A new measure of consumption inequality

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Article Highlights

  • There's been a lot of buzz around income inequality. But what about consumption?

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  • Hassett and Mathur challenge public opinion with proof of stable, even decreasing, consumption inequality.

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  • Looking at consumption, low-income households are better off than they were only 10 years ago.

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Executive Summary

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.[1] 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.

Inequality: Income vs. consumption
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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.

Note

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).

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About the Author

 

Kevin A.
Hassett
  • Kevin A. Hassett is the State Farm James Q. Wilson Chair in American Politics and Culture at the American Enterprise Institute (AEI). He is also a resident scholar and AEI's director of economic policy studies.



    Before joining AEI, Hassett was a senior economist at the Board of Governors of the Federal Reserve System and an associate professor of economics and finance at Columbia (University) Business School. He served as a policy consultant to the US Department of the Treasury during the George H. W. Bush and Bill Clinton administrations.

    Hassett has also been an economic adviser to presidential candidates since 2000, when he became the chief economic adviser to Senator John McCain during that year's presidential primaries. He served as an economic adviser to the George W. Bush 2004 presidential campaign, a senior economic adviser to the McCain 2008 presidential campaign, and an economic adviser to the Mitt Romney 2012 presidential campaign.

    Hassett is the author or editor of many books, among them "Rethinking Competitiveness" (2012), "Toward Fundamental Tax Reform" (2005), "Bubbleology: The New Science of Stock Market Winners and Losers" (2002), and "Inequality and Tax Policy" (2001). He is also a columnist for National Review and has written for Bloomberg.

    Hassett frequently appears on Bloomberg radio and TV, CNBC, CNN, Fox News Channel, NPR, and "PBS NewsHour," among others. He is also often quoted by, and his opinion pieces have been published in, the Los Angeles Times, The New York Times, The Wall Street Journal, and The Washington Post.

    Hassett has a Ph.D. in economics from the University of Pennsylvania and a B.A. in economics from Swarthmore College.

  • Phone: 202-862-7157
    Email: khassett@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202-862-5862
    Email: emma.bennett@aei.org

 

Aparna
Mathur
  • Aparna Mathur is an economist who writes about taxes and wages. She has been a consultant to the World Bank and has taught economics at the University of Maryland. Her work ranges from research on carbon taxes and the impact of state health insurance mandates on small firms to labor market outcomes. Her research on corporate taxation includes the widely discussed coauthored 2006 "Wages and Taxes" paper, which explored the link between corporate taxes and manufacturing wages.
  • Phone: 202-828-6026
    Email: amathur@aei.org
  • Assistant Info

    Name: Hao Fu
    Phone: 202-862-5214
    Email: hao.fu@aei.org

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