns out that whatever you account for first tends to matter more. So, you could account for in-kind benefits like food stamps and housing, which in truth are what most–those two together constitute most of what low-income people spend their money on. So, it makes a lot of sense to account for those two if they’re provided by the government.
But, if you instead just corrected money income first, using the administrative data, you still would cut the number by more than half, just bringing in the administrative data on cash income first.
Russ Roberts: Explain what you mean by administrative data. So, these people in extreme poverty, there’s a survey of households that these numbers are based on. They go around they ask people how much money did you earn last year? How much money did you earn in the last x weeks or whatever it is? And people report a number. You’re saying you correct that number? If so, how do you do it?
Bruce Meyer: So, people don’t like to respond to surveys; and survey response rates have been going down dramatically over time. What is more problematic for what I’m doing is that when people respond to the survey, they’re often not willing to talk about things like their income. Income turns out to be more sensitive in surveys than people’s sex lives. They’re more willing to talk about sex than their income.
So, you have this problem that just using the survey reports will give you very misleading information. And, it’s not because people necessarily are trying to hide something, or they’re lying. I think of it as the interviewer and the respondent are both very busy and they just skip over things.
So, we find that even pensions–half of pensions aren’t reported in these main surveys that the census produces, that we’re talking about and we’re using here.
Russ Roberts: How do you know that? How do you know that half? Explain how you would correct for that.
Bruce Meyer: Sure. For the past 15 years, I’ve been working with census data where you link the individual census records that have been anonymized but a code has been attached to them, so that you can then link them to tax records and program records from SNAP and housing programs and Social Security and Medicaid and Medicare; veterans’ benefits, welfare, cash welfare benefits, as well. We link these tax records and government records to the individual survey records. And we can see that about half the people that receive a pension according to the tax records that appears on a tax form called the 1099-R–that you might or might not be familiar with: That form indicates who received a pension. And if you go and look and see in the survey record whether or not those individuals, in fact, reported pension income, you see about half of them didn’t.
Russ Roberts: So, that’s what you mean when you say you use the administrator data. These other source of information, you can correct the census data or other surveys that have come up with these measures of poverty. Is that right?
Bruce Meyer: Exactly. And we have to link these data sources in a protected environment, where all of the records have been anonymized, so we don’t see names or addresses. And, we’ve gone through training to make sure that we do not disclose anything that we see in the data that could potentially reveal an individual’s information.
Russ Roberts: So, you mentioned two things that make a difference. One is: people don’t report all their income, either out of privacy, forgetfulness, whatever. So, that’s one measure. The second thing is you do want to care if you’re trying to measure the standard of living that people have, whether they have access to things other than cash. So, food stamps, housing benefits, health benefits, you could argue. You didn’t include those but you could argue, but you didn’t include that.
Russ Roberts: Is there anything else big that we want to correct for that you have information about?
Bruce Meyer: Yes. A lot of people have substantial assets. You might think, ‘Well, the poor don’t have substantial assets.’ But, our point is that these individuals are being misclassified as poor. They’re not, in fact, poor.
So, we do exclude people with substantial assets that they could draw upon so that their standard of living would not be below the $2 or $4 a day level. In fact, the individuals that have high assets that we say are not poor, when you look at their housing and the appliances they own, they look like middle-class families. They don’t look at all like poor families. Their standard of living is way above that of the poverty line. It looks more like the standard of someone a little bit above average income.
Russ Roberts: But that’s somewhat subjective–right?–about what’s adequate or what assets are substantial. So, the question I would have is the following. Some of the other folks are claiming 10 million people are in extreme poverty.
Russ Roberts: What’s your best estimate of what that number actually is, based on the work you’ve done?
Bruce Meyer: Well, I, in the end, don’t think the number that we come up with is what you should rely on. In that, I think of it as probably an overestimate. So, we come up with a couple hundred thousand individuals; but we’re using incomplete administrative data. So, we aren’t accounting for people that are receiving unemployment insurance, or a TANF [Temporary Assistance for Needy Families], or–
Russ Roberts: Which is a welfare program–
Bruce Meyer: Which is a cash welfare program.
