5 The Economics of Poverty
Caroline Krafft
What is poverty?
In the United States, poverty is measured relative to a federal poverty line (FPL) and depends on a family’s size. The basis of the poverty line is spending on food, updated for inflation, and multiplied by three. This basis is because, in 1955, when the data that determined the first poverty line were collected, food was one third of a family’s income. Box 5.1 discusses this historical basis of the poverty line. Table 5.1[1] shows the poverty lines in the U.S. as of 2024. A family of four, in 2024, would be considered “in poverty” if their income was below $31,200. Globally, similar poverty line construction is used in countries such as Egypt, which calculates a variety of poverty lines, also based off of food expenditure.[2]
The FPL is used to determine eligibility for a number of different anti-poverty programs in the U.S. There are a variety of critiques in using the FPL either to determine program eligibility or measure wellbeing. Recent estimates indicate that food is one-eighth, not one-third, of budgets, suggesting FPL provides a substantial underestimate of poverty. Some families may have additional expenses—such as child care needs—that are not accounted for in measuring poverty. Local variations in cost of living are not taken into account. The measure does not take into account taxes, which reduce disposable income. The measure also does not take into account non-cash public benefits, such as public housing, that may improve well-being substantially without changing (cash) income. Although alternative measures have been proposed, none have yet been implemented in the U.S.[3]
Box 5.1: Mollie Orshansky and the History of Poverty Lines in the U.S.[4]
Mollie Orshansky developed the modern system of measuring poverty for the U.S. At the time she developed the poverty lines, Orshansky was working for the Social Security Administration as a social science research analyst. She had training in economics and statistics and studied families’ budgets and spending. Orshansky calculated in 1955 that a family spent one third of their money on food. She then used the amount of money needed for an economy food plan as the basis for the poverty line, multiplying that amount by three to cover non-food expenses. Her initial work on poverty lines was published in a Social Security Bulletin in 1963. When President Lyndon Johnson declared a war on poverty in 1964, Orshansky played a key role in designing poverty thresholds that depended on family size and spending a third of the budget on food. Her poverty thresholds were made the official statistical definition of poverty in the U.S. in 1969.
The progress the U.S. has made in fighting poverty over the past 50 years has been mixed. Figure 5.1[5] shows poverty rates from 1966, at the start of the “War on Poverty,” until 2023. Notably, the poverty rate for seniors (those 65+) has declined from a high of 29.5% in 1967 to just 9.7% in 2023. However, c