Finally, a sensible way to measure poverty.

The economic mysteries of daily life.
July 26 2008 7:25 AM

But My Neighbor Has a Cell Phone …

Finally, a sensible way to measure poverty.

A homeless person. Click image to expand
Is poverty defined by what you can afford?

Seebohm Rowntree was the son of wealthy Quaker businessman Joseph Rowntree but was acutely aware of the poverty that surrounded him in late-Victorian York, England. In 1899 he set himself the task of defining a "poverty line" by working out how much it would cost to supply basic food, housing, and clothes. Anyone who couldn't afford to buy those basics—including a helping of pease pudding with bacon on Sunday—was below the poverty line.

The idea of a poverty line has stayed with us, but the candidates have multiplied. The World Bank has two poverty lines: $1 a day and $2 a day (strictly, those are 1985 dollars adjusted for inflation). In the United States, the poverty line is $29.58 a day for a single adult under the age of 65. All these are absolute income standards, just as Rowntree's was.

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Eurostat, the European Union's statistics agency, takes a different approach: It defines the poverty line as 60 percent of each nation's median income. (The median income is the income of the person in the middle of the income distribution.) This has an unfortunate consequence: Poverty is permanent. If everyone in Europe woke up tomorrow to find themselves twice as rich, European poverty rates would not budge. That is indefensible. Such "poverty" lines measure inequality, not poverty, and they do so clumsily.

On the other hand, absolute standards of poverty are creepy, reliant as they are on expert definitions of a nutritionally balanced diet. (Rowntree was a Victorian philanthropist, so we're willing to make allowances.) The U.S. definition dates back to early 1963 and the efforts of a Social Security Administration researcher called Mollie Orshansky. Lacking decent statistics, she based her poverty line on government nutritional advice. It was a decent estimate given the limited resources of the time, yet the threshold has changed only to take account of inflation.

So, the U.S. definition of poverty is stuck in the 1960s. Had Seebohm Rowntree been working for the U.S. government, perhaps it would now have a poverty standard that was based on the price of pease pudding and that assumed that electricity and indoor plumbing were luxuries. This cannot be right.

Adam Smith put his finger on the problem back in 1776. In The Wealth of Nations, he wrote: "A linen shirt, for example, is, strictly speaking, not a necessity of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt. ..."

Smith's point is not that poverty is relative but that it is a social construction. A person can lack the money necessary to participate in society. Whatever Eurostat may say, people don't become poor just because the median citizen receives a pay raise, but they may become poor if something they cannot afford—such as an Internet connection—becomes viewed as a social essential.

That is why a new unofficial poverty threshold, published this month by—appropriately—the Joseph Rowntree Foundation, makes more sense than it at first appears. The standard was set by focus groups working out what was and was not necessary "to participate in society." The results are frugal—there is a budget of £40 ($80) every two years to buy a suit, for instance—but they were always bound to be controversial. The list of essentials includes a self-catering vacation, a cell phone, and enough booze to get drunk twice a month.

But the new threshold's apparent weakness—its subjectivity—is in fact its strength. Poverty is not relative, and it cannot be objectively determined by an expert. Adam Smith understood that very well.

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