California’s Poverty Rate Remains High — Why?

By: Tom Church

***Editor’s Note: The following article is one viewpoint on California’s poverty. On October 8, another viewpoint was published in the article, “Why Poverty in California Remains High.”

According to the U.S. Census Bureau, there are two ways to measure poverty in each state — the official poverty measure and the Supplemental Poverty Measure (SPM). California’s official poverty measure estimates that approximately 13 percent of Californians currently reside in poverty. But that number rises to 19 percent when calculated by the SPM. The official poverty measure places California in the middle of the nation’s poverty rankings, while the SPM pushes us all the way down to the bottom of the list — ranking us as the worst among the fifty states. And ultimately that’s because of how poverty is defined with the supplemental measure.

Undoubtedly, there are longstanding issues with the official poverty measure. It doesn’t include taxes or non-cash transfers. There are no adjustments for cost of living differences by region. And, famously, its original poverty line was calculated using three times the average food budget in the 1960s, and has only been updated with inflation over time.

For these reasons and many more, the Census Bureau created the Supplemental Poverty Measure. The SPM provides a more accurate picture of available resources to individuals by including all government assistance that can help to meet basic needs, and subtracts taxes and other necessary expenses.

But the SPM’s key difference from the official poverty measure is that its poverty threshold is calculated using a moving average of the 33rd percentile of consumer spending on food, clothing, shelter, and utilities, multiplied by 1.2 to account for other necessary expenses.

This way of calculating poverty makes the SPM a more accurate measure of poverty, but also highlights the monumental task before us in eliminating poverty, especially in states like California, where housing costs are higher than the national average. In fact, blue states across the country traditionally see higher rates of poverty compared to their official poverty measure score, while poverty figures in red states fall. For example, under the SPM, Mississippi has a lower poverty rate by two percentage points than California. But under the official poverty measure, Mississippi’s poverty rate is six percentage points higher. Which one seems more likely?

Even comparing changes in poverty over time becomes an exercise in caution since the goal posts are moving every year by more than a simple inflation adjustment. Under a relative poverty measure, it’s not clear that poverty figures will fall as the economy gets better. In fact, if incomes went up evenly but everyone decided to spend more, proportionally, on food or housing, then poverty would rise as well. This is the inherent trade-off of a relative poverty measure.

The biggest step toward reducing poverty in California under the SPM would be to bring down the costs of housing. California’s Legislative Affairs Office reports that the average California home costs two-and-a-half times the national average, and renting is 50 percent higher here than in the rest of the nation. This pushes poverty thresholds much higher. And no amount of rent control or low-income housing requirements will put a dent in housing prices, like vastly expanding the supply would. Requirements from CEQA and other permitting rules severely limit density due to the costs they impose and must be relaxed in order to bring the price of housing down throughout the state.

The Census Bureau itself writes “The SPM does not replace the official poverty measure and is not designed to be used for program eligibility or funding distribution.” As long as we continue to measure the Supplemental Poverty Measure, don’t be surprised if poverty remains “high” in California even during the best economic times. That’s because of the way poverty is defined and because artificial limits on the housing supply make it expensive to live here.

Tom Church is a research fellow at the Hoover Institution. He studies entitlement reform, health care policy, income inequality, poverty, the federal budget, and immigration reform. He also contributes to PolicyEd, the Hoover Institution’s initiative to educate Americans about public policy. The opinions in this article are presented in the spirit of spurring discussion and reflect those of the author and not necessarily the treasurer, his office or the State of California.