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We Need To Define Poverty Before We Measure It

Most of us would say that a homeless person with an undiagnosed mental illness, no job, no marketable skills and no bank account is “poor.” Does the label still apply if that person wins a $1 million lottery jackpot?

What about a doctor just out of medical school who has $200,000 in debt, no savings, and a residency that pays $40,000 a year for long hours of arduous work? Is this also an example of poverty?

Is an aspiring novelist “poor” if she has a newly minted liberal arts degree from a prestigious college, $100,000 in debt, a minimum-wage day job and no history of selling any books? How about the novelist’s co-worker, who has the same income but has no debt and no higher education?

We are much better at counting poor people than we are at identifying them. This makes no sense, and it explains why decades of anti-poverty programs have made little headway at actually reducing poverty.

According to the U.S. Census Bureau, 2.6 million more Americans were poor in 2010 than in 2009. That brought the poverty rate to 15.1 percent of Americans, the highest since 1993.

Critics of the official poverty index, which is based on comparing food costs to income, point out that it ignores many significant financial dimensions, including non-cash government assistance such as food stamps, as well as non-food expenses such as out-of-pocket medical expenses, transportation and child care. Various alternative measures have been created, but so far none have caught on.

I believe we approach poverty from the wrong direction. Most definitions of poverty focus on an individual’s circumstances – how much money the person has, or how much income the person receives, compared to some benchmark.

I think of poverty as a human condition that does not change as quickly or readily as circumstances. A poor person, in my view, is one who cannot adequately provide for himself, or who cannot conserve and manage what resources are available to him.

No wonder anti-poverty efforts ultimately fail when they merely provide cash or goods. If you hand a poor person a check, you still have a poor person, just one who has some money at the moment. The Chinese understood this when they created the proverb about the difference between giving a man a fish and teaching him to fish.

If we measure poverty according to net worth or according to single-year income, the homeless lottery winner is richer than the young doctor, the aspiring novelist and the minimum-wage worker. In fact, the latter two might already be part of the 15.1 percent of the population that is officially considered poor.

But I would consider the mentally ill, homeless person to be the poorest of the group. Winning $1 million may temporarily change this person’s circumstances, but it will not change his condition. With no financial skills and an untreated, disabling illness, the lottery winner is likely to quickly squander his windfall and revert to his former situation.

The minimum wage worker, lacking skills or opportunity to better his financial circumstances, also qualifies as poor in my book. But the aspiring novelist working at the same job for the same minimum wage does not – even though the novelist has $100,000 of debt.

The novelist’s degree from a prestigious school is a pretty good indicator that she has opted to follow a personal dream instead of choosing a different, more financially secure path. This person’s education and intellectual skills should continue to provide opportunities that the unskilled minimum-wage co-worker does not have. Poverty by choice ought not to be seen as poverty at all, at least for purposes of making public policy.

And what about the doctor? The doctor has the lowest net worth, at negative $200,000, of the entire group. When we consider that most minimum-wage-earners are entitled to overtime at time-and-a-half, the doctor, on a per-hour basis, may make even less than the official minimum wage. But hardly anyone would consider the doctor to be truly poor. While medicine is not the automatic ticket to wealth and luxury that people assumed it to be when I was growing up, it still provides a decent living – and provides enormous intellectual and emotional satisfaction to a lot of very smart people, not to mention the benefits to society.

We cannot make the unskilled worker or the disabled homeless person “non-poor” just by giving them cash or goods; doing so only perpetuates their poverty while masking its symptoms. To reduce poverty, we have to offer tangible help in the form of skills, treatment or some sort of structure to manage resources. This is why financial planners like me help clients set up special needs trusts for disabled family members. (My colleague Shomari Hearn has written a very good article on this topic.)

Besides tangible help, opportunity is the other vital ingredient in a recipe to reduce poverty, as well as the pseudo-poverty that comes from unemployment of capable people. The truly poor have little chance of escaping poverty when even their formerly better-off neighbors cannot find work. Some people seem to believe it is the wealthy – the people who not only have money, but also the skills (personal or hired) to retain it – who suffer most when businesses struggle with scarce capital, high taxes and onerous regulation. But if you ask someone who is desperate to find work in order to prevent her family from bouncing from one shelter to another, you’ll get a different viewpoint. A breadwinner who needs a job does not care how rich the boss gets from her labor.

The deep recession and rotten recovery has hurt a lot of people. It has cost homes, jobs, savings, marriages and more. It has pushed far too many households down to poverty-level income and net worth. But it has not made those people truly poor, at least not yet. We do not help anyone when we lump the unemployed with the unemployable under a single label of “poverty.” The problems in both groups are real, but the solutions are not entirely the same.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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