You're Only as Poor as You Spend

Ronald Bailey | February 11, 2008

Income inequality was the centerpiece of failed Democratic presidential hopeful John Edwards' campaign. But it never gained much traction. One intriguing part of the answer as to why income inequality has not played a big role in current American politics may be supplied by Dallas Federal Reserve economist Michael Cox and Dallas Federal Reserve economics writer Richard Alm in a column in Sunday's New York Times. They argue that our focus should be on consumption inequality rather than income inequality. The bottom fifth of American households earned $10,000 while the top fifth averaged $150,000 per year. However, spending for the bottom fifth averaged $18,000 per year and the top fifth $70,000 annually. The gap between rich and poor narrows even further:

So, bearing this in mind, if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.

Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1. The average person in the middle fifth consumes just 29 percent more than someone living in a bottom-fifth household.

The biggest differences between how rich and poor households spend their incomes is in housing, cars, and taxes. Rich housing is $21,500 vs. poor housing at $5,500; rich transport at $16,500 vs. poor transport at $3,000; and rich taxes at $23,400 vs. poor taxes at $900.

Cox and Alm also offer a fascinating chart (~~in the print edition, I couldn't find it online~~ now added thanks to commenter Elemenope) that shows that the speed with which new technologies and conveniences become widely adopted has been accelerating over the past century.

They point out:

To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households....

The conveniences we take for granted today usually began as niche products only a few wealthy families could afford. In time, ownership spread through the levels of income distribution as rising wages and falling prices made them affordable in the currency that matters most — the amount of time one had to put in at work to gain the necessary purchasing power.

At the average wage, a VCR fell from 365 hours in 1972 to a mere two hours today. A cellphone dropped from 456 hours in 1984 to four hours. A personal computer, jazzed up with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours to 25 hours. Even cars are taking a smaller toll on our bank accounts: in the past decade, the work-time price of a mid-size Ford sedan declined by 6 percent.

Look, I completely agree with Getrude Stein, Mae West and Sophie Tucker, who said, "I've been rich and I've been poor. Rich is better." But getting people richer is a far more important goal than making sure that everyone has an equal income. After all, things weren't so great when almost everyone was equally poor. However, we'll save that topic for another time.

Whole New York Times column here.

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|2.11.08 @ 11:12AM|#

The bottom fifth of American households earned $10,000 while the top fifth averaged $150,000 per year. However, spending for the bottom fifth averaged $18,000 per year and the top fifth $70,000 annually.

If I did the math right here, that means that a fifth of American households are spending 80% more than they earn.

That's not good. No amount of spinning can make it look any better.

|2.11.08 @ 11:15AM|#

It costs at least 40% more than they earn just to get by, and I'm not even including frivolous items like DVD players, etc. Food, electric, rent, water, and transportation to the job we all hope they have costs more than 10 grand/yr.

Now, having said that, they probably do spend an additional 40% above income on shit they don't need. I know people that don't have much expendable income but they have a DVD collection that would make Best Buy look like a garage sale.

|2.11.08 @ 11:17AM|#

The bottom fifth of houshold income includes a lot of dorm rooms and retirees spending money they already earned. It isn't a very good stand-in for actual poor people.

Elemenope|2.11.08 @ 11:19AM|#

The bottom fifth of American households earned $10,000 while the top fifth averaged $150,000 per year. However, spending for the bottom fifth averaged $18,000 per year and the top fifth $70,000 annually. The gap between rich and poor narrows...

This has got to be one of the stupidest, self-refuting statements I've ever seen. In a nutshell, for annual consumption the bottom fifth is spending 8,000 over income annually (i.e. drowning in debt), while for the same period the top fifth on average spends 80,000 under income annually, which can be invested that way that rich people do, where hey take money and make more money from it.

So, in essence, the rich get richer and the poor get poorer. But we already knew that.

|2.11.08 @ 11:23AM|#

That is a good point Joe. But you have to admit the nature of being poor and problems of poverty have changed. The problem is not one of lack of necessities. Even the poorest household today has things like AC and phones and TVs that the middle class didn't have 60 years ago. The problem is that despite the abundance of goods, they still live in unsafe neighborhoods, go to lousy schools that offer little opportunity for betterment, and suffer from social pathologies like child abuse and drug addiction and criminality at appalling rates. The problem is not wealth or income. It is a lot worse and deeper than that. If it were income we could just write a check and solve the problem.

robc|2.11.08 @ 11:23AM|#

lmnop,

I think joe already counteracted your post, while making a different point. For example, my Dad worked 1-3 days a month in 2007 and will be working less than that (approximately zero) this year. I doubt he earned 10k last year at his job. And, with the performance of the stock market, he may not have had too great of a year that way either. So, it is quite possible that my parents spent more than they earned this year and they havent had ANY debt since before I was born.

fyodor|2.11.08 @ 11:24AM|#

Warren,

I would assume that many to most of these "poor" spending way more than they earn would be young folks who move up the ladder into a percentile range as they age. Otherwise this would seem to have to imply that the debt of this group is increasing $8000 per capita per year, which would seem unustainable and unlikely. Either that or the stats are crocked.

Anyway, I don't know what the point of all this is. People can feel poor whether they really are (based on whatever ultimately subjective measure you deem to be the true and most accurate one) or not. I do think Edwards' message just seemed kind of old and boring especially in the absence of any genuine economic crisis. If the war succeeds in bankrupting us, the next class war populist/demagogue may fare better.

|2.11.08 @ 11:28AM|#

Poverty is definetely more than a lack of money.

