Income vs. consumption inequality

Some time ago, John Quiggin became apoplectic at libertarians citing TV and Playstation purchases as evidence against American poverty being a serious problem; Henry Farrell chimed in too.  John asserts that consumption data "tell[s] us precisely nothing about what’s happening to inequality."

I cannot agree with this claim:

1. Consumption is robust for many categories, not just fancy TVs.

2. The data indicates that the people buying the stuff are not miserable, or at least not miserable for economic reasons.  There are plenty of historical episdoes where consumption does fall, and we know that is not a pretty state of affairs.

3. The demand for flat TVs and the like is not just a relative price effect, it is also a wealth effect.

4. If robust demand for fancy TVs and PlayStations is not convincing, what kind of consumption data would be?  Let’s say there was a robust demand, among the middle classes, for medium-size yachts.  Rembrandt etchings?  Wouldn’t that show something?  It can be argued that "TVs are not enough," but that is not reason to reject consumption data out of hand.  It is a reason to look at more categories of consumption.

Consumption studies do have the following defects:

1. They sample smaller numbers of people than do good income studies, and they cannot pin down the consumption patterns of definite percentiles very easily.

2. Money spent is not always money well spent.

3. The data series do not go far back in time and there may be problems of consistency over time.

4. People may be borrowing and accumulating large debts.  Note that in this case, however, the comeuppance, however bad it may be, has yet to come.  It could instead be argued that "inequality will (someday, when the debts come due) be a serious problem."

Mark Thoma surveys some interesting pieces.  Here is a very detailed study of the topic.  Here are many excellent slides on the topic.

Consumption data, even if sometimes misused by zealous libertarians, are not a means of dismissing the poverty problem, but they do put that problem in another light. 

First, they show that income and wealth data overstate poverty and inequality problems.  Second, a focus on income data leads one to conclude that the elderly require most of the assistance.  A focus on consumption data lead one to conclude that helping parents with children is, in many cases, more important.  That sounds right to me.


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