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When Life Doesn't Add Up

You may ask, “But what about the federal poverty guidelines?  Reading the reports, it seems like a relatively small proportion of Americans are actually living in poverty. 

Measuring Poverty

There are two federal poverty measures:  the “poverty thresholds” and the “poverty guidelines.” 

The poverty thresholds are issued annually by the U.S. Census Bureau, and are used in making statistical calculations of the number of Americans living in poverty. 

The federal poverty thresholds, then, are determined by taking a “low cost” food plan for “needy families and others who wished to keep food costs down” from 1961 and reducing it by another 20-25 percent to arrive at an “economy” plan, for “temporary or emergency use when funds are low”, adjusting it for inflation, and multiplying it by three to allow for non-food expenses based on 1955 statistics, with no allowance for variation by geography. 

The poverty guidelines are issued annually by the U.S. Department of Health and Human Services (HHS). [i]  They are a simplified version of the poverty thresholds, and are used in determining financial eligibility for certain federal programs.[ii] 

The poverty guidelines for 2015 are as follows:

A cursory glance leads one to conclude that these amounts are not sufficient to provide for basic necessities.  It is fair to say that the federal poverty guidelines do not represent a socially acceptable minimum standard of living, below which one can be deemed to be living in poverty.  That standard surely lies somewhere north of these numbers, a fact implicitly acknowledged by Congress and federal agencies in setting eligibility for many means-tested federal programs at levels higher than 100% of the poverty guidelines. 

Of what use are these standards, then?  Even the Census Bureau, which publishes the poverty thresholds, points out:  “Although the thresholds in some sense reflect families’ needs they are intended for use as a statistical yardstick, not as a complete description of what people and families need to live.”[iii]

They can be useful in tracking trends over time.  And we can be sure that individuals and families living at or below these levels are living in poverty, by anyone’s definition.  However, it is clear that many people with incomes above these levels are “poor” by any reasonable definition: we should never read statistics on poverty in America based on the poverty thresholds and assume that they accurately describe the number of Americans who are not able to provide for the basic necessities of life.

 

[ii] See, generally, Poverty Guidelines, Research, and Measurement - Further Resources on Poverty Measurement, Poverty Lines, and Their History; U.S. Department of Health & Human Services. http://aspe.hhs.gov/poverty/contacts.cfm

 

[iii] How the Census Bureau Measures Poverty.  https://www.census.gov/hhes/www/poverty/about/overview/measure.html

 

The Minimum Wage

Well, then, what about the federal minimum wage?  Doesn’t it establish a “floor” for wages at a place where people can make ends meet?

One was to answer this question is to look at the history of the minimum wage.  If at some point it was sufficient to cover one’s basic expenses, there has been no mechanism to keep it so, whether by indexing it to inflation or otherwise.  Rather, it has been sporadically increased by Congress and then had its purchasing power eroded by inflation until such time as Congress might enact another increase. 

Here is what the actual wage has been since 1967:

Of course, one cannot compare a 2014 dollar to a 1967 dollar, which could purchase a lot more, so in order to compare the minimum wage over time, it is necessary to express it in one year’s currency, i.e., adjusted for inflation.  Adjusting each year’s amount to 2014 dollars, the minimum wage since 1967 looks like this:

 

The chart shows the value of the wage eroding over time as inflation eats into it, until the next time Congress increases it.  The dollar amounts, in 2014 dollars, are as follows:

An interesting question to consider is, how has the minimum wage related to the economy’s ability to pay?  The ability to pay can be measured as the amount of Gross Domestic Product per employee.  For example –

  • in 1967 –

    • GDP was 6.15 trillion 2014 dollars, and the population was 197.3 million.

    • GDP per capita was $31,172 (in 2014 dollars).

    • Assuming a labor force participation rate of 60%, the GDP per employed person was $51,953 (in 2014 dollars).

    • The annualized minimum wage was $20,792 (Approx. $10.00/hr. x 2,080 hrs.)

  • In 2014 –

    • GDP is estimated at $17.1 trillion and the population is estimated at 318,351,393.

    • GDP per capita is $53,718.

    • Assuming a labor force participation rate of 60%, GDP per employed person is $89,530.

    • The annualized minimum wage is $15,080 ($7.25/hr. x 2,080 hrs.).

 

These values, and the corresponding amounts for the intervening years, are expressed in the following Figure:

 

The chart shows an increasing disparity between the minimum wage and the ability to pay: from $20,792 on a per-employee GDP of $31,172, to $15,080 on a per-employee GDP of $89,530.

This disparity is expressed by the minimum wage as a percentage of per-employee GDP, in the following Figure:

So we see that between 1967 and 1982 the minimum wage declined from about $10.00 to about $8.00, and since then has swung up and down within the $6.00-$8.00 range, now being at $7.25.  Compared to the per-employee GDP, it declined from a high of 42% in 1968 to 18% in 1989, and since then has moved up and down within the 14%-21% range, now being at 17%. 

