You're Only as Poor as You Spend

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.