Although differences in income is the most commonly discussed type of economic inequality, there are two other important measures: consumption and wealth. Each type of measure – income, consumption, and wealth – have both advantages and disadvantages relative to the others.
The disadvantages of using income as a measure arise from a phenomenon known as “income smoothing.” A concept that is familiar to all of us, if more commonly under the pseudonym of “budgeting.” Families at different stages of their lives use debt and savings to provide a relatively stable level of economic well-being, thus “smoothing” their total lifetime income over the course of their entire period of employment (and retirement).
Therefore, as the CBO states:
[A] household’s consumption might be a better measure of its economic well-being than its income is. For households whose spending tracks their annual income, the distinction does not matter. But a young family may spend more than its current income, relying on borrowing to finance current consumption, while an older family may also spend more than its current income, drawing down assets in retirement. In contrast, a household in its middle years may spend less than its current income while saving for future needs.
Consumption data itself is also flawed since the Consumer Expenditure Survey (CEX) measuring consumption are not as wide spread as those that cover income, and there is poor coverage of consumption patterns at the top of the distribution. Nevertheless, it is clear that using consumption based measures of well-being, inequality looks much better.
For instance, two economists, Michael Cox and Richard Alm – using data from 2006 – show that although income inequality between the top and bottom fifth stood at a ratio of 15-to-1, consumption inequality was only 4-to-1. (You can read their op-ed in the NY Times along with critiques from Paul Krugman and Mark Thoma here).
In a separate study James Sullivan and Bruce Meyer reconstructed consumption poverty rates from 1963 through 2009 using different types of measures. The dark blue line shows the official poverty rate using the standard income measure, while the dark brow line shows consumption data including health insurance. (This later measure also uses a different deflator, but I will save the details of measuring inflation for another post). The difference in the two measures is not trivial. Poverty drops from 14.5% to around 8.5%.
A separate, but related way to measure inequality is by the number of modern conveniences in the average poor household. Using US Census data some economists have constructed tables showing the percentage of US households that have a varying degree of common appliances and household technology. Mark Perry, for instance, constructed the chart below that shows the poor in 2005 seem to be significantly better off in basic material terms than the average American in 1971.
A new paper from May of 2012 by Mark Bliss uses more advanced statistical techniques to account for the shortcomings in survey data to estimate the change in consumption inequality since 1980. While, in absolute terms, consumption inequality is still much lower that that of income inequality, the increase in consumption inequality tracks that of inequality in income:
Our estimates suggest that consumption inequality increased by close to 30 percent between 1980 and 2010, nearly as much as the change in income inequality, and nearly three times that estimated based on directly examining relative household expenditures in the CE [Consumer Expenditure Survey].
This paper is certainly not to be the last word on the consumption versus income debate over inequality.
A more anecdotal piece of evidence comes from Don Boudreaux who revisited his 1975 Fall/Winter Sears catalog, which he then compared to the equivalent products today (he uses as a measure the number of hours the average America had to work to be able to afford the items in 1975 and in 2006). You can read his posts here and here.
Other than the style differences, the fact most noticeable from the contents of this catalog’s 1,491 pages is what the catalog doesn’t contain. The Sears customer in 1975 found no CD players for either home or car; no DVD or VHS players; no cell phones; no televisions with remote controls or flat-screens; no personal computers or video games; no food processors; no digital cameras or camcorders; no spandex clothing; no down comforters (only comforters filled with polyester).
Sears’ lowest-priced 10-inch table saw: 52.35 hours of work required in 1975; 7.34 hours of work required in 2006.
Sears’ lowest-priced gasoline-powered lawn mower: 13.14 hours of work required in 1975 (to buy a lawn-mower that cuts a 20-inch swathe); 8.56 hours of work required in 2006 (to buy a lawn-mower that cuts a 22-inch swathe. Sears no longer sells a power mower that cuts a swathe smaller than 22 inches.)
Sears Best freezer: 79 hours of work required in 1975 (to buy a freezer with 22.3 cubic feet of storage capacity); 39.77 hours of work required in 2006 (to buy a freezer with 24.9 cubic feet of storage capacity; this size freezer is the closest size available today to that of Sears Best in 1975.)
Sears Best side-by-side fridge-freezer: 139.62 hours of work required in 1975 (to buy a fridge with 22.1 cubic feet of storage capacity); 79.56 hours of work required in 2006 (to buy a comparable fridge with 22.0 cubic feet of storage capacity.)
Sears’ lowest-priced answering machine: 20.43 hours of work required in 1975; 1.1 hours of work required in 2006.
A ½-horsepower garbage disposer: 20.52 hours of work required in 1975; 4.59 hours of work required in 2006.
Sears lowest-priced garage-door opener: 20.1 hours of work required in 1975 (to buy a ¼-horsepower opener); 8.57 hours of work required in 2006 (to buy a ½-horsepower opener; Sears no longer sells garage-door openers with less than ½-horsepower.)
Sears highest-priced work boots: 11.49 hours of work required in 1975; 8.26 hours of work required in 2006.
One gallon of Sears Best interior latex paint: 2.4 hours of work required in 1975; 1.84 hours of work required in 2006. (Actually, Sears sells no paint on-line, so the price I got for a premium gallon of interior latex paint is from Restoration Hardware.)
Sears Best automobile tire (with specs 165/13, and a treadlife warranty of 40,000 miles: 8.37 hours of work required in 1975; 2.92 hours of work required in 2006 – although, the price here is of a Bridgestone tire that I found at another on-line merchant. Judging from its website, Sears no longer sells tires with specs 165/13 and a 40,000 mile warranty.
In my next post I’ll examine the second of the two alternative inequality measures: wealth.