What is wrong with government statistics on poverty? Well, a lot of things. I will point out a few in a second, but in case you are thinking I am biased, here is a critique from a person in government; introductory remarks to a Conference: Improving the Poverty Measure After 30 Years by Constance F. Citro from the Committee on National Statistics, National Academy of Sciences. I particularly liked this quote:
Although we do not fully understand the reasons, it seems that the "official" standing of the U.S. measure and the fact that it is used to determine eligibility for a number of government assistance programs have made it almost impervious to change."Poverty" was defined in the 60s. A survey in 1955 showed lower income people spending roughly one-third of their income on food. Food prices in 1955 for a minimal diet were used to calculate a minimal food budget. Then 3 times that was assumed, and a minimal necessary income computed. (3.7 was used for singles, and various other arbitrary-but-not-unreasonable multipliers for other domestic situations.)
"Poverty" then was assumed to increase proportionate to increases in food prices (as officially measured) for a few years. In the early 70s, the definition was changed to increase with the full CPI (which increases faster than food prices do). Food prices have generally continued to drop relative to the CPI price level.
So what are some problems with "poverty"? The largest problem is that it defined people as poor based only on their cash income. However, there are many very large income sources for poor people that are non-cash; for instance food stamps, subsidized rents, the Earned Income Tax Credit.
Another very important problem is the definition itself. Food prices have been dropping in spite of the fact they increasingly reflect processing and packaging; wholesale commodity prices have collapsed quite a bit since the 60s. Modern Americans spend only a small fraction of their income on food; nothing near 1/3. Using the CPI as a whole to adjust the poverty level is misleading because poor people do not buy the same mix of things that richer people do.
There are also a few effects that would increase "poverty" that are not measured in it: income and wage taxation. The social security tax, for instance, eats 18% of all working poor people's incomes. When it is hiked, more poor people result.