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A Reason for Optimism

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 [1].

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 [2].)

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) [3]

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.

ConRising [4]

*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 [5] 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 [6]. 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 ConservativeFollow @RAVerBruggen [7]

14 Comments (Open | Close)

14 Comments To "A Reason for Optimism"

#1 Comment By Sally Snyder On July 25, 2016 @ 8:06 am

Here is an article that looks at the relationship between wealth and longevity in the United States:

[8]

Poorer Americans have a substantially shorter lifespan even when they live in regions with high spending on health care.

#2 Comment By Johann On July 25, 2016 @ 9:14 am

So if median incomes are declining but consumption is going up, why is there no discussion of debt in the article. Americans are sinking further into credit card debt.
[9]

And why is there no discussion of the current account deficit? [10]

#3 Comment By Johann On July 25, 2016 @ 9:20 am

So we are buying more at Walmart and other Chinese outlet stores with borrowed money. Forgive me if I’m not so optimistic.

#4 Comment By Richard Terrace On July 25, 2016 @ 9:55 am

The advantage of measuring consumption is that it does a better job of including the gains to the current generation stemming from past productivity growth. This makes sense if you think about it. We’re all better off today because of the toil of previous generations, building infrastructure, driving scientific and technological progress to extend lives, reduce pain, etc. Incidentally, this is also the reason why pay as you go insurance systems like social security are able to pay each generation more than they paid in to the system. It’s the same advantage that accrues to each generation through productivity growth, allowing each retiring generation to receive more than it provides.
That said, I am genuinely at a loss to see what conservatives believe this argument accomplishes. Assuming that the purpose is not just to troll liberals who care about inequality (and ignoring the evidence that these pieces tend to appear whenever the public discourse about inequality starts to reach higher decibel levels), I genuinely don’t know why conservatives are attracted to the view that inequality is not as bad as we thought because of welfare and taxes!
In their conclusion, the authors of the paper you cite say that ‘accounting for taxes considerably reduces the rise in income inequality over the past 45 years’, whereas noncash benefits account for less. Now, isn’t it rather cynical for conservatives to endorse an argument that, thanks to taxes, inequality is not as bad as we thought, when we have just had a primary campaign in which ALL major conservative candidates had plans to radically slash high-end taxes. So, to present this argument honestly, you would have to say something like: ‘The truth is, inequality is made less bad by a robust and progressive tax system. However, us conservatives think that’s a bad thing, and would like to abolish the role of the tax system in reducing inequality’. How else to explain Ted Cruz’s (the guy who came second!) idea of a 10% flat tax. Did you take the time to work out how Cruz’s 10% flat tax and high consumption tax would have affected consumption inequality?
I am genuinely puzzled, though, because we have just been through a wrenching campaign in which the white working class, the conservative base, has made it clear they want jobs and dignity, not welfare. So what in heaven’s name is the point of trying to argue that the working class are not doing too bad because welfare? . Surely it isn’t beyond conservative pundits to recognize that there is a certain dignity to earning market income that is lost when those independent workers are turned into passive recipients of consumption? Why is it so hard to realize that people want the dignity of work and self-reliance?

#5 Comment By Joan On July 25, 2016 @ 10:30 am

Consumer goods bought with current income are a different matter entirely from consumer goods bought with payday loan debt. (Unless, of course, you are in the business of selling consumer goods. Then it doesn’t matter where the money comes from.) A downwardly mobile family can keep up appearances for a long time using such debt, but that doesn’t mean they’re not downwardly mobile. It’s downward mobility, not poverty as such, that is behind the rise of Donald Trump. If we want to understand the current political moment, combing the numbers for something that will give us a reason to sail along in complacency a little longer is just folly.

#6 Comment By Johann On July 25, 2016 @ 10:41 am

@Richard Terrace,

The inequality trends have continued under the Obama administration. Much of the trend is caused by monetary policy, which is neither left or right. Two other causes, uneducated worker immigration and non-free trade deals, also have had bi-partisan support.

#7 Comment By mrscracker On July 25, 2016 @ 11:30 am

I don’t know, seems to me it’s more about how much money you keep as opposed to how much you make or spend.
I’d feel better knowing folks are putting money aside in savings or investing for the future..
Anyone can spend money, rich or poor. It takes little talent. The harder part is to know how to hang on to it & spend wisely.
Didn’t a survey recently say that most Americans would be hard pressed to come up with $400. for an emergency?

