Saturday, June 23, 2012

The Recession and Extreme Poverty

The 2008 recession has caused massive increases in extreme poverty.

For the purpose of our analysis here, an individual as "extremely poor" if he or she resides in a family unit whose income is less than half of the federal poverty threshold. To give you a sense of what that means, the awful extremity of extreme poverty: a single person under 65 must have made less than $5,851, and a family of four must have made less than $11,509. (In my opinion, it is likely that for the majority of the extreme poor, taxable income is zero.)

Recessions, in fact, appear to affect disproportionately the extreme poor, rather than those closer to the federal poverty threshold or the "near poor," those whose income is less than twice the federal poverty threshold.

Consider this: in 2010, 6.7 percent of Americans were among the extreme poor, as compared to 5.2 percent in 2007 and 4.5 percent in 2000. That's a 50 percent increase in the fraction of extremely poor individuals -- the greatest increase, by far, of any income group relative to the poverty threshold.The unambiguous statistical trend since 2000 has been large increases in the fraction of Americans at the extreme end of poverty, with little to no change in the fraction of Americans considered "near poor." The poor, in other words, are getting poorer -- or more precisely, poverty in America is becoming an increasingly extreme and unequal phenomenon.Observe, for example, that since 2008, the percentages of individuals making between one-half and three-fourths of the poverty threshold, and between three-fourths and up to the threshold, have seen the second and third largest growth since 2000 -- 27 percent and 21 percent respectively. The former has increased from 3 percent of Americans to 3.8 percent, the latter from 3.8 percent to 4.6 percent. Meanwhile, the fraction of near-poor individuals has remained roughly stable in the 18 percent range since 2000.

If you're an economist, you might notice that the statistical behavior of the two most extreme poor groups in the first graph -- less than half of the threshold, and between half and three-fourths of it -- is dramatically different from the other income brackets. They appear highly sensitive to recession, rising as sharply as a fraction of the population during the recessions of 1981, 1990, 2000, and 2008. All other poverty-threshold groups show little to no cyclical behavior.


  1. Look at the correlation between the rise of extreme poverty and election years. Every time a (modern) Democratic president gets elected, extreme poverty falls. Every time a (modern) Republican president takes office, it rises. The exception being pre-Bush Sr the trend appears to be reversed, and Obama obviously was handed a rotten economy. It would be nice to have the stats for the last 2 years to see if he was able to bring it down at all.

    1. Please refrain from hijacking this economics-centric blog to try to create a gain for any political party. I'm not hear to defend the republican presidents as I do not care about either political party, but the correlation is with recessions. Evan pointed this out clearly. I don't see how you missed that, considering the title of this blog post.

      Evan's analysis is enjoyable and his writing is more reachable to a broader audience than many leading economics blogs. He's doing an excellent job and he's keeping political biases out of the analysis. Political commentary assigning blame or praise to a given political party has it's place, but Evan's blog is not the proper venue.

  2. Nicely done Evan. Robert Waldmann has a yearly series on deep poverty stats...we will link to your post.


  3. Evan,

    Something to consider.

    That extreme poverty has increased, yes, clearly so. However, a detail about the US poverty measure you're using. To a large extent this measures poverty before poverty alleviation attempts. Not poverty after poverty alleviation attempts.

    What your figures are therefore showing, to a large extent, are poverty by market incomes. But not poverty as it is actually experienced, poverty after taxes and benefits.

    The US poverty line is calculated using market incomes and direct cash transfers. It does not include transfers in kind nor through the tax system. The largest anti-poverty programs are, in order (I think I've got this order correct) Medicaid, the EITC, SNAP (food stamps) and Section 8 housing vouchers.

    None of these are included in the measurement of poverty that you're using. If we want to measure poverty by market incomes, your figures are correct. If we want to measure poverty by consumption say, we need to adjust them. To take account of those benefits provided in kind and through the tax system.

    This becomes much more important when we try to do one of two things. Either:

    a) Compare poverty across countries. Everyone else uses after tax, after benefit numbers.

    b) Compare poverty across time. Pre 1975 the majority of poverty alleviation in the US was direct cash transfers. Since then it has increasingly become through the tax system (successive expansions of the EITC) and in kind (successive expansions of SNAP, Section 8 etc).

    As far as Princeton goes Angus Deaton will be able to explain this all much better than I can.

  4. Very good point re poverty as measured by consumption. The rate of actual deep poverty in the US is very, very small and is mostly confined to the mentally ill and those who choose poverty as a lifestyle.
    Along with in kind transfers, as mentioned by TM above, there is a tremendous amount of undeclared cash income earned by those at the bottom of the, measured,income rung.