Obviously, the official poverty rate isn't reflecting shifting living conditions in the United States. A wealth of evidence shows that those who are counted as poor today have dramatically higher living standards than their counterparts in the 1960s, when the poverty rate was originally devised...

...Contradicting both economic theory and readily observable facts, the poverty rate assumes that a household's annual spending cannot, by definition, exceed its annual income.

Of course, this is not true, and economists have won Nobel prizes explaining why spending can far exceed income, particularly in advanced societies. For instance, when families are experiencing an unusually bad year, they may spend more than they earn if they see better prospects in the future. Similarly, a young worker may go into debt if she anticipates increases in her pay or benefits. Living standards, in other words, are linked to purchasing power -- and a family's purchasing power is not limited to its annual earnings.


...Among low-income households in the United States, the gap between reported income and reported spending has widened gradually since the 1960s and now has taken on chasm-like dimensions. In the early 1960s, the poorest quarter of U.S. households spent 12 percent more than their annual incomes. In 1973, spending by America's poorest fifth surpassed their income by almost 40 percent. And in 2004, spending by the poorest fifth of American families exceeded income by a whopping 95 percent; in effect, spending was nearly twice as much as income.

These patterns might be due to easy access to credit, with many consumers maxing out their credit cards or engaging in other unsustainable borrowing. (Curiously, however, recent credit surveys suggest that the net worth of poorer Americans has been rising, not falling.)

Another important factor could be the increasing instability of American incomes. Scholars such as Jacob Hacker at Yale University and Robert Moffitt at Johns Hopkins University have noted that the income of American families is likely to bounce around much more today than it did three decades ago -- whether due to greater global competition, increasing rewards for education or other factors. Intensified swings, in turn, mean that more households may, in any given year, earn low incomes and be temporarily classified as living in poverty. But they continue to spend as they did before, anticipating that their incomes will bounce back. Such oscillations also mean that the incomes reported by families in annual surveys -- the backbone for the official poverty estimate -- are a steadily less accurate indicator of true living standards.

The truth is that there has been a modest widening of the income gap in recent decades, regardless of which party is in power. That gap seems due largely to growing returns on education and skills in the global economy. Americans without a high-school diploma are losing ground against those who have college degrees. But this argues not for higher taxes on the rich, who already pay the vast bulk of U.S. taxes. It argues for reforming K-12 education so even the weakest and poorest students can compete against the world.

In any event, it's a mistake to put much stock in these class-envy statistics on income shares, gini quotients, and wealth gaps that Washington and the media like to stress. There's nothing that policy makers can do about them in the short run, and a preoccupation with inequality will do actual harm if it leads to policies such as higher tax rates that reduce economic growth. We'd suggest readers ignore the inequality fad that is intended for election-year consumption and keep their eyes on what really matters--the policies that promote growth and prosperity for all Americans.