A college student usually doesn't have much extra cash, but he knows that he has an oppourtunnity to advance his standard of living in the future. He may be broke, but hes not poor.

A person living in a trailer in Appalachia or a housing project in Detroit has no such hope or opportunity. They remain stuck where they are. They are both broke AND poor.

Theres a huge difference between being broke and being poor.

How many of the "poor" spending way more than they earn are college students? If you are in college working weekends and summers and making say 10K a year, but at the same time assuming 30K in student loan debt every year. Sure some of that figure is poor families dying in credit card debt but some of it has got to be students and the like. The statistic would mean a hell of a lot more if it controled for such factors.

robc|2.11.08 @ 11:30AM|#

I do think there is a point in this story. How do we measure rich/poor/etc?

Income doesnt work, for obvious reasons. My parents are "poor" by that measure, despite not being poor.

Wealth is a better measure, it gets my parents more right. But, you end up with a situation where the 6 figure making lawyer/doctor with piles of student loan debt and too much house/car are listed as amongst the poorest people in America.

Consumption, on the other hand, is a pretty good measure. If you are buying a lexus and paying on a million dollar house, you arent poor, even if you are broke. If you are only spending 18k a year for a household, unless you are single, you are (probably) poor. If you are finding a way to 100k a year, you arent poor. You may be in the future, it your spending is unsustainable....

|2.11.08 @ 11:33AM|#

The $8,000 discrepancy need not be fully attributable to debt. It can be (as joe pointed out) an indicator of reliance on retirement savings. It can also include consumption as a result of government supplied assistance.

The problem is not wealth or income. It is a lot worse and deeper than that.

Sadly true. Ghetto life is behavior, not poverty, driven.

fyodor|2.11.08 @ 11:38AM|#

It can also include consumption as a result of government supplied assistance.

Well I think such assistance would count as income, or if it comes in the form of subsidy, then it wouldn't count as spending.

Anyway, I see how spending money previously earned helps explain the discrepancy in addition to spending money not yet earned.

fyodor|2.11.08 @ 11:41AM|#

The statistic would mean a hell of a lot more if it controled for such factors.

Maybe these studies should only look at 40 year olds, or 30 to 55 year olds?

|2.11.08 @ 11:41AM|#

"Well I think such assistance would count as income, or if it comes in the form of subsidy, then it wouldn't count as spending."

Income transfers are generally not considered in income statistics. It is a very old shell game played by the poverty lobby. If you included welfare payments in income, people might conclude that welfare was working and that there was no need to spend more and we can't have that.

MattW|2.11.08 @ 11:44AM|#

From the article:

"The bottom fifth earned just $9,974, but spent nearly twice that - an average of $18,153 a year. How is that possible? A look at the far right-hand column of the consumption chart, labeled "financial flows," shows why: those lower-income families have access to various sources of spending money that doesn't fall under taxable income. These sources include portions of sales of property like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts. 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."

Elemenope|2.11.08 @ 11:45AM|#

Nifty Chart and Graphic from NYTimes article, sheds some light...

adrian|2.11.08 @ 11:48AM|#

to me poverty is lack of one of these: food, shelter, water. If you have all of those but don't have an Ipod you are still ok. Hell when i went to Monte Carlo i felt poor too, doesn't mean i am.

it's all about a lack of self responsibility and an inability to deal with the fact that we are not all equal.

robc|2.11.08 @ 11:51AM|#

From the bottom graph, shouldnt vcr ownership be plummetting? I guess I count as still having one, but I didnt hook it back up when I moved in October. In fact, its in the way in my basement storage area, I have to move it off a box it is sitting on top of everytime I need something from that box. I guess I should pick a different location to store it.

|2.11.08 @ 11:52AM|#

John,

Things like unemployment insurance and AFDC and TANF aren't usually counted as income?

robc|2.11.08 @ 11:55AM|#

I dont know that I buy the concept that new tech is getting adopted faster. The cell phone curve seems parallel to the microwave, color tv, and radio curves. Refrigerator was only slightly slower. The computer, on the other hand, is a much slower increase.

It depends on the product. Sure telephone took a long while, but so has dishwasher.

|2.11.08 @ 12:00PM|#

In my apartment I just moved out of a year and a half ago, I didn't have a dishwasher, but I certainly wasn't poor. Conditions of living should be the primary determinant of "how well people are doing." You could buy a house in Coast Rica for $20k and live on the beach with plenty of food and be considered rich. In Hawaii you'd be destitute if you showed up trying to buy a house for $20k.

|2.11.08 @ 12:02PM|#

Mitch,

It is my understanding they are not, but that is based on pretty dated information. It may have changed in the last 15 years, i don't know.

|2.11.08 @ 12:04PM|#

My kids go to a truly mixed income school, with 60% of kids qualifying for free and reduced lunches (meaning 1st and 2nd fifths/quintiles of income), and then some solid middle class kids and some kids of prosperous professionals. We are in the top fifth, though earning less than the average of that group. Though my kids are sort of oblivious to the differences, by the look of it we consume way more than 2.1x of the typical family of a poor kid: better than 2x on cars, houses, high quality paid babysitters, vacations, furniture, clothes... And we spend much less than we earn. So, based on my anecdote, which is always dangerous, I sort of suspect that among families with kids, the difference is more than 2.1x in consumption.

Income inequality was the centerpiece of failed Democratic presidential hopeful John Edwards' campaign. But it never gained much traction. One intriguing part of the answer as to why income inequality has not played a big role in current American politics...

A bit strange to declare an issue as not being important to voters just because a failed candidate used that as his wedge issue. After all, most of the remaining candidate are using "shrinking middle class" as their buzz phrase to one degree or another. If that isn't harping on income inequality, what is?