The minimum wage has not borne a consistent relationship to inflation or to the economy’s ability to pay.  But the real question is, what relationship does it bear to the cost of living in America today?  How far does $7.25 go in 2014? 

To answer that question, we must make an honest inquiry into how much it costs to live in America.

The Real Cost of Living in America

In considering the consequences of the low price, low wage economy, it is necessary to establish a point of reference:  how much does it really cost to live in America today?  Much has been written on this subject.  However, in the spirit of honest inquiry, we thought it worthwhile to pursue the question independently, wherever the facts may lead. 

A Subsistence Budget

As an initial point of reference, we consider what it costs to pay for a minimal level of the necessities of life without having to resort to subsidies or charity, what we will refer to as a “Subsistence Budget.”  The Subsistence Budget is made up of minimum, “bare bones” amounts for necessary living expenses of food, clothing, shelter, transportation, medical care, and, where applicable, child care and school expenses.[i] 

The Subsistence Budget does not include provision for many ordinary living expenses, such as modest Christmas and/or birthday gifts, children's participation in sports or other activities, or other recreation.  It does not include any provision for saving for immediate extraordinary expenses, retirement, or post-secondary education.  It does not include any provision for contributions to church or charities.  Even for the included categories, these amounts are obviously very “bare bones.” 

Versions:  We have prepared three versions of the Subsistence Budget, as follows.  The first budget is for an individual, applicable, for example, to a 25-year-old who has not yet married, and to a 55-year-old who is single, divorced, or widowed.  The second and third budgets are “family” budgets – one for a family of two adults and two children, and the other for a family of a single adult and two children. 

Individual Budget – Can you make a living doing that?

The Individual Budget is summarized in the following table:

Family Budgets  – Can you support a family doing that?

Two Parents, Two Children

The first “family” budget is for a family of two adults and two children. [ii]  There is a rather broad range of option when there are two parents in the home. 

  • One or both parents working more than one job (probably in low-paying jobs, trying to make ends meet).

  • Both parents working full-time.

  • One parent working full-time, one part time.

  • One parent working full-time, the other not working.

For this Subsistence Budget, We have assumed both parents working full-time.  Many American households are pursuing this option, perhaps for career fulfillment, perhaps for income to support a better lifestyle, and likely often for a mixture of both reasons.  In any event, it maximizes the number of hours worked (excluding the extreme option of more than two full-time jobs), and thus minimizes the hourly wage required to meet the subsistence budget, providing the most conservative result.  So, the budget assumes 80 hours worked per week, resulting in an average hourly wage between the two parents necessary to pay subsistence expenses and taxes. 

It should be noted that this assumption does require a second car and child care, the trade-off that every family must calculate in deciding whether and how much the second parent will work.  There is tremendous variety in the arrangements families make for child care where both parents are working or only one parent is present (see below).  For purposes of the Subsistence Budget, I use the average amount reported by the U.S. Census Bureau for a family with two children under age 15.  In 2011, the amount was $169 per week.  Adjusted per the increase in the Consumer Price Index, in 2014 dollars the amount is $177 per week, i.e., $769 per month. 

With regard to housing costs, in the case of a two-parent family, I assume that the family is able to purchase a home.  Therefore, in determining effective income tax rates, I assume deductions for $300 a month for property taxes and $600 per month for mortgage interest. 

The Subsistence Family Budget for Two Parents and Two Children is summarized in the following table:

One Parent, Two Children

It is important to also consider the case of the single parent with children.  The number of these households, both absolute and as a percentage of households, has been increasing. 

As I have noted, there is tremendous variety in the arrangements families make for child care where both parents are working or only one parent is present.  The Census Bureau described this variety in a report issued in June 2012.  The arrangements include care by grandparents and other family members, sharing child care duties with neighbors, and commercial day care, preschool, and after school providers, often in combination.  As noted, for the Subsistence Budget, I have utilized the reported national average, adjusted to 2014 dollars, i.e., $769 per month. 

In the case of single parents, the parent often will receive child support payments that may offset some of the costs of child care and other costs of supporting a child.  This is not always the case, and most single parents to not receive all of the child support payments that they are due.[iii] 

The Subsistence Family Budget for One Parent and Two Children is summarized in the following table:

Subsistence Budget Conclusions

Let us recall that the Subsistence Budget is designed to measure only what it costs to pay for a minimal level of the necessities of life without having to resort to subsidies or charity. It is made up of minimum, “bare bones” amounts for necessary living expenses of food, clothing, shelter, transportation, medical care, and, where applicable, child care and school expenses, that is, those expenses that are necessary to provide for an individual’s (and his or her family's) “health and welfare and/or production of income.” 

