Authored by Michael Lebowtiz via RealInvestmentAdvice.com,
Michael Green, Chief Strategist and Portfolio Manager at Simplify Asset Management, wrote a provocative Substack essay, Part 1: My Life Is A Lie, that is sparking a debate among economists and raising awareness of the affordability crisis. It’s not just the wonky economists debating the merits of his article; The Washington Post, CNN (News Central), FOX Business (Charles Payne), and social media are also critiquing it.
Michael uses the official poverty line calculation and what he deems the “Mathematical Valley” to help his readers better appreciate why affordability is becoming a hot topic.
The Poverty Line
Per Michael Green:
But there was one number I had somehow never interrogated. One number that I simply accepted, the way a child accepts gravity.
The poverty line.
I don’t know why. It seemed apolitical, an actuarial fact calculated by serious people in government offices. A line someone else drew decades ago that we use to define who is “poor,” who is “middle class,” and who deserves help. It was infrastructure—invisible, unquestioned, foundational.
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.”
I read it again. Three times the minimum food budget.
I felt sick.
This article summarizes Michael Green’s perspective and opposing arguments regarding the poverty line. Bear in mind, as you read on, that there is no “right” poverty line. However, what Michael Green has successfully done is ignite a conversation about the large number of Americans who feel left behind economically and repeatedly raise affordability as a key political issue.
The 1963 Poverty Line Benchmark
Green’s analysis centers on the poverty line, which was established in the early 1960s by Mollie Orshansky. The original formula she developed was simple: take the cost of a basic basket of food for a family, multiply it by three (on the assumption that food accounted for about one-third of a household’s budget), and use that as the poverty threshold.
Her benchmark was then adjusted for inflation each year, but the underlying assumptions about household spending and needs haven’t been updated since. Per Green:
Orshansky’s food-times-three formula was crude, but as a crisis threshold—a measure of “too little”—it roughly corresponded to reality. A family spending one-third of its income on food would spend the other two-thirds on everything else, and those proportions more or less worked. Below that line, you were in genuine crisis. Above it, you had a fighting chance.
Notably, Green emphasizes that Orshansky’s poverty line served as a threshold. Those with incomes beneath this threshold were in crisis.
Orshanky’s Poverty Line Is Outdated
Green emphasizes the items we spend money on, and their costs compared to food prices have changed significantly since then. For example, he points out:
Housing costs as a percentage of income rose significantly.
Cell phones didn’t exist.
Healthcare costs have become the most significant expense for most families.
A second income became a necessity for many families after the formula was devised, leading to increased childcare expenses.
He also notes rising college and transportation costs.
Simply, feeding a family no longer constitutes a third of total family budgets. To wit, he states:
Housing now consumes 35 to 45 percent. Healthcare takes 15 to 25 percent. Childcare, for families with young children, can eat 20 to 40 percent.
Michael Green’s punchline:
Which means 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.
What does that tell you about the $31,200 line we still use?
It tells you we are measuring starvation.
Green’s Data Analysis
Green supports his theory with a basic family budget based on national averages. He applies it to a family earning the median household income of $80,000. The results, as we share below, cast significant doubt on the value of the current $31,200 poverty line. Furthermore, they argue that at least half of the nation is “living in deep poverty.” Per Green:
I wanted to see what would happen if I ignored the official stats and simply calculated the cost of existing. I built a Basic Needs budget for a family of four (two earners, two kids). No vacations, no Netflix, no luxury. Just the “Participation Tickets” required to hold a job and raise kids in 2024.
Using conservative, national-average data:
Childcare: $32,773
Housing: $23,267
Food: $14,717
Transportation: $14,828
Healthcare: $10,567
Other essentials: $21,857
Required net income: $118,009
Add federal, state, and FICA taxes of roughly $18,500, and you arrive at a required gross income of $136,500.
The graph below shows the cumulative price growth for $1,000 across many of the spending items Michael Green identifies above. As shown, except for transportation prices, all the others have significantly outpaced food prices. Thus, to Green’s point, a poverty line based on a steady price-consumption relationship for these goods and others in relation to food prices has become grossly ineffective.