Edwards problem was that he focused almost solely on that to the exclusion of other hot button issues like health care and the economy - which is at least tangential to income inequality. That an the fact that he creeps out large percentages of even loyal democrats.

|2.11.08 @ 12:08PM|#

wealthy vs unwealthy comparisons should be about net worth...probabilisitc and timevalue assumptions with regards to "salaries" from tax free foundations...the efforts to compute everything based on salaries is anotehr false paradigm to keep teh middle class from challenging the elite classes...that way highly educated dual income indebted couples with young kids are taxed at higher rates than drugged out billionaire heiresses. You guys are helping perpetuate this jedi mind trick of the mainstream media.

|2.11.08 @ 12:11PM|#

Hey you poor people....

Stop being so damn poor....

Pull yourself up by your bootstraps....

We have only 5% unemployed....

Best economy ever....

Why don't you have any money?

Life is choices, why did you choose to be so damn poor?

|2.11.08 @ 12:12PM|#

People who make $150,000 only spend $70,000 because the rest goes to taxes..

People who earn $10,000 pay no taxes plus receive welfare benefits including tax credit rebates, housing assistance, food stamps,etc. At least many do.

|2.11.08 @ 12:13PM|#

Your wrong about AC I live in half million dollar home without AC...

|2.11.08 @ 12:14PM|#

I think I remember a study done not so long ago where a single mother with two kids in New Mexico had available to her roughly $40,000 if she earned $10,000, $30,000, or $40,000. The difference was in the welfare/wealth tranfers that she received. That is likely the biggest reason why poor people can spend more than they earn. They have been receiving huge amounts of wealth transfer payments that are not included in the income figures that get thrown out. I also believe that taxes paid are not figured in the income figures either so it may make the poor look poorer than they really are and the rich look richer than they really are.

Gilbert Martin|2.11.08 @ 12:14PM|#

Just exactly what ennumerated power is it in the Constitution that makes it any business of the federal government who has how much income and/or wealth in the first place?

|2.11.08 @ 12:21PM|#

"""If I did the math right here, that means that a fifth of American households are spending 80% more than they earn."""

Credit cards?

|2.11.08 @ 12:26PM|#

Unfortunately, the study is deeply flawed. See: http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=02&year=2008&base_name=obligatory_nonsense_on_inequal

|2.11.08 @ 12:33PM|#

People who make $150,000 only spend $70,000 because the rest goes to taxes..

What country are you in where people are paying a 53% effective tax rates? We don't even have marginal tax rates that high.

KDeRosa|2.11.08 @ 12:35PM|#

Well I think such assistance would count as income, or if it comes in the form of subsidy, then it wouldn't count as spending.

Non-cash transfers do not count as income, though cash transfers (welfare payments) do. Another thingthat doesn't count as income is the income of cohabitors (i.e., the single mother's boyfriend). Non-cash transfers include:

"... food stamps (about $2,200), housing assistance (about $5,400), Medicaid (about $6,000 for a family of four), the State Children's Health Insurance Program (SCHIP) (about $1,000 per child), energy assistance (about $400), the school lunch and breakfast programs (as much as $600 per child), and the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) (about $400 per person). It also does not count refundable tax credits such as the Earned Income Tax Credit (EITC) (about $1,700), because they are "post-tax." (All figures are average benefit amounts in 2002 regardless of family size, unless otherwise noted.)"

(Source)

|2.11.08 @ 12:36PM|#

Terry P,

Any clues where you saw that study? It sounds interesting.

|2.11.08 @ 12:41PM|#

Why do people always take technologies that were widespread years ago as the measure of how well off the poor are?

I bought a DVD player last year for $25. They had them stacked up like candy bars at the cash register of Best Buy, and that price, they actually were an impulse buy. In the mean time, if you can find a two-bedroom apartment for 40X that number in my low-income city, you're doing very well.

Gee, golly, lots of poor people have DVD players. I bet they have coffee makers, too. Lazy bastards.

|2.11.08 @ 12:45PM|#

"But you have to admit the nature of being poor and problems of poverty have changed. The problem is not one of lack of necessities."

John-For many people the problem of inequality, as opposed to poverty, have not changed. If you think money is power, then income inequality means some people have more power than others. To many folks, that in and of itself is a problem for a country that values equality (even if merely "equality of opportunity" because a person with way more money than another has way more opportunity). To others, the fact that much of that difference in power can be traced to unfair or undeserved sources creates an additional concern.

robc|2.11.08 @ 12:47PM|#

What country are you in where people are paying a 53% effective tax rates? We don't even have marginal tax rates that high.

My marginal tax rate:
25% Fed
15.3% FICA
5.8% State
2.2% County

Thats 48.3% marginal. Bump me up another tax bracket and I break 53%. Effective is lower, but we damn well do have marginal rates that high.

|2.11.08 @ 12:50PM|#

There are still millions of Americans who have trouble keeping the fridge full between paychecks.

And if they spent somewhere on the order of two-three shopping baskets of cheap food on a DVD player three years ago, that doesn't change that fact.

x,y|2.11.08 @ 12:54PM|#

What country are you in where people are paying a 53% effective tax rates? We don't even have marginal tax rates that high.

