Consumption and Income Inequality

From the NY Times opinion page:

You Are What You Spend, by W. Michael Cox and Richard Alm, Commentary, NY Times: With markets swinging widely, ... and the word “recession” on everybody’s lips, 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 from 43.6 percent in 1975 to 49.6 percent in 2006, the most recent year for which the Bureau of Labor Statistics has complete data. Meanwhile, families in the lowest fifth saw their piece of the pie fall from 4.3 percent to 3.3 percent.

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.

The top fifth of American households earned an average of $149,963 a year in 2006. As shown in the first accompanying chart, they spent $69,863 on food, clothing, shelter, utilities, transportation, health care and other categories of consumption. The rest of their income went largely to taxes and savings.

The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? A look at the far right-hand column of the consumption chart, labeled “financial flows,” shows why: 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.

So, bearing this in mind, 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. As the second chart, on the spread of consumption, shows, this wasn’t always so. ...

While foreign competition may have eroded some American workers’ incomes, looking at consumption broadens our perspective. Simply put, the poor are less poor. Globalization extends and deepens a capitalist system that has for generations been lifting American living standards — for high-income households, of course, but for low-income ones as well.

Paul Krugman responds:

Income and consumption inequality, by Paul Krugman: So Cox and Alm have a piece in today’s Times arguing that consumption inequality is much less than income inequality, so nothing to worry about.

Now, there’s no question that consumption inequality at a point in time is less than income inequality. But the CEX study on which they rely is widely believed to be seriously flawed, especially for tracking recent trends. For whatever reason, the survey seems to be missing a lot of consumption growth among the affluent. There’s a good summary of that discussion in Gordon and Dew-Becker.

You probably should also know that Cox and Alm previously tried to make the case that there is huge income mobility in America — unconvincingly. In fact, they repeated in full arguments that had been thoroughly debunked years earlier. (Also see Gordon and Dew-Becker on this.)

So my basic reaction to the piece was, there they go again. There’s some truth in what they say, but no news.

Let me add this from the Minneapolis Fed. This is from an earlier post I did on this topic (with new comments at the end):

Poverty Rates in Recent Years, by Mark Thoma: In a recent commentary in the Washington Times, Alan Reynolds says:

No economist who hopes to avoid professional ridicule would try to deny that consumption is a better measure of long-term living standards than the most widely cited income distribution figures, which do not even add transfer payments or subtract taxes.

It's clear why the administration's defenders are pushing this point. Here's a graph of income and consumption based measures of poverty taken from a recent article from the Minneapolis Fed on measuring poverty:

The green line is income based poverty and it has been increasing since 2000. The consumption based measure shows more progress and that's why it is being pushed on some editorial pages. But even with the consumption based measure, poverty is little changed between 1998 and 2003 and the total decline since 1998 has been less than 1%. Thus, while the consumption based measure does not show the increase in the poverty rate that income based measures show, it is still evident that progress has stalled in recent years as compared to the decline from 1993 through 1998.

As Paul Krugman notes in comparing the change in poverty in the U.S. and in Britain:

And Britain’s poverty rate, if measured American-style — that is, in terms of a fixed poverty line, not a moving target that rises as the nation grows richer — has been cut in half since Labor came to power in 1997.

For the same time period, and using the best case consumption based measure, the rate has only fallen by a little over a percentage point over the same time period in the U.S. (see graph). Thus, while it's easy to see why the administration prefers the consumption based measure, even using this measure the U.S. has not done as well as Britain has over the same time period. As Paul Krugman also notes, this is partly due to a difference in the priorities of the two administrations.

I want to defend my colleagues against the claim made by Reynolds that they will face ridicule if they question Reynold's preferred consumption based measure of poverty.

Actually, I'll let who economists who work in this area speak for themselves. This is from the article containing the graph shown above. See if you think these economists ought to receive the "professional ridicule" Reynolds says they deserve rather than the respect accorded to colleagues engaged in serious research on important issues:

Poor by what standard?, FedGazette, Minneapolis Fed: ...Not foolproof Add it all up, and a different pattern emerges regarding poverty. A 2003 Census report on material well-being noted, “As many (studies) show, the levels of poverty and inequality tend to decrease using consumption-based figures, in comparison with income-based measures.”

Recent studies have reinforced that notion. In a 2006 working paper for the NBER, economists Bruce Meyer (University of Chicago) and James Sullivan (Notre Dame) pointed out that the official poverty rate “suggests that poverty has changed very little over the past three decades,” rising with recessions and then subsequently falling. In contrast, “Consumption-based poverty rates often indicate large declines, even in recent years when income-based poverty rates have risen” (see chart).

Responding to questions via e-mail, Sullivan said that consumption “is a more consistent measuring stick over time and that it is a better measure of the well-being of the worse off.” He added, “Over the past three decades, consumption poverty tells a more optimistic story than does income poverty ... suggesting we are winning the war on poverty.”

Some economists prefer to look at consumption because it is less volatile than income on an annual basis for most households. People smooth their consumption based on long-term income expectations. Such a phenomenon is readily apparent among those who lose a job. While their income might plummet, consumption tends to fall much less dramatically. Such households tend to either dip into savings or take on additional debt with the expectation that higher income will return in due time.

All this is not to say that consumption wins the best-measuring-stick debate hands down, even among advocates. Sullivan, for example, acknowledged “some important practical concerns with switching to consumption,” including the fact that consumption surveys are much smaller in scale than income surveys, making it difficult to analyze local patterns because of sampling problems.

