This week, while trying to understand why the American middle class feels poorer each year despite healthy GDP growth and low unemployment, I came across a sentence buried in a research paper:The U.S. poverty line is calculated as three times the cost of a minimum food diet in 1963, adjusted for inflation.
The formula was developed by Mollie Orshansky, an economist at the Social Security Administration. In 1963, she observed that families spent roughly one-third of their income on groceries. Since pricing data was hard to come by for many items, e.g. housing, if you could calculate a minimum adequate food budget at the grocery store, you could multiply by three and establish a poverty line.Orshansky was careful about what she was measuring. In her January 1965 article, she presented the poverty thresholds as a measure of income inadequacy, not income adequacy—”if it is not possible to state unequivocally ‘how much is enough,’ it should be possible to assert with confidence how much, on average, is too little.”
if you measured income inadequacy today the way Orshansky measured it in 1963, the threshold for a family of four wouldn’t be $31,200.It would be somewhere between $130,000 and $150,000.And remember: Orshansky was only trying to define “too little.” She was identifying crisis, not sufficiency. If the crisis threshold—the floor below which families cannot function—is honestly updated to current spending patterns, it lands at $140,000.What does that tell you about the $31,200 line we still use?
I'm a little skeptical of the way the author goes about recalculating the poverty line, but I do think the following is largely true:
The single largest line item isn’t housing. It’s childcare: $32,773.This is the trap. To reach the median household income of $80,000, most families require two earners. But the moment you add the second earner to chase that income, you trigger the childcare expense.If one parent stays home, the income drops to $40,000 or $50,000—well below what’s needed to survive. If both parents work to hit $100,000, they hand over $32,000 to a daycare center.The second earner isn’t working for a vacation or a boat. The second earner is working to pay the stranger watching their children so they can go to work and clear $1-2K extra a month. It’s a closed loop.
There was also this interesting bit about the quality difference between items in the 1950s and thing now. I know that I've often pointed out the quality improvements of certain items over the last three-quarters of a century, but there is a good point here that if the cheapest version you can buy of a certain thing also happens to be a much better version of the thing, it doesn't really count as an improvement...it's still the cost of participation.
Economists will look at my $140,000 figure and scream about “hedonic adjustments.” Heck, I will scream at you about them. They are valid attempts to measure the improvement in quality that we honestly value.I will tell you that comparing 1955 to 2024 is unfair because cars today have airbags, homes have air conditioning, and phones are supercomputers. I will argue that because the quality of the good improved, the real price dropped.And I would be making a category error. We are not calculating the price of luxury. We are calculating the price of participation.To function in 1955 society—to have a job, call a doctor, and be a citizen—you needed a telephone line. That “Participation Ticket” cost $5 a month.Adjusted for standard inflation, that $5 should be $58 today.But you cannot run a household in 2024 on a $58 landline. To function today—to factor authenticate your bank account, to answer work emails, to check your child’s school portal (which is now digital-only)—you need a smartphone plan and home broadband.The cost of that “Participation Ticket” for a family of four is not $58. It’s $200 a month.
I totally buy that these cut-offs work this way:
- The View from $35,000 (The “Official” Poor)
At this income, the family is struggling, but the state provides a floor. They qualify for Medicaid (free healthcare). They receive SNAP (food stamps). They receive heavy childcare subsidies. Their deficits are real, but capped.
- The Cliff at $45,000 (The Healthcare Trap)
The family earns a $10,000 raise. Good news? No. At this level, the parents lose Medicaid eligibility. Suddenly, they must pay premiums and deductibles.Income Gain: +$10,000Expense Increase: +$10,567Net Result: They are poorer than before. The effective tax on this mobility is over 100%.
- The Cliff at $65,000 (The Childcare Trap)
This is the breaker. The family works harder. They get promoted to $65,000. They are now solidly “Working Class.”But at roughly this level, childcare subsidies vanish. They must now pay the full market rate for daycare.Income Gain: +$20,000 (from $45k)Expense Increase: +$28,000 (jumping from co-pays to full tuition)Net Result: Total collapse.When you run the net-income numbers, a family earning $100,000 is effectively in a worse monthly financial position than a family earning $40,000.
Finally, I really found the following part interesting. I certainly remember the Covid window where it seemed like there was more money sloshing around. Maybe it was because it was harder to spend it (nobody was going out, a lot of social activities were impossible), but this description may also line up:
In April 2020, the US personal savings rate hit a historic 33%. Economists attributed this to stimulus checks. But the math tells a different story.During lockdown, the “Valley of Death” was temporarily filled.Childcare ($32k): Suspended. Kids were home.Commuting ($15k): Suspended.Work Lunches/Clothes ($5k): Suspended.For a median family, the “Cost of Participation” in the economy is roughly $50,000 a year. When the economy stopped, that tax was repealed. Families earning $80,000 suddenly felt rich—not because they earned more, but because the leak in the bucket was plugged. For many, income actually rose thanks to the $600/week unemployment boost. But even for those whose income stayed flat, they felt rich because many costs were avoided.