Since the beginning of recorded organized civilizations the issue of poverty has maintained itself at the forefront of societal controversies for those living in the communities. Throughout the years the way in which impoverished societies are measured has changed considerably. In this paper I will discuss specifically the topic of poverty in the United States of America and how it is calculated, review the most recent statistics, and how the role of inflation might affect poverty. Finally, I will briefly discuss how income inequality relates to business and globalization.
What is Poverty?
Before I can discuss poverty we must be parallel with our definition of the word. According to the United Nations Educational, Scientific and Cultural Organization, “income poverty is when a family’s income fails to meet a federally established threshold that differs across countries” (“UNESCO,” 2014). Additionally, it might be argued by some that “poverty is also social, political, and cultural.” Next I will discuss how poverty is currently calculated in the United States.
How is Poverty Calculated?
Income poverty in the United States is calculated on severely outdated measurements that were established by the Federal government in 1964 (Institute of Social Research: University of Michigan [USDHEW], 1976, p. 4). Consequently, the official definition of poverty according to the U.S. reads: “A family is in poverty if its income is equal to or less than three times an average family’s minimum food expenditures as calculated by the U.S. Department of Agriculture” (Colander, 2013, p. 390).
In 1964, calculating income poverty was based on an annual family income of $3,000 and $1,500 for an individual (USDHEW, 1976, p. 4). Now, 51 years later, families spend more than that on food alone each year. Colander also pointed out that families are no longer spending more money on food but instead on housing and other living expenses such as health care and work-related expenses (2013, p. 391). Some might suggest that the current income poverty calculation method is a poor comparison that ought to be reevaluated in order to calculate a more accurate poverty rating aligned with 21st Century living habits. In fact, “this would result in a significantly higher official poverty line and significantly more people officially living ‘in poverty’” (Kirst-Ashman, 2011, p. 431). Now let’s discuss some statistics.
Poverty Statistics
The Federal Reserve Bank of St. Louis graph below shows the relationship of the Gross Domestic Product and Income Gini Ratio for Households of all races. It is apparent that there is a direct correlation between the rise of GDP and the incline of poverty.
The Gini Coefficient dates back to 1912 and is named after its creator, Italian economist Corrado Gini, and is defined as measuring “the degree of concentration in a country’s income distribution”—income inequality (Babones, 2012). However, it did not become a valuable asset to measuring poverty until much later. Although government programs began to help Americans get back on their feet after World War II, “poverty was not recognized as a national problem until the 1960s” (Soifer & Hoffman, 1999, p. 138).
The Gini coefficient helped establish a way to measure poverty by rating it on a scale of 0 to 1 with lower figures being closes to equal income distribution (Colander, 2013, p. 393). As a result of following this specific statistic calculation, I will discuss what will happen next with income inequality.
Where will income inequality go next?
Referencing back to the FRED graph on page 3, the 2013 Gini was 0.476, nearly reaching the halfway mark; meaning income equality was almost split down the middle. The 2014 figures haven’t been released yet, but considering the history according to the graph the Gini will most likely rise above the previous year’s coefficient.
Since its inception in 1967, the Gini coefficient has steadily climbed paralleling the GDP records with only a couple of minor dips on the graph. One can only conclude that income inequality is directly related to inflation. Due to this interaction it appears as though people have a difficult time climbing out of the income inequality abyss. It is an unfortunate cycle that only a handful of families find themselves reaching over the ledge and onto the other side of the poverty line.
To answer the question where will inequality go next, I believe it is definitely increasing because the FRED graph has the data to prove it. I think it will take many more years for Americas to get closer to 1 on the Gini scale since it follows the boom and bust cycle of economics. Next, I will discuss inflation in further detail.
Where did inflation come from?
In a nutshell, inflation derived from a snowball effect that began in 1933 when President Franklin Roosevelt tried to help the American people by introducing his New Deal and ended when President Richard Nixon officially switched the United States from the Gold Standard to fiat money—the U.S. dollar. It’s all been downhill from there with statistical graphs rising in numbers proving that the Gold Standard actually might have been the better choice for our nation and the world. Precious metals spoke as a worldwide commodity that held its value and could travel across borders. Fiat money is only valuable if society chooses it to be. Without the ability to peg the fiat money to gold, inflation has no price ceiling.
Now I will discuss the relationship between the Consumer Price Index and the Gini Coefficient.
Aftermath of abandoning the Gold Standard
Before 1971, the Consumer Price Index and GDP were two of the main economic measurements fixed to the price of gold. However, as people began to rely on other forms of assets after the release of the gold standard, inflation began to rapidly grow at a rate presidents following Nixon were never able to conquer. The FRED graph that follows displays the inception of the Gini coefficient compared to the CPI. In 1970, the two figures were nearly equal. As each year ended, the CPI and Gini began to leave the parallel status and simultaneously increased and eventually the CPI drastically exceeded the Gini coefficient. One can only assume that inflation in fiat money is the direct effect to the rise in prices of goods and services versus the cost of living. These factors all lend to the income inequality found in measuring poverty. Finally, I will discuss income inequality and business.
Globalization and poverty
It wasn’t always that way. Before the Internet, even before air travel, the majority of consumer products were manufactured or grown locally, close to home, which assisted in keeping prices low and secured available supplies. Now, with the rise of worldwide business alliances, “Globalization…has shifted bargaining power away from workers: firms can threaten to move elsewhere, especially when tax laws treat such overseas investments so favorably” (Stiglitz, 2013).
This shift in the way companies do business directly effects the income inequality factors because middleclass jobs are moved overseas leaving the majority misplaced and out of work. The middleclass eventually reaches poverty-level status due to theses shifts. Of course, on the flipside of the scale, the countries in which businesses flock to feel a positive effect from the globalization process.
In closing, we have discussed key elements of poverty, such as where it came from, how it is measured and where it is going. Also, I presented compelling evidence using the FRED graphs that back up my claims that the GDP, CPI and Gini coefficient are entangled like a fly in a spider web leaving little room for the societies trapped in poverty to escape. Lastly, I discussed how globalization is changing lives, some for the better, and others for worse, depending on which side of the world one resides. In the future I believe poverty will continue to be an ongoing issue that the U.S. government tries to fix by implementing more assistance policies.
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References
Babones, S. (2012). U.S. Income Distribution: Just How Unequal? Retrieved from http://inequality.org/unequal-americas-income-distribution/
Colander, D. C. (2013). Microeconomics (9th ed.). United States of America: McGraw-Hill Education.
Institute of Social Research: University of Michigan. (1976, September 10). Technical paper XVII. The Measure of Poverty. Washington, D.C.
Kirst-Ashman, K. K. (2011). Human behavior in the macro socil environment (3rd ed.). Belmont, CA: Brooks/Cole, Cengage Learning.
Poverty. (2014). Retrieved from http://www.unesco.org/new/en/social-and-human-sciences/themes/international-migration/glossary/poverty/
Soifer, P., & Hoffman, A. (1999). Cliffs Quick Review: U.S. History II. New York, NY: Wiley Publishing, Inc.
Stiglitz, J. E. (2013). Inequality Is Holding Back the Recovery. Retrieved from http://opinionator.blogs.nytimes.com/2013/01/19/inequality-is-holding-back-the-recovery/
On Location with Melissa 