December 2010, Shawn Fremstad
In “The Role of Prices in Measuring the Poor’s Living Standards,” Christian Broda, Ephriam Leibtag, and David E. Weinstein (2009) use proprietary data—the 2005 Nielsen Homescan dataset—to analyze differences by income level in the prices paid for food, and conclude that “the poor pay less—not more—for the goods they purchase.” This paper reviews the methodology and findings of Broda et al. and concludes that it is flawed in several respects. Their methodology almost seems designed to select the subset of lower-income households who are careful comparison shoppers, and to exclude those lower-income households who are likely to have the greatest barriers to food, particularly those with disabilities, low literacy levels, and limited or no access to the internet. These differences could account entirely for Broda et al.’s main finding that lower-income households pay less than higher-income ones for food. Moreover, even if we ignore the fact that Nielsen households are almost certainly unrepresentative of households in the population as a whole, Broda et al.’s interpretation of their results as showing that the poor pay less is overstated. Finally, Broda et al.’s argument that the official poverty rate overstates actual poverty today by some 60 percent because of biases in the CPI has no basis in economic reality. There is no reason to believe that a family of four can live a minimally decent life in 2010 on only $11,025 a year, the poverty line implied by their argument.