“Income statistics don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume….”
So argue Michael Cox and Richard Alm in a New York Times op-ed. Using data from the Survey of Consumer Expenditures (CEX), they find that households in the top fifth of the income distribution spend “only” about four times as much, on average, as those in the bottom fifth.
The shock value in their piece comes from their report that while average annual income among the bottom fifth of households is $10,000, average spending among this group is $18,000. How can that be? Paul Krugman and Dean Baker rightly point out, as have others, that there are reasons to worry about the reliability of the expenditures data in the CEX. The income data Cox and Alm cite also is likely wrong. The $10,000 figure for income is from the Bureau of Labor Statistics’ Current Population Survey (CPS). Actually, the CPS puts the figure at a little over $11,000, as you can see here. In any event, a better data source is the Congressional Budget Office, which merges CPS data with income tax records. That source estimates average after-tax income among the bottom fifth of households to be $15,300 (here), which is closer to the expenditure figure cited by Cox and Alm. It isn’t surprising that those with low incomes spend more than they have. Some have credit cards or access to other forms of credit, and some get income from friends or family that they don’t report.
There is a more fundamental problem with Cox and Alm’s argument. I agree that it is helpful to consider consumption in addition to income, but the point applies more to our assessment of poverty (on which Mark Thoma has helpful discussion and links) than to our assessment of inequality. After all, the portion of their income that high earners don’t spend gets saved. It is therefore available for later spending. And income saved becomes an asset that provides financial and psychological security.
While there is less inequality of consumption than of income, the flip side — because those with high incomes are able to save and invest much more — is that inequality of wealth is much greater than inequality of income. The following chart shows the shares of income and wealth of the bottom two quintiles (fifths) and the top three quintiles of households in 2004 (the most recent year for which wealth data are available). The calculations are by Edward Wolff (here), using data from the Federal Reserve’s Survey of Consumer Finances. The bottom two fifths of households have just 0.2% of the total household wealth. The top fifth have 85%.
If we focus on spending, we miss this key part of the inequality story.