53% does sound a little high for effective tax rate, but I would imagine 40-45% is not too far off for many people in the top-fifth (income). These are just the taxes I can think of: federal income tax, state income tax, local income tax, property tax, sales tax, and capital gains tax. And this doesn't include the inflation tax, which hurts those who do not get to spend the newly-minted coin first.

x,y|2.11.08 @ 12:57PM|#

Let's not forget that the poor in the U.S., Europe, etc. are probably in the top fifth (wealth, standard of living) in the world. Rich/poor is all relative.

|2.11.08 @ 1:08PM|#

OK, let's not forget that the rich in the United States pay vasly lower taxes than people with similar wealth in most other countries in the world. High/low tax is all relative.

|2.11.08 @ 1:09PM|#

robc - the federal budget, including social security, is about 3 trillion in a 14 trillion economy. That is less than 25%. Then, remember that people earning 200k plus are paying a huge part of that. So, everyone else must be paying a lot less for the averages to work out. I pay about 7% effective in fed income taxes and about 15% in social security, for low 6 figure income. That is 22% marginal, plus 5% state and local, which is federal tax deductible at my 25% marginal rate, so that is effectively 4%. Thus, my effective rate is 26%, while my marginal rate is more like 45%. Those with higher federal income tax rates pay a 0% social security marginal rate.

|2.11.08 @ 1:17PM|#

There are still millions of Americans who have trouble keeping the fridge full between paychecks.

If you think about it, this is consistent with obesity as the biggest health problem faced by the poor in this country.

fyodor|2.11.08 @ 1:18PM|#

KDeRosa,

Thanks for that info. I didn't check your source, but I'm guessing those things you cite as not counting as income don't count as spending either, in which case they couldn't explain why people receiving those types of assistance spend more than they take in. Well, not directly anyway. Am I wrong?

|2.11.08 @ 1:21PM|#

If you think about it, this is consistent with obesity as the biggest health problem faced by the poor in this country.

Yes, exactly. In fact, the strategy of buying calorie-dense prepared foods in order to strech limited food budgets is a widely-known phenomena among researchers, and those who make even a marginal effort to learn about poverty and food insecurity. As opposed to those who make a point of limiting their understanding of the issue so as to not ruin their snappy one-liners.

x,y|2.11.08 @ 1:22PM|#

What's your point joe? I didn't say anything about tax rates not being relative. FWIW, I agree with you. But I would go an extra step and say that high and low tax rates just represent varying degrees of tyranny.

adrian|2.11.08 @ 1:26PM|#

so in the world's "most free" economy the poor are richer than poor elsewhere and the rich are richer than the rich elsewhere.

yet most still want socialism. makes perfect sense.

|2.11.08 @ 1:29PM|#

What's your point joe?

That it no more makes sense to stop thinking about American poverty than American tax levels.

|2.11.08 @ 1:32PM|#

Interesting graph. In 1915 more people had telephones than had stoves, (or electricity, which doesn't make sense to me). In 1930 more people had autos than phones or stoves. We had a single air conditioner in 1965 which put us in the 5 percent category, not easy to believe.

|2.11.08 @ 1:33PM|#

"so in the world's "most free" economy the poor are richer than poor elsewhere and the rich are richer than the rich elsewhere.

yet most still want socialism. makes perfect sense."

so in the world's most free economy the poor are poorer than the poor elsewhere (most like Scandinavia for example).

yet some people still want laissez-faire government.

|2.11.08 @ 1:35PM|#

My point being of course that the fact that our poor are on average better off than the poor in Tanzania does not make our system therefore the "best" one anymore than the fact that our poor are worse off than many European nation's poor make our system the "worst" one.

Thats 48.3% marginal. Bump me up another tax bracket and I break 53%. Effective is lower, but we damn well do have marginal rates that high.

Once you make that much, your marginal FICA rate goes to 0%.

|2.11.08 @ 1:36PM|#

Our rich are richer than Dubai's? Kuwait's? Bruenei's?

You sure about that?

TrappedEastOfTheBigMuddy|2.11.08 @ 1:51PM|#

Nifty Chart and Graphic from NYTimes article, sheds some light.

Eww.

Whoever prepared that upper graph desperately needs to read Tufte. Jumping Jesus, what a piece of junk.

Come on, people: charts and graphs should make the information more accessible, and easier to understand. Informational graphics are not a place to allow graphic designers to exercise their frustrations at not being able to make it as a "pure artist".

// Just a pet peeve. We now now return you to your regularly scheduled flamewar.

|2.11.08 @ 2:00PM|#

joe, if someone who can't keep the fridge stocked to feed their family spends anything on a DVD player that is irresponsible, only partially because they bought a DVD player. It is compounded by the fact they will inevitably buy DVDs to use in the player when they should be buying food, fuel, clothes, educational materials, paying rent, paying off any debt they have...unless they don't mind remaining in that situation.

I'm not saying we don't all buy things we shouldn't, but don't defend the practice just because it doesn't seem like a big deal in the long run.

adrian|2.11.08 @ 2:04PM|#

*not really a good rebuttal but i don't have time for research:

rich people

|2.11.08 @ 2:07PM|#

Even if they had no trouble keeping the fridge stocked when they bought the DVD player, Nick?

Because going through periods of relative plenty and scarcity is very common for poor people in the US. They have a job for a while, then lose it, or they are getting by and then have a financial crisis.

|2.11.08 @ 2:09PM|#

If we are to accept the thesis that poor people are, in general, irresponsible people who just don't pay attention to whether they have enough money before spending it, as Nick and other suggest, then that would be yet another rebuttal to the thesis that smaller spending gap between rich and poor is evidence that the poor are not really poor.

|2.11.08 @ 2:16PM|#

Joe-

The United States has the highest per capita income of any decent sized country. IIRC excluding the European postage-stamp banking countries and the oil sultanates, its the top in the world.