#8 Comment By SteveM On July 25, 2016 @ 11:30 am

Americans are also “consuming” more health care. But that is because the price increases for insurance and health care services far exceed the nominal general inflation rate. So people are not actually consuming more health care services, they are merely paying more for what they already get. And toss in the Obamacare mandates that force people to buy very low value health insurance policies.

Moreover, increasing numbers of people out of the workforce also “consume” using money from government transfer payments to social services programs. And of course much of that money is debt funded. (Another $600 BILLION deficit for FY 2016.)

There is only so much lipstick the political cronies and economic hacks can put on a Ponzi pig. What cannot go on forever – won’t.

#9 Comment By Rossbach On July 25, 2016 @ 12:19 pm

Our current national economic policy is to export manufacturing jobs and to import millions of poor, uneducated people to work for low wages to boost profits and help support aggregated demand (via government subsidies). This increases GDP (though not per-capita GDP) but is a very poor long-term approach to economic growth.

#10 Comment By russ On July 25, 2016 @ 1:45 pm

@Richard Terrace,

Your post is curious. You seem to be operating under the assumption that this piece was written solely to confirm some conservative narrative, or to use as a “gotcha” with our liberal friends. I found it to be an interesting analysis that could help clarify the scope of the inequality problem, and determine which policy solutions might or might not be appropriate. Basically, it just seems like more/different data that someone should be talking about.

So, are you asking why it’s necessary to consider all the data when it comes to analyzing inequality, poverty, and the policy solutions? Do you really think it’s improper to consider this data?

#11 Comment By Megan On July 25, 2016 @ 2:05 pm

Hmm. I am not understanding how increase in consumption is a cause for optimism, unless you are looking at it from a business perspective.

This doesn’t account for the fact that the 1% can afford emergency expenses, school tuition, high taxes, etc. While those living paycheck to paycheck cannot, and are crippled in debt because of this. The fact that they are both spending more on gas and groceries doesn’t really tell us much. I’m all for being optimistic, but this article was a little off the mark for me.

#12 Comment By Richard Terrace On July 25, 2016 @ 4:08 pm

Hi russ. The reason I found this piece to be ‘not entirely up front and above board’ is because it constructs an argument that progressive taxation and transfer payments to low wage workers are important bulwarks against massive social inequality, whilst failing to mention that the conservative elite has spent decades trying to make taxation less progressive and trying to reduce the value of transfer payments . In other words, if the argument is true, it is true only because conservative elites have not in fact succeeded in making taxation more regressive and transfer payments less robust.
The reason it set me off is because, this year, in the age of Trump, the base has become aware that conservative elites have been lying to them for decades. And this strikes me as yet another dishonest argument from a conservative pundit who wants to convince the working class they are not doing too badly because progressive taxation and transfers – the very things that the conservative elite has always tried to convince the working class are against their interests!
Mr. Verbruggen says ‘Things are not as bad as they seem, and have gotten better with time.’. So what are you complaining about, working class whites? Haven’t you noticed how good you have it because of EITC, welfare, and medicaid? Never mind that none of those things actually furnish a job with dignity.

Johann: You’re right that some trends towards greater inequality have increased under Obama. But you also need to acknowledge that the increased taxes on the wealthy in 2013 have radically slowed the increase.

#13 Comment By KD On July 25, 2016 @ 4:22 pm

Please, rising consumption fueled by expanded household debt is generally the end of Act III, beginning of Act IV, in the global production called the “The Depression: The Endless Spiral of Global Debt Deflation”.

Gee, everything is just peachy like 1928 and 2007 again, do a cartwheel!

#14 Comment By An Agrarian On July 25, 2016 @ 7:50 pm

I’m w/ KD’s analysis. One does not borrow and consume their way to prosperity. If this is what mainstream conservatism delivers as data-driven optimism, then conservatism is thoroughly bankrupt. Is there really any class distinctive to be drawn from this data, other than the fact that Americans, no matter their class distinction, enjoy gratifying their lusts?

That said, I can almost wrap my head around the data. My parents generation would buy and keep a U.S. made durable goods for at least a decade or more – fridge, car, washing machine. Today we purchase these (non) durable goods with likely 4 times the turnover … how many ‘Energy Star’ appliances last more than 5 years? My parents used the same camera for 30 years … today they’re nearly disposable. Products designed and manufactured for short lifespans don’t differentiate between rich & poor consumers. These products weave their way into our culture and transition from luxury items to must-haves … so now the impoverished have smartphones, huge TVs, two cars, and a plethora of appliances that require turnover every few years.

“Strong consumption” in our culture is often the resultant product of greed, poor stewardship, minimal financial discipline, and crappy products. Sorry to rain on your optimism.