Consumer Debt and Poverty

The unintended consequences of the consumer credit binge.

In a new working paper, two economists from Monmouth University in New Jersey argue that poverty levels are actually higher than government statistics indicate.

The problem, Steven Pressman and Robert H. Scott say, is that when government statisticians calculate household income -- which are used by the Census to determine poverty levels -- they don't take into account how indebted many consumers are.

So, thanks to these rising debt levels over the past decade, increasingly more income must be used to make interest payments. But since incomes have largely stagnated over the past 20 to 30 years, that means there's less money available to spend on other things. The end result is a decline in living standards.

Using data from the Fed's Survey of Consumer Finances, Pressman and Scott subtracted from each family's income the amount the household spent to maintain its non-mortgage debt. Using this new measure to recalculate poverty levels, they found that the poverty rate in 2006 should have been 13.7 percent as opposed to the Census' 12.3 percent -- or an extra 4.2 million people in real-world terms.

The number of these "debt poor" has been on the rise since the early 1980's, growing from 0.5 percent of the population to 1.4 percent in 2006. During the same period, the government's poverty rate fell from 15 percent to 12.3 percent.

Taking their analysis a step further, Pressman and Scott find that income inequality as measured by the ratio of income received by the top 10 percent of households versus the bottom 10 percent would also be 5.6 percent higher when non-mortgage consumer debt is factored.

Pressman and Scott are on the liberal side of the political spectrum, and in the world of economics that usually translates into supporting the idea that relative income is a more pertinent measure of well-being than absolute income.

It is for this reason that the European Commission has defined poverty in relative terms, where households are considered poor if their income falls below 50 percent of the mean income of the country for the year.

The study adds to a long line of criticism over how the government measures poverty. Other suggestions for improvement include counting food stamps, health and housing benefits as income which would have the effect of reducing poverty levels, or creating regional poverty levels to take into account different costs of living around the country.

Perhaps it's time for a change?

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