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September 1996, Vol. 119, No. 9
Thesia I. Garner, David S. Johnson, and Mary F. Kokoski
Each year, price inflation adjustments are made for various Federal, State, and local programs in the United States. According to the Congressional Research Service,1 approximately 80 benefit programs provide cash and noncash aid, primarily to persons with limited incomes. The combined cost of these programs in fiscal year 1994 was almost $345 billion, up 11 percent from the previous fiscal year. Federal funds accounted for nearly 72 percent of total spending.
The benefit levels and eligibility guidelines for a substantial number of these programs are adjusted annually for inflation.2 For example, food stamp levels are adjusted each October for changes in the Consumer Price Index for All Urban Consumers (CPI-U) for food. Similarly, the U.S. Department of Health and Human Services poverty guidelines (or some adaptation of them)3 are adjusted each year using the CPI-U for all items.4 All of these adjustments can lead to significant changes in eligibility requirements for the receipt of government benefits and in increases or decreases in benefit levels, thereby directly influencing government budgets.
Perhaps one of the most visible results of adjusting for price inflation with respect to a specific group in the population is in the use of the CPI-U to update the official poverty thresholds published by the Bureau of the Census. Since 1969, the CPI-U has been used for this purpose; prior to that date, the U.S. Department of Agriculture's Economy Food Plan cost index was used.5 These thresholds are generally used for statistical purposes - for example, to determine the number of persons or families that are poor. Poverty rates, based on the use of the official as those poverty thresholds, are sometimes used to target government funds to poor areas.
In this article, we produce an experimental price index for poor consumers in order to determine whether such an index would be lower than, higher than, or equal to the current CPI-U. If a significant difference results, this could have major implications for funding and eligibility requirements for poverty programs, as well as for government budgeting and decision making in general. Requests for price indexes for specific sub-populations were made as early as 1958, when Kenneth Arrow noted that lower income people are likely to have consumption patterns that differ from those of higher income people; for example, lower income people spend more of their budget, on average, on necessities than they spend on luxuries. In fact, Arrow states that "there should be a separate cost-of-living index number for each income level."6 Whether such price indexes should really be used to adjust poverty thresholds or eligibility requirements is not addressed in our study, although adjustments using them are made for expository purposes.
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1 See Burke, Cash and Noncash Benefits for Persons with Limited Income: Eligibility Rules, Recent and Expenditure Data. FY 1992-1994, Congressional Research Services Report 96-159 EPW (Library of Congress, 1996).
2 See Burke, Cash and Noncash Benefits: and Gordon M. Fisher, "Poverty Guidelines for 1992," Social Security Bulletin, vol. 55, no. 1, Spring 1992.
3 The Health and Human Services poverty guidelines are a simplified version of the Federal Government's official statistical poverty thresholds are updated at different times. (See Fisher, "Poverty Guidelines for 1992.")
4 Unless otherwise noted, the term CPI-U refers to the index for all items.
5 Constance F. Citro and Robert T. Michael (eds.), Measuring Poverty: A New Approach (Washington, DC, National Academy Press, 1995)
6 Kenneth J. Arrow, "The measurement of Price Changes," in The Relationship of Prices to Economic Stability and Growth (Joint Economic Committee, I.S. Congress, Mar. 31,1958).
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