Alice Bowie|2.11.08 @ 2:17PM|#

Don't forget ... The bottom 5% also contains Self employed people who write-off LOTs of expenses (Tax Frauds) ... and it appears that they ONLY make less than $10,000.

This statistic also excludes people that have OFF-the-BOOK jobs like:
-waiters
-bartenders
-barter type jobs

And, let's not 4-get the people involved in criminal activity.

|2.11.08 @ 2:20PM|#

Joe, I'm saying many of us buy things we don't need WHEN we are struggling. And we should stop doing that, poor people in particular, because their ability to get back to where they were is more difficult, hence all the programs you love. If you are living in shitty housing, you shouldn't have bought that DVD player three years ago. IF you were living in a nice house and everything was going great and then you lost your job and had to change your living situation, fine, but you and I both know lots of people buy things when they should be spending on necessities.

You are always telling people not to play dumb, so don't be a hypocrite. You know damn well what I'm talking about.

|2.11.08 @ 2:28PM|#

Don't know if anyone mentioned it, since I'd have to wade through a plethora of idiotic comments to find out, but"

Income is not the same as available liquid assets.

|2.11.08 @ 2:34PM|#

In fact, the strategy of buying calorie-dense prepared foods in order to strech limited food budgets

Buying prepared foods of any kind is a good way to blow your limited food budget, not stretch it. Buying ingredients and cooking meals at home is a cheaper way to feed your family.

alisa|2.11.08 @ 2:36PM|#

"But getting people richer is a far more important goal than making sure that everyone has an equal income."

True. But right now, we aren't getting people richer, at least not compared to the increase in labor productivity; median weekly compensation rose by only 14% in the last quarter century, while labor productivity rose by 67.4%. And this NBER working paper suggests that federal policies in the 1980's are responsible for the fact that we have wide inequality now compared to the 50's and 60's.

They've got a "bargaining power" index worked out that shows people with BA's and high school degrees have are worse off than they were a half-century ago, while people with graduate education are both more productive and richer than ever before. It seems like (partly due to government policies that are less pro-union and less inclined to redistribute wealth than in the past) the well-educated minority is doing extremely well, and everybody else is falling behind. Maybe that's not a bad thing -- maybe it's meritocratic. But I've never seen a convincing argument that it's not happening. What do people think?

Jennifer|2.11.08 @ 2:40PM|#

It's true that a $25 DVD player doesn't matter when you have to pay $600 a month to rent a single crummy room in a shitty neighborhood. But that's mostly the fault of government, passing laws which make housing far more expensive than it has to be. Especially here in Connecticut, where the official motto seems to be "homelessness is preferable to less than 1,000 square feet of living space per person."

And as for food prices. . . two blocks from my apartment is a "Discount Food Outlet," where you can find amazing deals on foods that are a week or two away from their expiration dates. (It's perfectly good food if you eat it now; you just don't want to buy it for long-term storage.) So of course, city council is trying to close the store down because it's just too icky for our working-class town which is desperately trying to pretend it's not. They've managed to pass laws making it impossible for poor folks to afford a decent place to live; now they have to close the loophole that lets poor people affordably fill their bellies.

The free market's doing a great job of providing ways for the poor to improve their lot; it's the damned government who keeps outlawing them. Eeeew, poor people. Ick. Let's zone them right the hell out of town. They don't pay enough taxes anyway.

alisa|2.11.08 @ 2:44PM|#

RC Dean:
Ah, food budgets. Pick your favorite American city. Now map where the grocery stores are. Have a look at the neighborhoods where people without cars cannot easily buy normal ingredients to cook at home (I believe in urban studies these are called "food deserts.") Chicago is full of them. Chain grocery stores don't come to poor neighborhoods -- sometimes not even to middle-class neighborhoods if the population is black or mixed. It's stupid and unhealthy to blow your budget on prepared foods and fast food, but sometimes geography contributes to the problem.

|2.11.08 @ 2:45PM|#

Cesar,

The United States has the highest per capita income of any decent sized country. True, but this is an observation about the mean and median. The point I was discussing was about the size of the extremes.

Yes, Nick, I do konw what you're talking about, am not playing dumb, and have been responding to your points directly and honestly. Stop bitching at me just because you don't like the answers I've given.

"We" should go to the gym more, too. Very virtuous, and the objectively smarter thing to do. Nonetheless, I raised the issue as a rebuttal to another point, that the ability of the poor in this country to accumulate consumer goods is not a good indicator of a lack of genuine poverty. If someone lived in a shitty apartment three years ago, and decided to buy himself something nice like a DVD player for less than one week's worth of groceries at the same time he was having no trouble paying for groceries, I'm not going to wag my finger at him, as if that $75 three years ago would have done a damn thing to improve his situation today.

|2.11.08 @ 2:53PM|#

RC,

It is true that buying ingredients is a better way to get a nutritious diet, but it is not the best way to maximize your calories. When you are food-insecure, making sure there will be something on the table tonight take priority over making sure you get enough potassium. Hence, the obesity problem.

And, what alisa said. Although I'll point one thing out; the belief among grocery chains that their stores cannot be viable in poor urban areas is a case of bad information and lousy assumptions, the $10 bill lying on the sidewalk. I live in a city with a large poor population, and as part of a neighborhood revitalization effort, the city induced a local grocery store chain owner to put a store in the 'hood as a philanthropic venture.

