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American Consumption

Posted By Don Boudreaux On February 10, 2008 @ 9:20 am In Inequality,Myths and Fallacies,Standard of Living | Comments Disabled

Mike Cox and Richard Alm [1] have an excellent op-ed in today’s New York Times [2].  It exposes as (at best) facile the view — expressed just yesterday [3] by the Gray Lady’s columnist Bob Herbert — that "[t]he middle class is hardly flourishing" — that America’s middle-class is disappearing and needs to be "resuscitated."

Here are some key paragraphs:

Income statistics, however, 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, and that the
abstract, income-based way in which we measure the so-called poverty
rate no longer applies to our society.

The top fifth of American
households earned an average of $149,963 a year in 2006. As shown in
the first accompanying chart, they spent $69,863 on food, clothing,
shelter, utilities, transportation, health care and other categories of
consumption. The rest of their income went largely to taxes and savings.

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.

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.

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[1] Mike Cox and Richard Alm: http://www.amazon.com/Myths-Rich-Poor-Better-Think/dp/0465047831/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1202653532&sr=1-1

[2] an excellent op-ed in today’s New York Times: http://www.nytimes.com/2008/02/10/opinion/10cox.html?ref=opinion

[3] expressed just yesterday: http://www.nytimes.com/2008/02/09/opinion/09herbert.html

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