The Census released its 2018 poverty report last week, which showed no change in the poverty rate from the prior year. What follows is a novel rundown of the state of poverty and welfare in the United States based on my own calculations of the report’s underlying data.

The Tale of Two Measures

When you want to determine how much poverty is reduced by the nation’s welfare programs, what you normally do is determine how many people are in poverty based on the distribution of market income and then compare that number to how many people are in poverty when you include taxes and welfare benefits, i.e., the distribution of disposable income.

Using this approach, we see in the below graph that there are 77.9 million poor people based on market income and 42.4 million poor people based on disposable income. This is equal to a 24 percent market income poverty rate and a 13.1 percent disposable income poverty rate. According to this head-count poverty approach, the welfare state cut the amount of poverty by 46 percent.

In recent years, I have become more and more dissatisfied with this head-count poverty approach. By only counting the number of people moved over the poverty line, you miss all the good the welfare state does beneath the poverty line, and you get a distorted picture of what kinds of programs are the most beneficial to those with low market incomes.

A better approach is to see how far families are below the poverty line based on market income and disposable income. The total distance poor families are from the poverty line can be expressed in dollar terms as the “poverty gap.”

We see in the below graph that the market income poverty gap is $512 billion, which is to say that poor families are collectively $512 billion below the poverty line based on the distribution of market income. For disposable income, the poverty gap is $173 billion. This means that the welfare state cut the poverty gap by 66 percent.

Another way to illustrate the difference between head-count poverty and the poverty gap is with the next couple of graphs, which allow you to see both at the same time.

In the first graph, I have plotted market income as a percent of the poverty line for the first 25 percentiles, i.e. the bottom fourth. Incomes go up as you move from left to right, and incomes get above the poverty line right at the 24th percentile, which indicates a market poverty rate of 24 percent.

To eliminate poverty, what you have to do is fill in the white area (the poverty gap) so that every percentile has an income that is at or above 100 percent of the poverty line. In the next graph, I show how much of the poverty gap is filled in by our current welfare state.

When we bring in taxes and transfers, we see that incomes get above the poverty line at the 13.1st percentile, indicating that the disposable income poverty rate is 13.1 percent. But notice how much information you miss out on by only doing a head-count measure.

The head-count measure implies that only the red wedge between the 13.1st percentile and the 24th percentile matters when we are talking about poverty reduction. But clearly all of that red to the left of the 13.1st percentile also matters. Indeed, that is the majority of the poverty reduction delivered by the welfare state.

What these poverty gap figures show us is that the welfare state is perfectly capable of cutting poverty dramatically. We just need to make it bigger.