Income inequality is a big topic these days, but there are some who argue that income inequality data doesn't tell the whole picture. Income data typically uses pre-tax and pre-transfer income (meaning people at the top have less than it appears because of the taxes they pay, and the people at the bottom have more because of assistance they recieve.) There are other factors that muddy the waters as well.
The American Enterprise Institute released a study last summer that focuses on consumption differences. Yes, I know many of my readers will roll their eyes at AEI. I'll say that I've seen similar arguements made in peer-reviewd articles. Here is a piece in the New York Times four years ago written by two Fed Reserve folks making similar arguements, You Are What You Spend. The AEI report is A new measure of consumption inequality. Below is the executive summary, which can be found at the AEI website.
Does seeing inequality in terms of consumption clarify anything? What are the advantages or disadvantages of looking at things this way?
In recent times, the debate surrounding middle-class welfare has tended to focus on the issue of income inequality. In a popular 2006 paper, economists Thomas Piketty and Emmanuel Saez use tax return data from the Internal Revenue Service to suggest that income inequality has widened significantly over the period 1913 to 2010. Another frequently cited statistic is that in 2010, approximately half of all reported income went to the top 10 percent of earners.
We argue in this paper that income data are not the best measure of overall welfare. What matters for household well-being is consumption, since households are better able to smooth consumption rather than income over their lifetime. To that end, we use two alternative sources of data to assess changes in consumption inequality.Our first source, the Consumer Expenditure (CEX) Survey, shows aggregated changes in consumption expenditures for households at all levels of the income distribution. Using these data, we find that consumption inequality has increased only marginally since the 1980s. Further, consumption inequality narrows in periods of recessions, such as during the 2007–2009 recession. We also construct Gini coefficients from the CEX data and find that they have remained relatively stable over time, suggesting that the inequality has not widened significantly.
The second data source we use is the Residential Energy Consumption Survey (RECS), which allows us to assess consumption inequality in durable goods. Consumption of durable goods is recorded less well in the CEX data but is important in thoroughly assessing consumption inequality. The RECS survey includes questions on household use of appliances such as microwaves, dishwashers, computers, and printers. Simple tabulations of these data across years suggest that a higher percentage of low-income households is able to afford and possess these items. In addition, the quality of dwelling spaces has improved and more low-income households have heating and air conditioning today than at any time in the past.
To see if these differences are statistically significant, we present regression tables showing the likelihood that a household owns any of these items. The results suggest a significant narrowing of the gap between low-income and other households in certain durable-goods items, such as color televisions, microwaves, refrigerators, and air conditioners. In other items, like computers and printers, the gap was small to begin with but widened as usage of these items became more widespread and cost of these items declined. However, in recent times, even this gap has narrowed. For a third category of items, including clothes washers, clothes dryers, and dishwashers, the gap has tended to be fairly stable over time. Even in a statistical sense, there is a trend toward narrowing the consumption gap between low-income and other households.
1. Thomas Piketty and Emmanuel Saez, “The Evolution of Top Incomes: A Historical and International Perspective,” AEA Papers and Proceedings: Measuring and Interpreting Trends in Economic Inequality 96, no. 2 (May 2006): 200–205, http://elsa.berkeley.edu/~saez/piketty-saezAEAPP06.pdf (accessed June 6, 2012). For updated data, see Emmanuel Saez, “Striking It Richer: The Evolution of Top Incomes in the United States” (working paper, University of California–Berkeley, March 2, 2012), http://elsa.berkeley.edu/~saez/saez-UStopincomes-2010.pdf (accessed June 6, 2012).