LIFE AT THE MARGIN.

In economics, does the concept of a "representative firm" in competitive market equilibrium make sense?  It's easy to draw up on the chalkboard, but in a world of identical firms and full information, thinking of all the price-taking firms as identical provides the class wiseacre with the opportunity to ask questions such as "in the case of a permanent adverse demand shock, which firm quits first?"  Thus, to the extent people teach the dynamics of competitive markets in any extended way, the idea of an "equilibrium firm," meaning one that under current conditions of supply and demand is indifferent between participating and not participating.  That leads to another set of opportunities for wiseacres, e.g. "why do the inframarginal firms have lower costs than the equilibrium firm, and what prevents the equilibrium firm from being more like an inframarginal firm?"  Good times.

There's an even more neglected actor in economics, namely the equilibrium consumer.  If we speak of an equilibrium of supply and demand, doesn't that suggest there is an equilibrium consumer, one who is, at the margin, indifferent between buying a little more of that good or not buying it?  We get so soon old and so late smart, the implications of being the equilibrium consumer dawned on me only after I took my pension.  "[Consider] a world that feels very much out of equilibrium, or one in which it appears that the equilibrium, thanks to returns to human capital and to smart machinery, feels more like Marx or Dickens than like the Treaty of Detroit."  And yes, academic economics has considered the way in which making decisions at the margin to do without present themselves.  I recall a line from one of my price theory texts in the Chicago or U.C.L.A. (motto: On! Wisconsin) tradition that goes something like "My wife says we need something and I respond 'Of course we need it.  What do we want to do without?'"  Yeah, that's likely to get you hauled before Student Affairs for some sæcular sin.  Or, less controversially, how many readers, particularly those of the Baby Boom era, recall asking for something only to hear Mom or Dad say "we can't afford that."  It's easier to instill the notion that stuff is expensive in youngsters than to get into a discourse about optimizing along margins and thinking through what, exactly, the kiddos would be willing to give up to have that Next Big Thing (which in the American High, involved more real dollars for fewer features than most of what's at Target or Best Buy these days).

All of that by way of a long prologue to a recent discussion, I think originating with Michael Green's "My Life Is a Lie," characterizing the national government's "poverty line" as "a broken benchmark" that "broke America."

This week, while trying to understand why the American middle class feels poorer each year despite healthy GDP growth and low unemployment, I came across a sentence buried in a research paper:

“The U.S. poverty line is calculated as three times the cost of a minimum food diet in 1963, adjusted for inflation.”

I read it again. Three times the minimum food budget.

That calculation seemed logical in 1963, when Henry Aaron was a rising star with the Milwaukee Braves.

The formula was developed by Mollie Orshansky, an economist at the Social Security Administration. In 1963, she observed that families spent roughly one-third of their income on groceries. Since pricing data was hard to come by for many items, e.g. housing, if you could calculate a minimum adequate food budget at the grocery store, you could multiply by three and establish a poverty line.

Orshansky was careful about what she was measuring. In her January 1965 article, she presented the poverty thresholds as a measure of income inadequacy, not income adequacy—”if it is not possible to state unequivocally ‘how much is enough,’ it should be possible to assert with confidence how much, on average, is too little.”

She was drawing a floor. A line below which families were clearly in crisis.

For 1963, that floor made sense. Housing was relatively cheap. A family could rent a decent apartment or buy a home on a single income, as we’ve discussed. Healthcare was provided by employers and cost relatively little (Blue Cross coverage averaged $10/month). Childcare didn’t really exist as a market—mothers stayed home, family helped, or neighbors (who likely had someone home) watched each other’s kids. Cars were affordable, if prone to breakdowns. With few luxury frills, the neighborhood kids in vo-tech could fix most problems when they did. College tuition could be covered with a summer job. Retirement meant a pension income, not a pile of 401(k) assets you had to fund yourself.

There's all kinds of Cold Spring Shops material in that excerpt: restrictive zoning, increased labor force participation by married women, Medicare and Medicaid, student loans, frugal Depression babies, including those parents of Baby Boomers saying "we can't afford it."

And that drives Mr Green to offering his updated poverty line.

The single largest line item isn’t housing. It’s childcare: $32,773.

This is the trap. To reach the median household income of $80,000, most families require two earners. But the moment you add the second earner to chase that income, you trigger the childcare expense.

If one parent stays home, the income drops to $40,000 or $50,000—well below what’s needed to survive. If both parents work to hit $100,000, they hand over $32,000 to a daycare center.

Opening up yet another set of pet Cold Spring Shops quibbles.  But people with bigger platforms than mine also raised quibbles.  In The (Not Detroit) Free Press, Tyler Cowen notes,

Green’s core argument is that participating in the basics of American life costs much more than it used to, and as a result, we should set a new poverty line: up from about $32,000 a year for a family of four with two kids, to $140,000 a year.

