girl bitting appleThe opening paragraphs of latest issue of Stanford University’s Pathways magazine contains an eye-opening claim: in any given month of 2011, 1.65 million U.S. households with children were living on less than $2 per person, per day.

That sounds horrific, and it is: horrifically misleading.

Once you dig deeper you find that what they mean is “households living on $2 or less in cash income per person per day.” The reason it is misleading is because, as a savvy economist might say, you don’t eat income.

What we mean (or should mean) when we say “living on” is consumption. In economics, consumption is the use of goods and services by households.

For at least the first few years of our lives (i.e., when we’re children), most of us have no incomes at all. So how do we keep from starving? Because what we “live on” (our share of consumption) is paid for by someone else’s income, usually our parents. Americans in extreme poverty are also able to consume using someone else’s income: their fellow taxpayers. This is why the poor can have near zero income and still have access to many of the goods and services, such as housing and food, required for survival.

As Jordan Weissmann notes, the Stanford article “ignored all non-cash safety net benefits.”

Food stamps? Housing vouchers? Tax credits? None were included. Once they accounted for those programs, only 613,000 families were living below the $2-a-day mark in 2011—still up by about half since the Clinton years.

At a bare minimum, then, hundreds of thousands of American households are living in true destitution. (For a family of three, the federal poverty line works out to about $17 per day, per person.)

According to the new Brookings report, however, even Shaefer and Edin’s most conservative estimates of extreme poverty might have been too high. If you look at data on income, the pair’s estimates essentially hold up. But Brookings fellow Laurence Chandy and MIT Ph.D. student Cory Smith found that if you examine U.S. consumption statistics, then the number of families surviving on less than $2 each per day falls close to zero.

When it comes to living standards, consumption is significantly more important than income. That is why income inequality ultimately doesn’t really matter; what matters is consumption inequality. As The Economist recently wrote,

Income inequality is the most commonly cited measure, primarily because the data on it is the most comprehensive. However, for the purpose of measuring how inequality affects a community it is also probably the least interesting yardstick of the three.
Consumption inequality, though harder to measure, provides a better proxy of social welfare. This is because people’s living standards depend on the amount of goods and services they consume, rather than the number of dollars in their wage packet.

If we care about the poor, we should care about their consumption — not their income relative to Bill Gates. Ensuring they have an income sufficient to meet their own consumption needs is the ultimate goal. But in the meantime we shouldn’t, as Stanford has done, obscure the truth by implying our neighbors are being left to starve in the streets because their incomes are too low.