Income vs Consumption

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I found it fascinating to read You Are What You Spend to see how different the economic picture is depending on the way we measure economic position.

. . . renewed attention is being given to the gap between the haves and have-nots in America. Most of this debate, however, is focused on the wrong measurement of financial well-being.

It’s true that the share of national income going to the richest 20 percent of households rose . . . while, families in the lowest fifth saw their piece of the pie fall . . .

Income statistics, however, don’t tell the whole story of 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, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.

Comparing the richest 1/5 of society with the poorest 1/5 using different metrics leads to widely different conclusions on the gap between those two groups.

• Income ratio – 15 : 1
• Income per person – 8.2 : 1
• Consumption ratio – 3.8 : 1
• Consumption per person – 2.1 : 1

Simply adding in the per person statistic cuts the gap in half and moving from an income base to a consumption base (which largely indicates standard of living) makes the gap 1/4 of what it might appear on the surface.

I’d love to see how this has changed over time. We know that the income gap has increased, but I’ll bet that the statistics would show that the consumption gap has decreased between the top and bottom income groups over time. If I’m right, the reason for this is that we have taught the poorest 1/5 to spend what they don’t earn and we have ingrained the expectation that they should be able to do that into our government which has adopted the same policy for itself.