The place is a goldmine, even with the crummy produce. The registers are always stacked 10 deep. We did a study of consumer-money (not disposable income, but money spent on food and other necessities, too) in our region, and found that the poorest neighborhoods in Lowell has significantly more money per acre than even the richest census tracts in nearby suburbs, owing to the density.

|2.11.08 @ 3:07PM|#

No, joe, "we" should go running outside and do pushups and situps at home, but "we" go to the gym, or at least pay for the membership at the gym but never go. My point is that "we" accumulate all these little things that add up to a big difference. When you buy a DVD player you then pick up DVDs for 10 bucks a pop because you wnat to be entertained instead of doing what is necessary to get out of your shitty situation, like get a second job or move into a less expensive area. Joe, I'm not blaming people for being initially poor, that is a result of other things, but I will not be afraid to criticize people who perpetuate a negative situation by continuing to do things that impact them negatively.

I used to live in West Philly where row houses were crumbling, sometimes quite literally, yet the people in front of the house were installing stereo equipment into their Escalades.

Like I said, poor people are not the only ones guilty of this. Most people are in some form of debt, but poor people will remain poor if they do not get themselves out of these situations by spending money on things they don't need. I'd like to see them get themselves out of the situation rather than have government throw money at them so they can stay in the shitty apartment but have new toys to play with.

If we must have a government assistance program, I'd rather it be a purchase card, like a bank card, but that can only be used for certain items, like food stamps, but that are tied to the person's identity so they can't sell it for drugs or alcohol. I want accountability so the money that is taken out of my check (that I EARN) is only used for necessities.

|2.11.08 @ 3:12PM|#

joe, I will agree affordable stores in low-income areas would go a long way, but I think commercial rent in dense areas as well as the requisite security in bad neighborhoods contributes to high prices. Right across the street where I lived, was a grocery store, but everything was insanely expensive. Wife and I drove 25 minutes every Saturday to go grocery shopping in the suburbs and saved a ton of money. It was well worth the drive, even with gas prices being high and the roads there practically destroying my old car.

alisa|2.11.08 @ 3:25PM|#

Food prices, as Jennifer pointed out, would be a lot better without well-meaning but counterproductive zoning regulations. My alderman recently banned "big-box" chains like Wal-Mart from her ward. It's not well thought through. A good mom-and-pop bakery is easy to love, and a corporate behemoth is icky, but some people never stop to think that we have neighbors who might need bargain prices for their kids' shoes.

|2.11.08 @ 3:40PM|#

Nick,

I will not be afraid to criticize people who perpetuate a negative situation by continuing to do things that impact them negatively.

As a matter of fact, you will not be afraid of criticize them for doing them whose negative effects are so vanishingly small as to have no observable influence on their economic situation at all.

It's aesthetics, Nick. You see poor people with things that strike you funny, and assume that those purchases are the difference between improving their situation and the status quo.

I'm not saying that it doesn't happen that there are poor people who make foolish choices with their money; I'm sure there are. I've seen poor people who buy a big screen TV so large that you can't see the whole thing from any point in their tiny living room.

Just don't be so quick to judge people because their shoes are too nice, or they have a piece of 20-year-old technology. Be aware that we have this reflex within us, that's all I'm saying.

On the cost of groceries, too true, too true. Still, supermarket chains can provide much better prices than bodegas, owing to volume. When we're talking about the urban poor, taking the minivan to a cheaper and better grocery store in the burbs isn't an option.

Mike Laursen|2.11.08 @ 3:51PM|#

Question for any trained economists on this group.

I've seen studies that show that there is a vast wealth disparity in most western nations. (N.B. I'm talking about wealth, not income.) I wonder if this disparity is partially attributable to the way the value of the more wealthy persons' stock holdings are estimated.

If were talking about totaling up in dollar amounts the wealth of every single individual in a county, as one does when determining the winner of a board game, wouldn't one have to use something closer to the book value of the stocks involved. After all, the day-to-day trading price of a stock is largely determined by the relatively limited number of shares that are traded daily.

I had a similar question when a commenter on this list talked about how much the price of gold has increased relative to the dollar. Is the price of gold partially propped up by the fact that trade in gold is fairly limited? If we were to switch to a gold standard, if everyone started trading gold, and the government reserves of gold were put into circulation, wouldn't the price of gold be much lower?

economist|2.11.08 @ 4:01PM|#

I know of no good reason why income inequality is an objectively bad thing. While the lack of basic necessities is a problem, I don't think the U.S. has a severe problem there. Of course, this brings up my next point, which is that people treat things, such as various medical treatments, that didn't exist as recently as 30 years ago, as "basic necessities" and in so doing call it an injustice that not everyone has these things. The way I see it, there are 3 ways to deal with this problem: 1.The government provides these treatments to everyone, creating a massive economic burden. 2.The government rations these treatments and decides whose life is worth saving, and doesn't leave much room for people to obtain these treatments with their own resources. 3.The government doesn't bother about it and leaves it to individuals to provide for obtaining these treatments.

Mike Laursen,
Sorry about not answering your question. Besides, I'm actually an engineer.

|2.11.08 @ 4:09PM|#

Mike,

Demand Kurve? Is that the right answer?

What am I saying, that's always the right answer!

Mike Laursen|2.11.08 @ 4:10PM|#

OK, I don't need an answer from a trained economist. Anybody who knows what the heck he or she is talking about will do.

Paul|2.11.08 @ 4:15PM|#

The bottom fifth of houshold income includes a lot of dorm rooms and retirees spending money they already earned. It isn't a very good stand-in for actual poor people.

