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The Problem with Poverty Lines

April 29, 2016

Poverty lines are frequently used to mislead readers. Poverty percents across countries are compared without any reference to the fact that poverty lines in different countries might be different by a factor of ten or more. Furthermore, readers are often left in the dark as to whether the poverty lines are pre- or post-tax and pre- or post-transfers. The official U.S. poverty rate does not include tax breaks such as the EITC, or in kind transfers, like food stamps or Section 8 housing. Since both welfare and tax rates vary greatly between countries, this is vital information to be able to compare the living standards of the poor between countries.

Text: The biggest declines in Chinese poverty were from 1980s to early 90s, well before it became a major trade player.

Well the problem with that is that the Chinese poverty line is based on $1 per day. Once 95% of your population gets over that pitifully small amount, no further income gains are going to be visible by the metric. Here is a more detailed graph of Chinese income over that period:

If you apply the U.S. poverty line to China of around $12,000 per person, China’s poverty rate looks like:
1970: 99%+
1980: 99%+
1990: 99%
2000: 90%
2006: 50%

Now, all of a sudden, there was no change in poverty in China until very recently. If you don’t show the whole distribution, you can be quite misleading.

If all you know is the poverty rates, the U.S. looks horrible compared to other countries:
Relative poverty rates

However, adjusted to purchasing power parity, it’s middle of the pack:
Earnings at tenth percentile

But if you include the costs of health care, the U.S. would start to look worse again, since many of those countries provide government health care which is far more valuable than similar services provided by the U.S. government. If you really want to dig into relative poverty, it takes work and a simple poverty line doesn’t help much.

Further Reading:
American poverty in 5 charts.
America’s poor compared to the rest of the world.
Global Rich list
The poverty rate and consumption

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