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The politics of poverty
And the poor get poorer. Federal government fudges economic figures. What’s next?

WHEN THE US Census Bureau released its annual income and poverty report two weeks ago, progressives immediately pointed to the numbers — which showed an increase of 1.7 million people living below the poverty line from the previous year — as evidence of the failure of President George W. Bush’s economic plan. Senator Ted Kennedy, for one, told the Boston Globe: "This troubling development should be a wake-up call to the White House that it’s time to reverse course on the economy." Kennedy’s critique of the Bush economic plan may have been reflexive, but he was right — even more so when the poverty and income numbers released by the Census Bureau are recalculated to adjust for a significant error in how they were tabulated.

The Phoenix has discovered that the Census Bureau calculated the 2001 after-tax-income figures using incorrect tax rates. The result is that after-tax income dropped more steeply last year than the Bureau reported. Here’s how it happened: the Census Bureau used the wrong marginal tax rates to calculate after-tax-income data for 2001. In calculating taxes for 2001, the Bureau used 15 percent as the lowest marginal tax rate, rather than the correct rate of 10 percent, which went into effect that year after Congress passed Bush’s first tax cut. Why did Census Bureau statisticians do this? Because the tax tables published by the Internal Revenue Service that year set the lowest marginal tax rate at 15 percent in order to account for the tax "rebates" of $300 for individuals and $500 for heads of households that were sent out that year. In fact, the "rebates" were advances on the tax reduction; to account for the discrepancy, the IRS did not reflect the tax cut in the tax tables that year. Census Bureau statisticians simply went with the published figure of 15 percent, instead of the correct one of 10 percent. (See "Follow the Money," this page.)

This resulted in the Bureau’s overestimating most taxes by $300 for individual taxpayers, $500 for heads of households, and $600 for couples. Accordingly, its estimates of after-tax income were low by the same amount. In short, the total amount of income unaccounted for in 2001 is roughly $39 billion, based on data from the Internal Revenue Service.

The mistake has been verified by officials in the Census Bureau’s Housing and Household Economic Statistics Division, as well as by economists familiar with the data. "Our intention is to rerun the numbers," says Chuck Nelson, assistant chief for the division. He would not say when that will take place, or how the corrected figures will be released. "We could publish right away over the Internet, or wait until next year to include them in the annual report, or do something else, based on the extent of the impact of the correction."

The new figures, however, will show that the 2.2 percent decline in pre-tax income during the 2001 recession year was mostly offset by the tax cut. For the year following the recession, however, they will show a large drop in after-tax median household income — roughly 1.5 percent. All of which suggests that the "jobless recovery" has had a greater negative effect on households’ ability to spend and save money. Or, put another way, middle-class households had a much tougher time last year than they did during the actual recession, which officially ended in the fall of 2002.

Talk about a wake-up call.

IN SOMETHING OF an understatement, Jared Bernstein (no relation), a senior economist at the left-leaning Economic Policy Institute, describes the poverty statistics released annually by the Census Bureau as "very political numbers." The poverty threshold set each year by the Census Bureau, for example, determines who qualifies for means-tested assistance programs like food stamps, welfare, health care, and housing subsidies. That threshold, $18,244 for a family of four, is unaffected by the Census Bureau’s error in tabulating income statistics for 2001.

But the revised numbers will show that three separate calculations for median household income, currently showing statistically insignificant declines of less than 0.5 percent, will instead reveal declines of roughly 1.5 percent from 2001 to 2002. Those measures all add the value of cash and non-cash government assistance, and subtract the amount paid in taxes. One measure stops there; the second also adds the value of Medicare and Medicaid; and the third further adds return on home equity. Although these measures of income are not tied to any government-spending programs and have no practical, immediate impact on policy, they matter greatly to the politicians who make economic policy and the advocates who try to influence that process. "Government officials went out of their way to argue that middle-income families didn’t really lose ground in 2002," says Arloc Sherman, a poverty analyst for the Children’s Defense Fund, of the recently released Census Bureau statistics. "Now it looks like income figures are falling after all."

To truly grasp just how political these statistics are, though, it’s instructive to look at how the Bush administration handled the announcement of this fall’s numbers. The Census Bureau report is typically published on a Tuesday in late September. Reporters from the major media gather at the National Press Club in downtown Washington, DC, where the Census Bureau tells them what Americans earned in the previous year, and how many of them lived below the poverty line.

This year things were a little different. The Bureau released the numbers on a Friday. In the afternoon. Hours before a major Jewish holiday. In Suitland, Maryland. Just as another branch of the administration released good news about the growth of the economy.