Exactly joe, which probably explains why this issue doesn't get much traction.

|2.11.08 @ 4:18PM|#

joe, like I said it was contributory to the perpetuation of their situation, not the initial cause of it. I believe government subsidy allowed the purchase of goods the people of my neighborhood could not otherwise afford but obviously wanted, or they didn't get subsidies at all but used whatever income they had to buy nice cars while their house fell apart. Now while I don't mind those self-sufficient folks spending their money as they choose, I do mind subsidized people spending MY money as they see fit. If I'm the benefactor, I want to "help" them my way. This doesn't make me a greedy, selfish, arrogant asshole. It makes me a consumer. I am paying for a service (my government to help poor people for the betterment of everyone) and I want it to be efficient and legitimate.

By the way, the grocery store I was talking about was not a bodega, it was regular sized, but it was way overpriced compared to other areas nearby. Part of the problem was city rent and security (there was some, not an overly aggressive amount in my view) but mostly due to the fact that they were the only store within 20 minutes driving. No competition surely had some part to play. This was no resident's fault, of course. Now, that's a city with potential that if I had the money I would love to invest in. I really think it could be better.

Paul|2.11.08 @ 4:18PM|#

I know of no good reason why income inequality is an objectively bad thing. While the lack of basic necessities is a problem, I don't think the U.S. has a severe problem there.

It's not a bad thing, and never has been. The richer your nation is as a whole, the greater your income gap will be. The most prosperous nations will always have the greatest income gap.

When the minimum you can earn is $0, and the maximum you can earn is ∞ your income gap is going to be ∞.

|2.11.08 @ 4:25PM|#

""""We" should go to the gym more, too."""

If you can't afford a $20 DVD, you can't afford gym membership. :-) However, Huckabee will mandate everyone to visit the gym at tax payers expense!

I keed, I keed.

You guys can argue about spending priorities all you want. But if you have to make decisions between a couple of $20 DVDs or food, you're poor.

|2.11.08 @ 4:29PM|#

Demand Kurve? Is that the right answer?

joe, its always the right answer because everything is distributed by the DK, even in non-economic systems. Its just that we measure the DK with different things in different systems.

In an economic/market system, we use dollars. In a non-economic system, we use political clout, or social status, or something else.

I have no earthly idea why distributing scarce goods or services based on political clout or social status is somehow more just or desirable than distributing it on economic grounds, but it seems to be an article of faith in some circles.

Mike Laursen|2.11.08 @ 4:32PM|#

joe, my questions were about the Supply Kurve. Get with the program.

Paul|2.11.08 @ 4:33PM|#

As a matter of fact, you will not be afraid of criticize them for doing them whose negative effects are so vanishingly small as to have no observable influence on their economic situation at all.

I'm not saying that it doesn't happen that there are poor people who make foolish choices with their money; I'm sure there are. I've seen poor people who buy a big screen TV so large that you can't see the whole thing from any point in their tiny living room.

It's not always foolish choices with money, sometimes it's foolish choices in lifestyle-- a much, much more difficult to problem to rein in. A problem which can be very frustrating to say, social workers who spend their careers working with the indigent.

Often times those choices have huge, long term impacts on their lives and their families which can't be traced to a questionable purchase of a big-screen tv. In fact, once you become aware of the real problems of the poor, ironically, the purchase of said big-screen tv has little impact on said poor. Here's why:

Someone with very little money purchases a big-screen tv on credit. At some point, they fail to make payments on said tv, but they're poor, so their credit rating really takes little extraneous damage. Seriously poor people tend to move a lot and as such its difficult for creditors and the like to keep up. So in essence, they end up paying pennies on the dollar for the tv. Most poor people are already tapped into some kind of social services, food stamps, welfare etc., so often basic necessities such as food aren't really a problem. A roof over the head is often a bigger problem than food.

One of the biggest areas (and consequently the most politically incorrect to discuss) is the choice (or lack thereof) to have more children, coupled with few resources or life skills to care for (more) children.

In addition, the general dysfuncitons of a seriously poor family are many and varied-- often like the myth of the hydra, you can cut one head off, another grows back. Drugs can often play a major part-- it only takes one member of said family to have a problem, and the entire family unit is dragged under with them. Father may be in and out of jail, abusive- disappearing for weeks at a time. Mother may suffer from some level of FAS (fetal alcohol syndrom) which cause her decision making skills to be...bottom rung, so to speak. All of these (poor) decisions which may be affecting two, three, or more children. There may be an older teenage daughter who has no direction. She ends up pregnant as early as 14 or 15, thus creating more stresses on family unit.

Am I describing all poor people? No, certainly not. But I am describing common problems affecting many a poor family.

|2.11.08 @ 4:34PM|#

Supply Kurve?

Dammit, now I'll have to take Ekon 102!

fyodor|2.11.08 @ 4:37PM|#

I know the $10 bill lying on the sidewalk is supposed to refute economics, but I've never seen a $10 bill lying on the sidewalk. Guess someone else got to it first.

|2.11.08 @ 4:39PM|#

To me, Paul, it all comes down to opportunity.

I don't think African Americans became considerably dumber and less responsible in 1960; I think industry and commerce migrated away from the cities where many African Americans lived. I think urban renewal wrecked their social and economic networks.

I think if there were suddenly an additional 10,000 middle-class-income-paying automotive jobs in inner city Detroit, we'd be amazed by how thrifty and responsible and far-sighted that city's residents would suddenly become.

alisa|2.11.08 @ 4:41PM|#

Paul: not really. The Gini index (an indicator of inequality) is very high in poor countries with government corruption. Is Botswana (Gini index 60.5) a "richer nation as a whole" than Canada (32.6)?

Maybe you're saying that a wealthy country can have significant income inequality, and that's true: the US is more unequal (at Gini 40.8) than other industrialized countries. Maybe certain kinds of growth (say, in financial technologies) actually contribute to inequality because they're less labor-intensive. But it's simply false that the richest countries have the greatest income inequality.

