A few weeks ago, Michael Green published a post where he argued that the poverty line for a family of four in the U.S. wasn’t $32,100 in annual income (as currently claimed by the Department of Health and Human Services), but closer to $140,000 per year.
He maintains that how poverty was determined historically (based solely on food prices) no longer holds because the costs of other necessities (namely housing, healthcare, and childcare) have gone up considerably. Therefore, a typical family of four needs far more income to participate in society today than they would’ve needed a few decades ago.
I believe that this thesis is fundamentally correct and the real poverty line is much higher than the $32,100 figure provided by the DHHS. However, how Green goes from this correct diagnosis to a revised $140,000 per year “poverty line” is flawed in many ways.
I have no interest in taking apart the $140,000 figure because others have thoroughly debunked it already, and even Green himself revised it down to $94,000 one week later. That alone should illustrate how outlandish his original $140k poverty line estimate was.
However, even Green’s more reasonable $94,000 poverty line for a family of four is still slightly exaggerated. The problem with this number isn’t the data Green uses, but how he applies it.
Ironically, Green bashes economists for championing rising home prices and 401(k) balances as signs of improving wealth, but, with similar naiveté, assumes that everyone pays the average price for all their goods and services. But they don’t. In the real world, the costs associated with things like childcare and housing vary significantly and can be much lower than the average.
For example, I know a woman who is unmarried with three children. Her and her boyfriend both work and they each make less than $20 an hour. As a result, their household income is less than $80,000 per year.
According to Green, this family would be struggling just trying to keep up with their childcare costs. Is that what happens in practice? No. When their children aren’t in school, they stay with the woman’s mother. So that hypothetical $32,000 in childcare costs (for two children) goes to $0 (for three children). While not everyone has this luxury, millions do, and a poverty metric that ignores the informal economy overlooks how the working class actually survives.
More importantly, if she didn’t have her mother there, she could consider other relatives to watch her kids or pay someone to watch them for far less than $32,000 per year. Most people aren’t isolated economic units. They exist within a broader network of friends and family that can provide real economic value that offsets some of these costs.
I understand that this is just one anecdote, but it exemplifies the logical flaw in Green’s argument. He assumes that people will willingly go to work, earn a low wage, and then spend it all on childcare (i.e., pay the average price). No, they won’t! If the second earner doesn’t make enough, they will stay home and watch the kids. Or they will only work part time (nights/weekends). Or they will find a cheaper childcare arrangement.
This demonstrates that there’s a big difference between the formal market and the informal market, especially for childcare. Green’s analysis assumes that everyone pays the sticker price at a licensed daycare center (i.e., the formal market). But in reality, millions of families operate in the informal market, utilizing grandparents, neighbors, or split-shifts to reduce their childcare cost significantly.
The same logic applies for housing as well. For example, the average price for a one-bedroom apartment in New York City is around $4,000. If we assumed that everyone in NYC paid that price for housing, then it would be easy to argue that lots of people in NYC are in deep poverty.
However, if you actually look at the data, the median rent paid for an apartment in NYC is only $1,650 per month across 2.3 million rental units. How is that possible? Because this figure includes rent-stabilized units, rent-controlled units, and public housing units which are much cheaper than market rate apartments. When we use the average market rate, we skew this number upward and exclude over half of NYC’s housing stock.
And that’s just what’s in the formal housing market. There are many informal housing arrangements that fly below the radar that are much cheaper as well. For example, one of my wife’s friends shares a room in Brooklyn with two other people and only pays $500 a month. While this is a bit extreme, she’s living in Brooklyn for only $500 a month! These kinds of housing situations are unlikely to be in the data, but they exist nonetheless.
I understand that the NYC housing market is very different from the rest of the U.S., but it demonstrates that housing options are far more diverse than what “the average” suggests. The same goes for childcare.
As a result, many families can get by on much less than what Green assumes. Does that mean that the poverty line for a family of four is only $32,100? No. It’s definitely more than double that.
But is that really a surprise? If low skilled workers now earn $20 an hour (~$40,000 per year), is it unreasonable to expect people to earn more than that to raise a family of four? I don’t know. Unfortunately, questions like this are more ethical than financial in nature, which isn’t my area of expertise.
Regardless of what you believe about the true poverty line, it’s fair to say that it’s far below $140,000. And Michael Green knows that.
The real genius of his article was saying something blatantly true and blatantly false at the same time. This is how you maximize engagement and go viral.
Why does this work? Because it gets those who believe the truth to come out and support you and those who think it’s false to come out against you. For example, consider this image I saw on LinkedIn recently:
This is incredible engagement bait because it says something true (“If you can’t tip your server, don’t go out to eat”) and something false (“You should tip your server 40%”) at the same time. Max outrage. Max engagement. Rinse. Repeat.
This is basically what Green did in his original article and it worked. Multiple readers asked me about it, so I felt like I had to respond.
Green is far smarter than me and I have nothing against him. Even though I disagree with his long-held stance that passive indexing is in a massive bubble, he’s a great thinker.
However, people are also more complicated than Green assumes. For example, you can run the numbers and declare that someone will run out of money in retirement using the 4% Rule, but they probably won’t. In practice, they will cut back as their assets decline. They will change their behavior. They will adapt.
This explains why so few people actually use the 4% Rule. It’s too robotic to fit actual human behavior. However, it’s a great convenience for investment nerds like myself and Green.
But convenience doesn’t equal truth, whether we look at the 4% Rule or the poverty line. Thank you for reading.
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This is post 481. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data
