I'm going to try to start what I hope will be a non-polemical thread here. Let's see if that can work.
The NY Times had an op-ed this week from a couple of economists that argued it's highly misleading to focus on income inequality. Here is a blurb from the op-ed that summarizes the argument:
Quote:
if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.
Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1. The average person in the middle fifth consumes just 29 percent more than someone living in a bottom-fifth household.
To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households.
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I can think of a couple of qualifying observations that would hold true even if the data here are totally reliable (from what I have read, the general gist is reliable, though some of the precise figures can be disputed). Here are the qualifiers:
1. Consumption comparisons are valid only in the short-term. Higher earners will presumably not spend many many times what lower earners will because, at a certain point, there's a limit to what you can spend on yourself. But the excess of the high-earner's earned income over the amount the high earner spends on consumption has to go somewhere, and where it goes is savings and investment. That means over the long term, even if there is not a large disparity in the people's short-run contentment, there is a disparity in wealth accumulation. Wealth provides (so far as I can tell) two things that income doesn't - first, it provides some degree of security that if something happens to adversely affect your earning capacity, you won't starve or lose your home. The other thing is it gives you the ability to direct its disposition - to your kids or to charity or wherever. To that extent, there is a value people get from wealth as a result of higher income that just can't be measured by looking at consumption. So, while I don't necessarily contest the thesis that consumption inequality is more relevant than income inequality, consumption inequality itself has problems as a measure of well-being because there are things it doesn't pick up.
2. Income inequality itself is misleading, primarily because the ways of calculating income are distorted by the tax system. Taxable income tends to be driven by what is reportable, but what is reportable does not align that well with what actually is paid to or for the benefit of the filer. The result is that reported taxable income tends to be much more unequal than actual compensation. So, for instance - just to take a very common item of compensation that isn't reported - a person who makes $30,000 but has $15,000 worth of health insurance paid by her employer does NOT make half what a person who is paid $60,000 and has the same coverage makes. The lower-paid person makes 60%, if there are no other non-wage items involved. But there of course
are other non-wage items: for example, employer's social security contribution (which is capped), 401(k) income accumulation and/or matching (also capped), etc etc etc. These items will, on a percentage (not raw dollar) basis, boost low-earners' income much more than high earners'. Once you factor in all the compensation people get that isn't reportable -- which includes, for low earners, things like food stamps or heating subsidies -- the degree of real income inequality correspondingly gets reduced. (I can't remember where I saw the graphs on this, but they're out there.)
Should this matter? It depends how you feel about economic inequality. If you think inequality is in and of itself a bad thing you'll think it's a problem that needs somehow to be fixed. If you think inequality is not necessarily a bad thing so long as it's linked to productive endeavors, you'll take a different view. But whichever school of thought you belong to, certainly it is in everyone's interest to have a handle on what the true scope of the issue is. That's where I think this NY Times article does a service - it gets us to thinking about what really makes people well-off or not.
Comments?