It’s hard to imagine what the administration would have done had the numbers been calculated correctly to begin with. Either way, critics say that the Bush administration is trying to keep important economic data from the public. "They’re hiding from it. They’re running from it," says Massachusetts Advocates for Children policy director John Mudd, who describes the original, uncorrected figures as "frightening."

Bureau personnel insist that they did not try to spin the numbers in the new report on income and poverty, but consider the headline they put on the official Census Bureau press release of Friday, September 26: POVERTY, INCOME SEE SLIGHT CHANGES; CHILD POVERTY RATE UNCHANGED, CENSUS BUREAU REPORTS.

Start with the first half, in which the headline writer avoided mention of the most fundamental information — the direction of the changes. Combined with the subjective term "slight," the headline gives the impression that the changes in poverty and income were so small as to be meaningless.

Were they? The poverty rate rose by 0.4 percentage points. Since the Census began the surveys in 1959, the poverty rate has risen 13 previous times, at an average of roughly 0.6 points. But median household income actually dropped by 1.1 percent, or $500 in adjusted dollars; only six times since 1969 has it dropped by more. Per capita income dropped even more, by 1.8 percent. (None of these figures is affected by the erroneous calculations.)

Then there’s the second part of the headline, which is a flat-out lie. Of the four ways the report measures child poverty (again, all unaffected by the error), three increased by statistically significant amounts, explains Sharon Parrott, a senior researcher for the Washington, DC–based Center on Budget and Policy Priorities. The other rose from 16.3 percent to 16.7, but that 0.4 percentage-point increase was a hair below the 90 percent statistical confidence level that the Bureau requires.

At best, one could argue that the numbers don’t definitively prove the rate went up — but they certainly don’t provide any evidence that the rate remained the same. "To lead with a headline that said the rate was unchanged is very odd," Parrott says. If 400,000 more children live in poverty, as the report says, and the total number of children rose only slightly, she asks, how else can one interpret it but as a higher rate of children in poverty?

"I usually try to defend [the Census Bureau], but that’s hard to defend," says Notre Dame economics professor David Betson. "I find that extremely misleading."

Even Robert Rector, a senior research fellow at the conservative Heritage Foundation, conceded that child poverty had risen — although he went on to blame it on "the lack of work and marriage."

HERE’S A QUESTION that matters to economists and presidents alike: have income and poverty rates historically continued to worsen for a while following a recession? Economists care because they like to think about this sort of thing. Presidents care because they need to know how to spin economic data to show that the economy is on track.

If the answer is yes, then one would expect the declines in income and increases in poverty reported for 2002 — the first expansion year after the 2001 recession — and thus could see them as part of a healthy recovery. If the answer is no, then the current income numbers indicate a particularly weak recovery.

When he presented the data, the Census Bureau’s Daniel Weinberg said yes. The Times repeated this view and went so far as to say that poverty rates in the last two years "have not been as severe as in the aftermath of past recessions."

No, says the Economic Policy Institute, which sent a letter to the Times and released an analysis claiming that median family income historically rises in the first year of a recovery.

This debate will become even more important now that the alternative measures, with the error corrected, will show that the decline in middle-class income was even worse in 2002 than the Census Bureau reported.

The political spin was reflected in the ways reporters and editors from different media outlets approached even the basic reporting of the data. The New York Times and Washington Post planted the story on the front page, leading with the increase in poverty and decline in median household income. The Wall Street Journal’s news report (which ran on the following Monday, since the Journal doesn’t print on weekends) was buried on page 14. The article focused on the finding that "the rich took a hit too" and that "the gap between the rich and poor didn’t grow" — a point not found at all in the Times and only near the end of the Post article. The increase in poverty made it into the Journal’s 18th paragraph. The decline in median household income appeared in only the final sentence.

Very little reporting highlighted what may be the most dramatic number in the report: a huge decline in income among African-Americans. In part, the lack of coverage may have stemmed from difficulty handling the numbers, says Parrott; this year marked the first time respondents could designate themselves as members of multiple races, which confounds comparisons to previous years. Nevertheless, African-American median household income dropped by roughly three percent, a stunning one-year fall in a year of economic expansion.

Meanwhile, neither the media nor analysts examined the data closely enough to realize that they contained a serious flaw. With all this in mind, consider that the last President Bush lost his bid for re-election in large part because he failed to acknowledge the effect the recession of the early 1990s was having on middle-class America. The current President Bush, rather than acknowledging the facts, is trying a different tactic: keeping the facts from the public. Time will tell whether his strategy works.

David S. Bernstein can be reached at dbernstein@phx.com

Issue Date: October 10 - 16, 2003
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