Not only are the amounts for these categories minimal, but many categories are entirely excluded:  It does not include provision for many ordinary living expenses, such as modest Christmas and/or birthday gifts, children's participation in sports or other activities, or other recreation.  It does not include any provision for saving for immediate extraordinary expenses, retirement, or post-secondary education.  It does not include any provision for contributions to church or charities. 

One could say that on this budget, one is “surviving both not thriving.”  And what is the hourly wage required for such an existence in an average American city?[iv]  In sum, it is:

In sum, it is:

A “Middle Class” Budget

As we have pointed out, the Subsistence Budget does not make adequate provision for many items, and no provision for others.  What would be the cost of the things we would typically consider to make up the “American dream” for a family of four?  This question was the subject of a special report published in USA Today on July 4, 2014.[v]  The USA Today analysis concluded that supporting the life most Americans aspire to requires a household income of $130,000 per year: 

  • $58,491 for essentials (housing (mortgage on a house costing $275,000), groceries, one car, medical, education, apparel, and utilities)

  • $17,009 for extras (vacation, entertainment, restaurants, cable, etc. and miscellaneous),

  • $32,357 for taxes (income, property, and sales taxes), and

  • $22,500 for savings (retirement and college).

The report noted that adding a second car and another child could easily take the total to $150,000, and that with large regional variations in cost, the number is much higher in many areas of the country. 

Noting that only one in eight U.S. households earned $130,000 in 2013, with the median at about $51,000, the report concluded that the American dream of owning a home, having time and money for a vacation and some modest recreation, paying their fair share of taxes, and saving for retirement and their kids’ college education, has become out of reach for most Americans. 

Conclusions

These exercises provide a point of reference and a reality check as to the current, actual cost of supporting oneself and one’s family in the United States.  When we compare these costs with reported wages and incomes, it becomes clear that for many, if not most, Americans, life is not adding up. 

 

[i] In creating this budget, we have relied largely upon the “allowable expenses” established by the Internal Revenue Service to determine a taxpayer's ability to pay a delinquent tax liability.  They are those expenses “that are necessary to provide for a taxpayer’s (and his or her family's) health and welfare and/or production of income.”  [Internal Revenue Service, Collection Financial Standards, effective March 31, 2014. http://www.irs.gov/Individuals/Collection-Financial-Standards.]  In determining the allowable amounts, the IRS determines the amount actually spent for household expenses, using survey data from the Bureau of Labor Statistics.  For some categories, a national standard is used; for others, amounts are determined for specific geographic areas.  For the geographical region, we have used Summit County, Ohio, where the city of Akron is located.  In selecting Akron, we have turned to the Census Bureau’s “Cost of Living Index--Selected Urban Areas,” [i]  The Index measures relative price levels for consumer goods and services in a geographic area for a “mid-management standard of living.” [i] The nationwide average equals 100 and each index is read as a percent of the national average.  Akron is an area with an “average” cost of living: the Census Bureau gives it a composite score of 100.2, without substantial deviation by category. 

 

[ii] It should be noted that two children is not enough to sustain a population, as has been discovered in Japan (where the population is in decline) and Germany (which must rely on immigrants).  A more realistic budget for a sustainable future would be for a larger family, with perhaps an average of 2.5 children.  However, for simplicity and ease of comparison with other studies, we have considered a four-person family. 

 

[iii] Monthly Child Support Payments Average $430 per Month in 2010, Census Bureau Reports,” U.S. Census Bureau, Newsroom Archive.  https://www.census.gov/newsroom/releases/archives/children/cb12-109.html

[iv] It is important to note that in much of America, living costs are much higher than these.  The Census Bureau ranks for 329 cities run from a low of 82.8 in Harlingen, TX, to a high of 181.7 in Brooklyn, NY (excluding Manhattan, with an index of 216.7.)  U.S. Census Bureau, op. cit.

http://www.census.gov/compendia/statab/cats/prices/consumer_price_indexes_cost_of_living_index.html

[v] Howard R. Gold, “Price tag for the American dream: $130K a year,” Special to USA Today, July 4, 2014.

http://www.usatoday.com/story/money/personalfinance/2014/07/04/american-dream/11122015/

News and Events

May 15, 2014, Ontario, CA - MIAA's founder, Jim Stuber, delivered the keynote address at the 20th annual World Trade Conference sponsored by the U.S. Department of Commerce and the California Inland Empire District Export Council in Ontario, California.  To view the conference agenda, click here:

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May 7, 2015, Radnor, PA.  MIAA's founder, Jim Stuber, appeared as the guest of host Richard J. Anthony, Sr. on The Entrepreneur's Network TV at Radnor Studio 21.  The program featured a discussion of the problems caused by offshoring manufacturing and white collar jobs and how consmers can solve the problem with their spending decisions. 

Studio 21 has made the program available for viewing here:

https://youtu.be/UIOwBD6-1pk

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