The ALICE reports claim to estimate the “minimal total cost of household essentials” when determining how much income is needed to “afford the basic necessities.”[17] Rather than measuring the minimum costs of essential goods and services, however, the reports rely on data on average consumer spending. This is an inappropriate conflation of two distinct statistics — minimum costs cannot be estimated by average spending amounts. When the latest report claims that 38% of households in Michigan cannot afford essential goods, it does not mean that these households cannot afford to purchase necessities. Instead, it means these households likely spend less than average on a selected set of goods and services — a much less meaningful result.
For example, the measurement for the costs of housing is determined by using the U.S. Department of Housing and Urban Development’s Fair Market Rent Studies.[18] The ALICE reports use the rent costs for the 40th percentile for one- and two-bedroom housing units for its estimate of minimum costs. But, by definition, this does not represent the minimum costs of housing. In fact, the HUD figures indicate that 40% of other housing options are available at a lower cost, and why the report assumes that every household needs to pay this average amount is not explained.
More specifically, in the latest ALICE report, the minimum need for housing costs is listed at $779 per month for a multiple person household. This is the 40th percentile of housing costs based on surveys of what people pay for a two-bedroom home or apartment.[19] By definition, there is housing available for less than that — all those that fall below the 40th percentile. This housing may not be as spacious, modern or in as desirable of a location, but that does not mean it cannot meet a household’s needs. The ALICE report assumes that a household spending $700 per month on rent cannot afford any housing until they spend at least $80 more.
This criticism applies to other measures in the report that are used to estimate the costs of basic needs. The technology category is “the cost of a basic smartphone plan for each adult” and is listed as costing $55 for a single-adult household and $75 for all households with two or more people.[20] This was derived from an article published by Consumers Report that compared the costs of phone plans available from just three companies.[21] A simple web search finds many phone plans available from other companies at half those costs, or less.[*] The ALICE report misinterprets some information about the average costs of some goods by declaring them to be a useful estimate of the minimum costs of basic needs.
The same approach is used in the report for child care costs, estimated to be a minimum of $1,122 per month.[22] This is based on a survey of spending set at the 75th percentile.[23] This is at least an attempt to measure what child care costs, but, again, this amount varies wildly in the real world and this bare minimum estimate is more than what most people actually pay. Why everyone needs to spend at least what 75% of people currently pay is not explained. Either way, this is not a valid estimate of the minimum costs needed to afford child care.
Food costs come from the “Thrifty Level” USDA food plan, which is based in part on survey data of what food low-income people purchase, but also estimates the cost of purchasing food that would satisfy a recommended, balanced diet.[24] The USDA notes that estimating food costs in this way “incorporates average consumption, [but] it does deviate from average consumption to satisfy the dietary standards of the plan."[25] In other words, this measure is part a reflection of what people pay for the food they eat and part what they would spend if they followed the government’s dietary recommendations. This may overestimate what is needed to survive, as most people do not purchase food based on dietary recommendations offered by government officials. As the USDA also notes in its report, “Only a small percentage of Americans has a good diet.”[26]
Another reason using average spending levels to estimate the costs of necessities can be misleading is that it fails to capture broad-based changes over time. For instance, when average spending increases on some items, it could be a sign that prices are rising and these goods are becoming harder to afford. But it could also be the case that consumers are simply choosing to increase their spending on these goods and services. This could happen even while the minimum costs of these items remain unchanged or even decreases. The ALICE reports assume that all increases in their average spending figures over time indicate that goods and services are becoming harder to afford.
And, indeed, the reports’ hypothetical household budgets based on average spending steadily increase year after year. The budget based on the needs of a family of four increased from $50,345 in 2012 to $64,116 in 2019, a 27% increase.[27] The single-person household budget went from $16,818 to $23,400, a 39% increase.[28] Inflation over that period, according to the 2019 ALICE report, increased just 12%.[29]
This could reflect a jump in the minimum costs of the goods and services built into these budgets. But the reports’ method is unable to say one way or the other, despite numerous assertions in the text that necessities are becoming less affordable.[30] So, these reports err when they claim that the number of ALICE households has increased from one year to the next or that it is becoming more difficult to afford the basics, because they do not demonstrate that the minimum costs of household necessities have increased.
A related problem with relying on average spending levels is that it ensures that a sizable portion of households will always appear to be struggling financially. By definition, about half of households will spend below these averages. In fact, using this metric makes it impossible for the ALICE population to decrease substantially. Or, put another way, even if the income of every household in Michigan grew significantly, about half of these households would likely still be spending less than the average figure, and therefore, according to the ALICE methodology, still be deemed unable to afford basic necessities.
If society is generally growing richer, it is possible for a household to become better off even while their level of spending is outpaced by the average figures. The same is true in reverse: Households are not necessarily better off if their spending more closing aligns with the averages if those average levels are falling.
To illustrate, consider a family who spends exactly the same amount on the same goods one year as they did the last — house payments, grocery bills, car payments, child care, entertainment and recreation, utilities, taxes, etc. Now imagine their neighbor buys a new, expensive SUV, driving up the average spending on transportation. Did this hypothetical family get poorer as a result?
The answer, of course, is “no,” but the ALICE report’s methodology says “yes.” That some people are able to spend more does not mean that others are necessarily worse off. The ALICE methodology treats household wealth as if it is a pie to be distributed — where if one household gets a bigger piece it must mean that another has a smaller piece. But that’s not how wealth or economies work. Technological improvements and innovation often benefit consumers by enabling them to get more goods and services or higher quality goods and services for the same cost or less. Based on the ALICE report assumptions, any reduction in spending, even if more consumers are better off in the end, is a signal that people are getting poorer.
In sum, using average spending data to estimate the minimum costs of basic needs for households is inappropriate. The average levels of spending by households is more representative of consumers’ preferences for certain types of goods or levels of services than it is of the bare minimum costs needed to afford these items. It implies that people are struggling financially when their spending does not match the overall average, and that they automatically become poorer if they do not keep up with increases in average spending levels.
[*] Whistleout.com, for example, allows users to compare cell phone plans from many different providers. At the time of this writing, dozens of different plans were available for less than what the ALICE report claims is the minimum costs required to afford this service.