Paul|2.11.08 @ 5:08PM|#

I don't think African Americans became considerably dumber and less responsible in 1960;

I would never suggest that they did. But poverty has many faces- I admit I'm talking about the chronically poor. You're talking about the transitionally poor. Each group has a set of unique problems surrounding their circumstances.

Alisa: I don't know how the Gini index is calculated, but I'll check into as soon as I can. However, I'm going to admit straight out that I'm skeptical. If I have a nation of 'x' number of people, and the poorest earn $0, and the richest earn $40,000,000,000 per year, that's a pretty wide income gap. But if I go to a 'poorer' country and the poorest person earns $0, and the richest earns $10,000,000 then the income gap is...not so wide. So I'm assuming that the Gini index takes some kind of aggregate and applies some clever algorithm creating said index? Ie, the total number of people earing at the low end, vs the total number of people earning at the high end?

alisa|2.11.08 @ 5:19PM|#

The Gini coefficient is a ratio of the areas on the Lorenz curve, which graphs the percent of total income as a function of the percent of households. In conditions of perfect equality the Lorenz curve would be a 45-degree line; if the top few households earn most of the income, the Lorenz curve is bent closer to an L-shape. So yes, it's a relative and not an absolute measure of the income gap. That's considered a better measure of inequality because it doesn't depend on the scale of the economy.

Paul|2.11.08 @ 5:29PM|#

Alisa:

Thanks for that very excellent info. It explains a lot. A whole lot. There are a lot of members of our media who might benefit greatly from that curve effect, because most members of our fine media organizations are calculating income gap the same way I was.

Homeless guy on the corner: $0 per annum
Bill Gates: $80,000,000,000,000

Income gap: large.

|2.11.08 @ 6:03PM|#

the difference between the richest and poorest households falls to just 2.1 to 1.

Holy shit you have 2.1 ipods when I have only one!!!!!

I am going start a bloody revolt!!!

....

I think science just proved that joe is completely full of shit.

DannyK|2.11.08 @ 6:44PM|#

Even that stronghold of free-market thinking, the Economist Free Exchange, is calling B.S. on this one. It's amazing (but maybe not surprising) that it's getting so much play here.

Robert|2.11.08 @ 6:52PM|#

I'm poor from chronic under-employment, and currently unemployment. I have objective characteristics of a high income person (high education, no crime, native, no handicap, location), but I'm lousy at selling myself or anything else -- see link for resume, which is of course puffed up with everything I could make look significant. Right now I'm going into debt on credit cards.

My personal contacts are good only for crap temp jobs like stuffing envelopes. When I try going outside the mainstream for business, I wind up working for unrealistic weirdos, manic depressives, etc. My one job that was in a big firm that sort-of (not really) employed me commensurate with my training turned out to be in a crooked outfit that a year after firing me was under grand jury investigation and a year after that was sold & dismembered.

As I look at the jobs being done by people I come into contact with routinely, it turns out they're mostly very low paying jobs that won't support an independent living individual.

Robert|2.11.08 @ 6:53PM|#

The squirrels ate my resume! So I linked it from the header here.

Paul|2.11.08 @ 7:13PM|#

economist|2.11.08 @ 8:16PM|#

So, Robert, when you say "high education", what kind of degree are we talking about? 'Cause if it's some English or art history degree, you brought this on youself. If it's engineering, maybe you need someone to help you with your resume.

economist|2.11.08 @ 8:24PM|#

"If there were suddenly 10,000 middle-class-paying automotive jobs, we'd be amazed by how thrifty and responsible the residents would become."
Actually, joe, if somebody has a job NOT because there services are worth the wage but because somebody has artificially inflated the wages, it's essentially the same as welfare. But then again, we all know how thrifty and responsible people on welfare tend to be.

alisa|2.11.08 @ 8:34PM|#

I took a look at the resume; I don't know much about what employers are looking for, but maybe some of the technical job descriptions could be clarified for the layman, and a little more language added about why your work was valuable and what skills you used. Maybe somebody who knows you could help you revise a little? I know my own tendency is to shrink from promoting myself too much, so I have to tell myself to be a little more confident on paper than feels natural.

|2.11.08 @ 9:37PM|#

Seems to me the interesting thing here is that bottom chart. Virtually every household in the US has modern "necessities" that the richest kings could only dream of a hundred years ago. Being poor in the US involves far more basic comforts than enjoyed by royals of old. Life is getting better for everyone, and at an increasing rate. We sure wouldn't know it listening to the foolish populist rantings from politicians and news media though.

Robert|2.12.08 @ 12:06AM|#

Economist, I've a Ph.D. in biochemistry, plus a little over 2 years' credit in medicine.

Alisa, I've been thinking of interpolating accomplishments (in greater detail) and skills in the resume, but what I've seen lately has discouraged me from doing so. Seems most these days are using software to parse your resume, and I don't want to make it any harder for their algorithms. Some are semi-automatic, parsing and then having you correct manually, which gives me an idea how the automatic-only ones work. Many of these application processes are very time consuming for the applicant, taking the time that previously would've been taken up by them at interview. Maybe I'll just append separate accomplishments and skills sections.

I've been all around the block with resumes, because the advice I've gotten over many years has been contradictory. Put this in, leave it out, etc.

I think I'd've been much better off career-wise in a more common trade where I'd have a lot of potential employers (such as individuals & small businesses) than with highly specialized training that few employers can exploit. You can't exactly go down the street shouting, "Science! Get your science here!"

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