June 27, 2012
Just how badly are the country’s poor and middle class doing? While the national debate about rising income inequality rages on, economists Kevin Hassett and Aparna Mathur of the conservative American Enterprise Institute are looking to shift the focus of the discussion. In a new paper released this week – in which the authors admit they set out to refute much-publicized claims about inequality rocketing higher in recent decades — they also argue that income is not the best measure of inequality, or of how Americans are really faring.
“What really matters to households is how much they’re able to consume,” Mathur says. While income fluctuates over a lifetime, consumption stays “smoother,” as economists put it. Retirees or younger people might have lower incomes, but they can dip into their savings – or build up debt – to buy the basics they need and the other products they want. Similarly, consumers across the age spectrum can borrow to buy things in lean times and save in better times. Studies focused on income, Mathur says, also don’t adequately account for the effects of tax credits and welfare programs like food stamps.
America's Best Kept Secret: Rising Suburban Poverty
Mathur and Hassett – the latter was an economic adviser to the presidential campaigns of Sen. John McCain in 2000 and 2008 and George W. Bush in 2004 – looked at government surveys on consumer spending and home energy usage. Those surveys ask whether households own items like refrigerators, color TVs, microwave ovens, dishwashers and coffee makers. A growing percentage of low-income households have these types of appliances as well as heating and air-conditioning – they aren’t exactly luxuries these days, which in a way is the point of the paper. “Overall, our analysis reveals a trend toward narrowing of the consumption gap between low-income and other households, contrary to popular perception of the issue,” Mathur writes in the foreword to the study.
The researchers don’t really account for how people might have gotten those items – whether they’ve piled up debt to do so, or not. “The truth is there’s likely to be some of that. The surge in consumer spending is definitely partly driven by an increase in debt and people just having better access to credit,” Mathur told The Fiscal Times. At the same time, she says, a lot of the gains for low-income households have also been fueled by falling prices for these items as technology continues to evolve. “These things have become more affordable.”
So while income inequality has been rising, these consumption data suggest that the poor and middle class “are not as badly off and the inequality is not that bad in the current system,” Mathur says. “It says something about what we think of as absolute poverty. You can always make the argument that there’s relative poverty, but it’s not the image of poverty that people typically have – that the guy at the bottom doesn’t own these items or have access to these things.”
But before anybody declares inequality a non-issue – and before anybody with the Obama or Romney campaigns even thinks of suggesting that poor people are “doing fine” – it’s worth noting that the data in the paper highlight one disparity in consumption that remains startlingly large (though it may have narrowed recently). As of 2009, according to the study, 50 percent of households below the poverty line said they had no computers, compared with just 2.5 percent of households with $120,000 or more in income. Just 41 percent of households at the bottom of the income distribution had access to the Internet in their homes, compared with 97 percent of the highest income group. That lingering digital divide can’t bode well for reducing inequality going forward.
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It’s also worth noting that even if low-income households have color TV sets or microwave ovens, that doesn’t exactly mean they’re economically secure, let alone comfortable or wealthy. After climbing during the downturn, the personal savings rate for U.S. households has been falling again, reaching 3.4 percent in April to match its lowest level since 2007. With that in mind, consider other data released this week: A survey by Bankrate.com found that more than one in four Americans (28 percent) have no emergency savings at all, while nearly half (49 percent) don’t have enough savings to cover three months of expenses. Only 25 percent have enough tucked away to cover six months of living expenses, as financial advisors typically recommend.
What do you think: Is consumption a better measure of inequality? Sound off below.