Fantastic new study from the AEI looks at consumption.. you know, the stuff we buy and use every day, and finds things haven’t changed much in the last 20 years, and in fact, we’re all richer.
First, instead of looking at income inequality, Hassett and Mathur look at consumption inequality, which represents a broader look at the economic resources a person can summon. Looking just at income ignores how individuals are generally able to smooth consumption by borrowing in the low-income years — such as during retirement or when they are just entering the workforce — and saving in the high-income years. Studies of income alone often exclude things like Social Security, Medicare, and food stamps.
Additionally, tax return data of the sort Piketty and Saez discuss can be influenced by changes in tax rates, giving a highly distorted picture of income inequality. For example, the personal tax rate reductions of the 1980s and the early 2000s caused businesses to shift income out of the corporate form and into the personal tax, thus raising reported incomes at the top.
So what does the consumption data tell us?
In 1984, households in the top income quintile, or top 20%, accounted for 37% of total consumption spending. Households in the bottom quintile accounted for only 10 percent of total spending. So the ratio of top-to-bottom consumption was approximately 3.8.
By 2010, that ratio had increased to just 4.4. This hardly represents an explosion in inequality. As measured by this ratio, consumption inequality has increased marginally over time, averaging 4.21 between 1984 and 1990, 4.29 between 1991 and 2000, and 4.46 between 2000 and 2010.
The graphs and charts tell quite a story, but not the narrative politicians want you to hear (click to enlarge):
I often mention seeing folks paying for food with “Independence” cards at the local grocery store while talking on an iPhone. Those people are far richer than the poor of 20+ years ago. Maybe we need to look at why they are richer now, instead of using force to take my stuff.