And, we are not accounting for people who are receiving Workers’ Compensation, which is a $40 billion program for those who are injured or ill on the job. And, we haven’t taken account, in this version of the paper, for people that have capital gains. Now, you may say, again, ‘The poor don’t have capital gains.’ But in a way, that’s our point. A lot of the people that have substantial assets, some of it often we don’t see in the survey, will then have capital gains on tax records. And, when we use those, we again, see that a large share of the people who–in another project, we see a large share of the people who looked like they were at the very bottom, in fact, aren’t.
Russ Roberts: So, you’ve confirmed my bias: that there is no one in America more or less living in extreme poverty.
However, you would also, I think, concede that you don’t have much data on homeless people. They tend not to answer surveys. They don’t get surveyed by the census reliably. So, it could be that the actual number is not, say, a few hundred thousand, but closer to a million maybe, and conceivably–right?–possibly; we don’t know. But, your number is an under-count in that sense, correct?
Bruce Meyer: Yes. We should have a separate conversation about the homeless at some point because this project caused us to do a whole line of research on the homeless. Who, as you point out, Russ, generally are not surveyed in the main census surveys. They are included in the decennial census. So, we take data from the 2010 census and we then are able to closely look at the homeless population in follow-up work to this paper that we’re discussing. Many people who heard us describe this research said, ‘Well, what about the homeless?’ And, the Edin and Shaefer work and the Deaton work starts from surveys that don’t generally include the homeless.
Russ Roberts: Correct.
Bruce Meyer: And, we started from those same surveys, but we wanted to do a more comprehensive examination of this issue. So, we then examined the homeless population, using other census surveys. The Decennial Census from 2010 and the survey called the American Community Survey [ACS] that surveys the homeless.
Russ Roberts: At least tries to, yeah.
Bruce Meyer: At least tries to. None of these surveys do a super-good job of serving the homeless: it’s a very hard population to track down. But, I think maybe we can talk about this work at another time.
But, I think we are able to get a pretty good picture of the situation of the homeless. And the best estimates of the homeless population in the United States at a point in time is a little over half a million. That’s from the HUD [Housing and Urban Development] Point-In-Time count. The Decennial Census gets a slightly lower number but in the same ballpark.
Russ Roberts: There’s a lot to say about that–like you say, let’s put that out for another time. You could argue that the presence of 500,000 or more even homeless people United States is an indictment of the American economy. I think it reflects other problems that are not based on the economy.
I want to put that to the side. I want to talk about just this work that we’re talking about now on the non-homeless–people who are typically surveyed annually. What kind of reaction did you get? You’re arguing that: it’s not 10 million; it’s actually closer to, say, 200,000; and it might be zero. That’s a big difference. Do people go, ‘You’re wrong, or did they say, ‘I guess we overestimated it?’ What was the reaction?
Bruce Meyer: There was a variety of different reactions. There were some people that said, ‘Well, that these surveys have to be right. They’re Census Bureau surveys; people have been using them for decades. And, to that we respond, ‘Well, people are misusing them. You shouldn’t trust the very bottom of the distribution, because it’s very easy for someone to not report one category of income that may be their main or their only source.’ And if they do that, they’re going to look like they’re almost living on nothing–which is essentially what Deaton and Edin and Shaefer have done here.
And, the other reaction we get is, ‘Well,’ leaving aside the homeless that we’ve already covered briefly, ‘if you’re paying rent, you have to have more than $2 a day. If you’re a single individual, you can’t rent a place for $60 a month. You can’t find a place for a family of three for $200 a month. So, it just doesn’t make any sense.’ And we’ve had that reaction, too.
Russ Roberts: Explain that. I don’t understand that. What doesn’t make any sense?
Bruce Meyer: That people could be getting by on less than $2 a day because, leaving aside the homeless, people are paying rent. And so, you can’t find a place to rent generally for less than $2 per person per day.
Russ Roberts: So, those people are agreeing with you?
Bruce Meyer: Yes, those people are agreeing.