Fortunately for us, this is all wrong. The underlying concepts are wrong, the details are wrong, and the use of evidence is misguided. There are genuine concerns about affordability in the United States, but the analysis in this article is not a good way to understand them.

He goes on to invoke those frugal parents of the American High.

[W]hen measured properly, poverty in America has been falling for many decades. In 2023, researchers from the University of Notre Dame, the University of Chicago, and Baylor University measured poverty using consumption—what people are actually able to buy—rather than income, which can fluctuate due to a variety of factors unrelated to well-being. They found that since 1980, poverty has fallen by more than 27 percentage points. This was a byproduct of tax cuts, government benefits, and overall economic growth.

Green fails to recognize this basic truth. Using 1955 as a comparison year, he argues that it has become tougher for Americans over time to make ends meet. The data doesn’t support this. Living standards may have risen more rapidly immediately after World War II than they have after 1973, but since then, economic life in America has continued to improve.

I doubt that Professor Cowen would recommend publication of Mr Green's essay in the Journal of Public Economics. "Green’s essay is anecdotal rather than systematic, omits evidence of qualitative improvements in standard of living, and is riddled with errors of logic, data selection, and interpretation."  If Scott "First World Problems" Winship is the second referee, transmission of these comments is not intended to encourage resubmission.  "It is…The Worst Poverty Analysis I Have Ever Seen."  Reason's Eric Boehm notes that others have joined the pile-on.

Michael Green caused a stir on social media last week with his outlandish claim that the federal poverty line should be raised to cover individuals earning as much as $140,000 annually.

That claim, which Green made on his Substack and subsequently in The Free Press, has been widely debunked by the likes of Scott Winship, Jeremy Horpedahl, Noah Smith, and Tyler Cowen (whose article pointing out Green's errors was published, somewhat hilariously, in The Free Press too).

In his response, though, Mr Green might be invoking the life at the margin with which we started this mini-dissertation.  "Green argues, essentially, that many middle-class families simply feel more economically stretched today than they did in the past, so much so that traditional measures used to define poverty are meaningless today."  But that would come as no surprise to those Depression babies become parents in the American High.  Mr Boehm offers that connection.  "Even relatively wealthy people can feel economically stretched without being in such dire need that it requires federal intervention—which is what Green is ultimately arguing for with all of this."  Well, yeah, you need that data plan but you'd rather not give up that subscription housecleaning service to get it.  Both come with substantial penalties for early withdrawal!  Tradeoffs are a part of life.  His colleague Liz Wolfe writes at length at the various margins along which buyers, in or out of equilibrium, optimize.

Green is correct to identify housing, child care, health care, and education costs as areas that have not gotten better over time to the degree that many of us had hoped. These are extreme pain points for many Americans, particularly for those who find themselves too rich for welfare, but too poor to be able to have much margin.

And, she continues, urban agglomeration economies smack right up against rent gradients.

And it is a good thing for people to care about agglomeration effects and to want to go where the jobs are, to be upwardly mobile and thus geographically mobile; if the price to doing so is incurring massive housing costs, one response is that those tradeoffs are natural and part of life. Another response is that we're disincentivizing people who would otherwise be highly productive workers, that we're making it costlier for them to pursue the most productive use of their time and talent.

(Sound familiar?)  To which I add: the equilibrium Manhattan yuppie is indifferent between spending a high salary on Manhattan amenities and some other bundle involving a lower salary and different locational amenities.  But, the author being Liz Wolfe and the magazine being Reason, the narrative has to be government as the source of poverty.

[F]eeling encumbered by tradeoffs is rather different than being poor. We should allow these words to retain their meanings. Affordability discourse is useless if it's not accurate, and every politician and pundit should strive to accurately describe Americans' financial realities, not inflate or exaggerate hardship to serve a particular political agenda.

Most of the time, politicians will offer one solution and one solution only: the warm embrace of the state to alleviate people's financial woes. In reality, getting the state the hell out of the way would help bring down prices in most of the categories people cite as the ones giving them the most trouble.

And in economics, we can teach the political economy of competitive markets allocating resources efficiently whilst acknowledging that "allocating scarce resources among competing uses" means people making a lot of decisions at the margin to do without a little of this in favor of some of that.

In the course of a lengthy discourse on inflation measures, Scott Alexander posts a passage that pretty well summarizes the state of debate over the meaning of a poverty measure.

My heuristic is that when the mainstream consensus refuses to engage with a critique and hem and haw about it being “problematic”, they are usually wrong. But when they explicitly declare “This is incorrect” and write papers explaining their reasoning, they are usually right. The experts have explicitly called the various TruthStats.org sites incorrect, and their arguments seem sound. I side with them.

I'll borrow from his next sentence to note, all that having been said, there are subtler ways in which poverty measures can fail, and the commentary other commentators have linked to develop many of those ways.  Ultimately, though, the genuinely poor, the modestly well-to-do, and the genuinely rich alike all face the problem of optimizing along various margins, and all will be pinched by tradeoffs.