Dallas Federal Reserve Bank VP/Chief Economist Michael Cox was featured in Drew Carey's video "Living Large: America's Middle Class" (see CD post here).In today's NY Times, Cox and co-author Richard Alm have an excellent article "You Are What You Spend," which addresses some of the Dobbsian (Lou) myths of "Two Americas," the "Disappearing Middle Class," the "War Against the Middle Class," etc. According to Cox and Alm, the problem with these myths is that they focus on the wrong measure of financial well-being: Income statistics, which don’t accurately measure Americans’ living standards. "Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume." For example, "The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? Those lower-income families have access to various sources of spending money that doesn’t fall under taxable income. These sources include portions of sales of property like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts. While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status."
Consider these statistics comparing the top fifth (richest 20%) and the bottom fifth (poorest 20%), measured by household income (see chart above, click to enlarge):Household Income Ratio: 15 to 1
($149,963 top 20%, $9,974 bottom 20%)
Household Consumption Ratio: 3.84 to 1
($69,863 top 20%, $18,153 bottom 20%)
Persons Per Household: 1.82 to 1
(3.1 top 20%, 1.7 bottom 20%)
Consumption Per Person: 2.1 to 1
($22,536 top 20%, $10,678 bottom 20%)
Bottom Line: Even though households in the top fifth earn 15 times more income per household than the bottom fifth, those households in the top quintile consume only twice as much per person as the bottom fifth. Or, we could say that income inequality is 7 times greater than consumption inequality, or consumption equality is 7X greater than income equality.
Living standards are determined by consumption, not income, so the obsession about income inequality is a distraction from the fact that consumption, and therefore living standards, are distributed much more evenly than we think. After all, both low-income and high-income households own many of the same conveniences: color TVs, cell phones, microwave ovens, washers, dryers, VCR/DVD players, iPods, computers, etc.