Economists Generate Confusion About Poverty: Old and Young

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Thursday, 14 March 2013 04:12

Given the disastrous failure of the economics profession to warn of the housing bubble, it is amazing that the country has not rounded up the lot of us (I'll go too) and chased us out of the country. Unfortunately, we still have a profession continuing to use its authority to spread confusion rather than enlightenment. 

Thomas Edsall and his readers are the victims today. In an interesting discussion of trends in poverty, Edsall includes a reference to work by Bruce Meyer and James Sullivan that shows poverty among the elderly has fallen to just 3.2 percent using a consumption based measure of poverty. There are many issues that can be raised about this analysis, as my colleague Shawn Fremstad has pointed out.

However perhaps the most fundamental point for purposes of Edsall's analysis, which explicitly compares poverty rates among the young and the old, is the fact that Meyer and Sullivan:

"report results using an adjusted CPIU-RS that subtracts 0.8 percentage points from the growth in the CPI-U-RS index each year (p 17)."

Okay, if the meaning of this line is not immediately clear, Meyer and Sullivan are assuming that actual rate of annual inflation is 0.8 percentage points less than official data show. This claim is debatable, but its implications are not. If we have been overstating inflation by 0.8 percentage point each year, then we have been understating real income growth by 0.8 percentage points.

This claim lies at the center of Meyer and Sullivan's claim that poverty has fallen sharply. Their adjustment would mean that income has risen by roughly 8 percent more over the last decade than official data show and 16 percent more over the last two decades. (I'm ignoring compounding to keep this simple.) This additional rise in income (or consumption) gets a lot of people over the poverty line.

The Meyer and Sullivan assumption has another important implication which they do not discuss in this paper and apparently did not discuss in their conversations with Mr. Edsall. If income is growing more rapidly than the official data indicate then people were much poorer in the recent past than official data indicate.

The Census Bureau's data show that median household income, measured in 2011 dollars, was 9.4 percent lower thirty years ago in 1981 compared to 2011. It was $46,024 in 1981 compared to $50,054 in 2011.

However if we make the Meyer and Sullivan adjustment then real income has been rising by 0.8 percentage points more rapidly each year than these data assume. This means that Meyer and Sullivan would say that the median income for a household in 1981, measured in 2011 dollars, would be $35,637, 28.8 percent less than the 2011 level. Meyer and Sullivan's adjustment implies that today's elderly were considerably poorer in their working lifetime than the official data show.

This goes in the other direction as well. If we apply Meyer and Sullivan's adjustment to projected income growth then income will be rising much more rapidly. If the Meyer and Sullivan adjustment is applied to the projection of average annual wages from the Social Security trustees then the average real (inflation adjusted) wage in 20 years will be more than 50 percent higher than it is today. If we go out to 30 years, then the Meyer and Sullivan adjustment means that average wages will be more than 80 percent higher than it is today.

This pattern of income and wage growth would likely be relevant to anyone trying to make an assessment of the relative well-being of the young and old. If today's old were relatively poor through most of their lives then we might think it makes less sense to take away benefits that sustain their current standard of living. On the other hand, if today's young can anticipate rapid wage growth in the future we might be less concerned about providing them additional support. The Meyer and Sullivan adjustment also helps to highlight that the main problem is distribution within generations, since there is no guarantee that most of today's young will share in the rapid rate wage growth that is projected.

Anyhow, the implications of the Meyer and Sullivan adjustment are very important for the issues that Edsall addressed in his blogpost. It would have been helpful if they had made these implications clear in their communications with Edsall. Since many economists share Meyer and Sullivan's view that the official data overstate the true rate of inflation, it would be helpful if they would draw out the implications of this view for public policy issues. Of course it would also have been useful if economists had warned of the dangers of an $8 trillion housing bubble.