Russ Roberts: Right.
So, that’s part of the problem I have with these claims is that, unlike many actual Third-World countries, so-called Third-World–we’ll call them poor: countries with large numbers of poor people–there aren’t large numbers of people in America living in shanties, hovels, huts. Open to the elements the way, tragically people do, in the poorest countries in the world.
And, most people in America have access to lots–not most people: an enormous proportion of Americans–have access to what you, as you point out, are usually but at least considered middle-class appliances. And it wasn’t that long ago that people, even in America, and in other developed countries, didn’t have access to running water: they might have an outdoor bathroom. They wouldn’t have air conditioning, for sure.
But those things have pretty much become ubiquitous, widespread in America–indoor plumbing, access to appliances, washers and dryers. And, even among people who are measured as poor, their consumption level is fairly robust.
So, this claim that actually there are people living in the same situation as the poorest people in the world right here in America, seem to me to be greatly exaggerated. And, you’re saying it was.
Bruce Meyer: So, you mentioned, it was greatly exaggerated by these studies. And, the studies were, in fact, very misleading in saying that there were these large numbers of people actually living on less than $2 a day or $4 a day.
And, you point out that what it means to be poor is very different in the United States today than it was in the United States 30 or 50 years ago or in less developed countries.
One of my favorite ways to show that is to look at various housing characteristics. And, how you don’t have to go very far back in time for the bottom 20% to have the housing characteristics that the middle 20% used to have.
So, for example, now, if you look at those with incomes in the bottom 20% of the distribution–which isn’t that different from the poor population, officially, which in 2010 was 15%: a lot of our data is from 2010 and it’s more recently–the poverty rate is around 11% or 12%.
But, if you look at this bottom 20%, 90% have air conditioning, either central or a room unit. And, the middle class, or the middle 20%, had 90% about seven years ago.
If you want to look at the size of people’s apartments or homes, you have to go back about 30 years to when the middle class–the middle 20%–had that size of an apartment in terms of number of rooms–
Russ Roberts: That the bottom 20% have in 2010–
Bruce Meyer: That the bottom 20% have now, in actually, 2019. So, that’s based on 2019 American Housing Survey Data.
Russ Roberts: Well, let’s talk for a minute about Consumption versus Income, because I think it’s really–some situations, some questions, one is appropriate, and others a different measure is appropriate.
If we wanted to say, ‘How badly do the bottom 20% live in the United States versus poorer countries?’ consumption would be the relevant measure. Issues like access to air conditioning–which is not unimportant. I just saw a chart that the number of people who die in heat waves has been falling steadily around the world, especially in the poorest countries. It’s a wonderful thing, that it’s gotten–fewer people are dying. So, air conditioning is not just a luxury: it can be a lifesaver in certain settings, for older people, especially.
But when you just look at–people will say, ‘A country as rich as the United States but have people this poor is an injustice.’
So, if you want to answer that question, you want to look at consumption.
But, a second question would be: ‘How is the economy doing? Is it creating opportunities for the least-skilled people to join the economy and to rise?’ That would be another thing you would care about–not just their level of poverty at a point in time, but how well they can do going forward.
And, in that situation, you might not want to look at food stamps as a measure of the performance of the economy. That’s a government program. You might want to just look at income–in which case, correcting for food stamps does give a cheerier picture, maybe, than we should have when we think about the overall effectiveness of the economy.
Bruce Meyer: Well, I’m a strong believer that we want to account for what the government has done to reduce poverty over time. And, the main things that the government has done are increased in-kind benefits like food stamps or SNAP [Supplemental Nutrition Assistance Program], housing benefits, health insurance through Medicaid, and also through tax credits–the Earned Income Tax Credit [EITC] and the Child Tax Credit.
The standard measures–the ones that Edin and Shaefer sometimes refer to and the official poverty measure–don’t account for any of those: things that we’ve done to reduce poverty over time by providing supplements to people’s cash income, through the Earned Income Tax Credit and Child Tax Credit–and supported their ability to pay for housing and food through SNAP and housing benefits. [More to come, 32:01]