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How Debt Is Swelling Ranks of Americans in Poverty How Debt Is Swelling Ranks of Americans in Poverty

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economy

How Debt Is Swelling Ranks of Americans in Poverty

Last time on America’s least favorite game show, “How Bad is the Economy, Really?” the Census Bureau’s annual report on poverty, health care, and income took center stage.

This time, the question is: "How Bad is the Poverty Rate Really?"

 

Probably worse than you thought. If the “debt poor,” those with upside-down debt-to-income ratios, were counted in the Census data, the total number of those below the poverty line would spike by a percentage point, according to by Monmouth economics professors Robert Scott and Steven Pressman.

That means that a truer picture of those below the poverty threshold looks like this: The percentage of Americans below the line would go from 15.1 percent to 16.6 percent, or 10 million people.

“It’s like the unemployment rate … everybody looks good if the unemployment rate is down. No one wants to think about if we’re measuring it incorrectly and should come up with a higher number,” Pressman said.

 

A higher-than-reported poverty rate could mean that the economy is in worse shape than the Census Bureau figures show.

In aggregate terms, Scott and Pressman’s argument goes like this: Taking on more debt, while stimulating certain sectors of the economy—like banks and other lenders—could aggravate the faltering economy as well as swell the ranks of those in poverty.

“Once [people] get a few extra bucks, they’re not going to buy a new car. … They’re going to pay off their past debt. And that doesn’t do anything for the economy,” Scott said.

So what does a snapshot of a “debt poor” household look like?

 

The 2009 numbers from the Bureau of Labor Statistics show that the bottom fifth of American households reported an average income of a less than $10,000. But their expenditures were estimated at $21,600, which means they are spending more than twice as much as they are taking in.

“This makes sense, because when people have bad years, they draw down their savings, or they borrow to try and stabilize their living standard,” said Nicholas Eberstadt, an economist at AEI.

Updating the how the government measures poverty, let alone the tall task of re-energizing the economy, is an uphill battle, laden with political barriers, Pressman and Scott say: If the poverty line is moved up, more people would become eligible for federal benefits, and with Congress in the mood to cut, it seems unlikely that updating the poverty measure would gain any political traction.

“It will have a cost to the government—besides the bad press,” Pressman said.

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