Income Inequality, Spending Inequality, Wealth Inequality

February 11, 2008

“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.

12 Responses to “Income Inequality, Spending Inequality, Wealth Inequality”

  1. pushmedia1 Says:

    Those in the lowest quintiles of the distribution of wealth are disproportionately young and old families. Young families will draw down on their savings (aka borrow) to smooth their consumption in the anticipation of higher incomes in the future. Sometimes this dissavings is actually the mis-measurement of investment in human capital (aka college).

    The old will drawn down on their savings because they’re retired.

    In this way, as you say, wealth inequality is the flip side of consumption inequality. But I don’t think this life-cycle take on the data screams for the need for redistribution.

    Cox and Alm’s point is that income and wealth are instrumental for consumption, not ends in themselves. If you want to track the variance in well-being in society, it makes sense to look at the variance of consumption. Despite Thoma’s misgivings about it, consumption, as a single measure, is the best aggregate measure of well-being we have and we can’t measure “level of participation” (or whatever his definition of poverty is).

  2. [...] Spending Inequality, Wealth Inequality” Lane Kenworthy, with another informative post, has useful additions to the discussion over the Cox and Alm claim that consumption inequality is less pronounced than [...]

  3. maximilian oberbauer Says:

    am I just confused, or is the previous posting missing quite a lot of points?
    The principal reason for policies that alleviate poverty is moral, that is, our conscience “screams for … redistribution.”, not some numbers.
    The point about credit is very well taken, because it is a problem if people have to issue obligations (not just running up their credit card) that might last very long, just to finance their daily lives.

  4. pushmedia1 Says:

    If our conscience screams for redistribution, then why all the numbers?

  5. Steve Roth Says:

    This really got me wondering, yet again some more, about wealth inequality: does it correlate with faster economic growth (in developed countries)?

    Went digging and came up with some tentative answers, across multiple OECD countries:

  6. Steve Roth Says:

    I don’t know why it took me so long to realize this, and I’m utterly at a loss as to why better-equipped souls like Paul Krugman didn’t realize it instantly. Cox and Alm do, after all, point out the fundamental failing of their whole analysis:

    “While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status.”

    Retirees—and the presumably gigantic gap between their collective (non)earnings and spendings—have to be a huge factor. And, uh…students? Who are being supported by well- or at least better-off parents who are nevertheless not part of the “household”?

    The sticky issue of “life stages” (my children earn nothing, but the little hoodlums sure seem to consume a lot) is basic to the most freshman-level macro-equity analysis. Why aren’t people who know better pointing this out?

    Absent this “unclear” information, the whole Cox and Alm thing seems to tell us exactly…nothing.

  7. [...] is worth paying attention to. But income is important in its own right because it confers capabilities to make choices. What matters, in this view, is what you are able [...]

  8. [...] in the bottom quintile famously consume $18,000 while only earning $11K-15K. There’s a lot of debate on how to interpret that [...]

  9. [...] inwestuje i oszczędza. Efektem tego jest naturalnie, akumulacja kapitału w rękach najbogatszych co najlepiej pokazuje dysproporcja poszczególnych grup społeczeństwa w udziale w dochodach ogół… Za Edward Wolff via Lane Kenworthy Podziel się z [...]

  10. [...] This is a key part of the reason why the distribution of wealth is much more unequal than the distribution of [...]

  11. [...] Alms’ piece in the NYT about consumption versus income inequality in the U.S., Lane Kenworthy has pointed out that they’re both utterly dwarfed by wealth [...]

  12. A E Pasquino Says:

    At what point is wealth pooled at the top considered unproductive? When it steals spendable income from lower quintiles it slows the demand economy, which no serious producer or merchant desires. A broader prosperity makes a healthier economy and a better society. I wonder why the modern Republicans find this so repellent. As if the word “good” is suspect when it’s paired with “public” or “broader”. It isn’t a redistribution of wealth that’s demanded (though we might wish it), it’s a proper distribution of reward for work. Does a hedge fund manager produce more in an hour than a high school teacher does in a year? Power and advantage reaps far too much reward relative to the good produced, if any. Often, at that level, the only good produced is for oneself. Fairer economies function better.

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