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A Reason for Optimism

Americans across the economic spectrum are consuming more than they used to.

One narrative driving America’s populist resurgence holds that the rich are getting richer while incomes are stagnating for the rest of us. There is truth to this: income inequality has indeed grown, with a rising share going to the very richest. And income growth has been weak at best for many groups, such as working-class men, even if the problem is often exaggerated.

But there’s another aspect to the issue—how much people actually consume, as opposed to how much they earn. New research from the economists Bruce D. Meyer and James X. Sullivan lays out the data. Bottom line: consumption inequality is less dramatic than income inequality, and there’s no shocking upward trend. What’s more, Americans across the economic spectrum are consuming a lot more than they used to. (The final paper is forthcoming, but you can see an early version of it here.)

Here’s a chart from the paper depicting “90/10” inequality, referring to the well-being of the 90th and 10th percentiles. By the authors’ various consumption measures, the well-to-do are only about four times better off than the struggling—as opposed to seven times if we use after-tax income (the top line). And consumption inequality has actually fallen since the recession.

Source: Meyer and Sullivan (forthcoming)
Source: Meyer and Sullivan (forthcoming)

The authors also present basic consumption numbers for 1980 and 2014 that are adjusted for inflation. As shown in this chart calculated from their data, by every measure, families in every quintile saw their consumption rise at least 50 percent.

*The very top and bottom 5 percent are excluded for data-quality reasons, so the first and fifth quintiles include only percentiles 5-20 and 80-95, respectively.

Consumption isn’t necessarily a “better” measure of well-being than income, but it has many advantages. For one thing, incomes can fluctuate wildly from year to year as people lose jobs or experience financial windfalls, while consumption tends to be steadier. For another, income among the poor tends to be wildly underreported, thanks to a rising tendency of people not to acknowledge the money they receive from safety-net programs.

This is hardly the first study to focus on consumption data—e.g., W. Michael Cox and Richard Alm drew attention to it in their 1999 book Myths of Rich and Poor—but it cuts through some key difficulties. The biggest problem is that, as with income, people aren’t always honest in surveys about how much they’re consuming. They report only about half of their restaurant-food consumption and less than a quarter of their alcohol consumption, for example. To make matters worse, the underreporting is growing worse with time and may vary by social class as well.

The authors’ solution is to rely on the more accurate categories, which they term “well-measured consumption”: food consumed at home, housing, vehicles, and gas and oil. A separate measure excludes food, a basic necessity. The authors argue (with some complicated statistical tests) that these are accurate measures of total consumption even though they include just 40-60 percent of it.

A gap in the paper, though, is that it neglects the extremes—neither of the charts above say much about the very rich or the very poor. The fantastically wealthy stand at the center of a debate about “high-end” inequality (think Thomas Piketty’s Capital in the 21st Century), while the poorest of the poor are the focus of much new work about welfare reform (e.g., the claim from sociologists Kathryn Edin and Luke Shaefer that many poor families now live on $2 per person per day). Sorting out consumption patterns at the extremes could help us understand these phenomena. Some say $2-a-day poverty is virtually nonexistent when it comes to consumption, for example—suggesting that underreporting among the poor is quite severe—and if we’re worried about the top 1 percent earning so much money, we might also want to know how much of it they’re spending.

Broad-based increases in consumption don’t mean we should ignore growing income inequality or the stagnation of incomes for many—in fact, this combination can be unhealthy in some ways, as seen in our rising debts. But strong consumption does mean something. Things are not as bad as they seem, and have gotten better with time.

Robert VerBruggen is managing editor of The American Conservative