The consumption model has other blind spots. For example, it can only measure total costs; it has no ability to distinguish the quality of purchases or the utility of different types of purchases to a household. For example, a 2005 working paper by Thomas Deleire of Michigan State and Helen Levy of the University of Michigan found that higher expenditures among single-mother households during the 1990s “can be explained by a shift from food at home to food away from home.” While that is positive in some senses—less work cooking at home and more food “leisure”—an alternative explanation is that more meals were eaten outside the home out of necessity and at higher cost to the household budget, as more single mothers worked, either voluntarily or because of changes to the welfare system in the 1990s. Better off? Hard to say for sure.

Sullivan and others also point out that income poverty has simple longevity on its side. “I think it is well understood that there are flaws in the official measure of poverty,” Sullivan said. “(But) we have been using the current measure for about 40 years, so we have a nice time series that is generally understood.” A 2005 article in the BLS's Monthly Labor Review noted that most studies of well-being are based on income data “partly because of history and also partly because of habit. Income data are accessible, comparable over time, and of high quality.” International comparisons are possible only through income because other measures like consumption are simply unavailable in most other countries.

Austin Nichols, a research associate at the Urban Institute, a nonpartisan economic and social policy research organization, has authored several recent reports on poverty trends. “I think a lot of folks use the official poverty line for the sake of convenience and comparability,” Nichols said via e-mail. That might sound like faint praise, but Nichols said that “convenience and comparability is not to be scoffed at.” Any new measure would not likely offer a view of poverty dating back to the 1960s and could have “equivalent or greater problems. ... At least the official poverty measure is understood by most people, as are some of its limitations.”

In the end, everything is relative. Not even researchers within the same organization agree on the best way to measure poverty. Gregory Acs is a senior research associate at the Urban Institute. Along with his counterpart Nichols, he has considerable experience with both poverty trends and the definition-measurement issue.

Acs and Austin tend to disagree over the utility of consumption-based poverty measures. According to Acs, “Ultimately, consumption is a better measure of well-being than income, but I think it is harder to measure, and income is not a bad proxy for consumption.” But Nichols responded, “I disagree that consumption is a better measure of well-being,” in part because researchers don't know how much consumption is financed by unsustainable borrowing. He added that consumption measures “have just as many problems as income-based measures.”

This scholarly head butting illustrates the general difficulty of pinning down who is poor and who is not. Said Acs, “I think Austin and I agree that there are pros and cons to all the poverty approaches,” both income and consumption.

The existing measure has stuck because “we have the most experience measuring income ... (and) researchers and policymakers are by now quite aware of its limitations,” according to Acs. “We want poverty to be an absolute measure of deprivation, and I think that's asking too much of any single statistic.”

However you measure it, we can do better.

To me, being poor isn't just about stuff, it's about being able to participate fully in society. The things on the list that almost all households now have, refrigerators, stoves, TVs, and telephones, are things you have to have to function in this society (the other things on the list such as VCRs and DVDs only have 80% penetration so they don't necessarily reach the poor). How do you make a doctor's appointment without a phone? Drop by in you spare time? A refrigerator and a stove are items a household has to have given how we bring food to the table in this society. I just don't see these things as doing anything more than providing the minimum necessary to function. Even something like a TV is necessary if you want to, say, keep up with the political debates (there's a presumption in our political discourse that you can watch campaigns on television and they are largely devoted to delivery over that medium - without a TV you cannot participate fully) or even talk to people around the water-cooler at work about the latest popular TV show. Yes, the poor might have been well-off in, say, 1821 given the societal standards of the time, or some other historical period one might choose to compare, but this isn't 1821 - things have changed and so have the minimum standards necessary to be part of the society. I'm sorry if there are people who don't want to share, an indication that even with all their wealth they don't think they have enough (if they did, why balk at sharing with the less fortunate, people who, according to the  Cox and Alm article, are "drawing down ... bank accounts" and selling other assets like cars just to keep up?). Giving people the things they need to be a full part of the society they live in is the decent and right thing to do. As our society elevates itself and the requirements for full participation increase, when things like computers are as necessary as a stove, our standards of decency - what we are willing to accept as a minimum standard of living - must also rise. Just meeting physical needs - food and clothing - is not enough to be a full part of the society we live in today. We can and should do better than that.

Comments

[reason]

So what they are saying is the poor aren't as poor as they are made out to be because they running down their assets (or running up debts) to stay afloat, whereas the rich are saving (i.e. building up their assets). It sounds like the poor are even worse of than we have been thinking to me, not the other way around. (The only way this is not true is if most of the poor ARE really elderly or temporarily unemployed. Surely there are statistics on this. But I wouldn't have thought that RECENTLY this was an INCREASING feature in the USA. Afterall, they keep telling us than unemployment is relatively low, and job turnover not unusually high. Have they been lying?)

[Bernard Yomtov]

I'm unconvinced that consumption is such a wonderful measure. What ever happened to the idea that people like to keep cash balances for liquidity, ease of transactions, emergency needs, etc.? Surely the psychological benefit of having some savings stashed away counts toward one's well-being.

[James Killus]

One first sights the trout in the milk when the comparison is only made at the quintile level. That "top 20%" sweeps in a lot of folks whose incomes aren't that spectacular, as everyone seems to understand when it's some lefty talking about "the rich," but gets ignored when it's some pleasing "See, things aren't that bad," argument.

One also wonders about what all is included in "consumption." Does paying the housekeeper count? How about the gardener, the architect? Does a ride in the company jet to the Kentucky Derby get counted as consumption?

For that matter, does "consumption" include the "charitable work" of paying money into foundations and academic instuitutions whose existence is devoted to churning out propaganda (and propagandists) demonstrating how very wonderful it is to live in such a fine land as ours, where income distribution is irrelevant compared to consumption, and a fellow like Richard Alm (a business writer), can fearlessly praise those he writes about, and everyone can feel so good about that.

We all get the same amount of ice. The rich get it in the summertime, and the poor get it in the winter. -- William Barclay "Bat" Masterson

[groucho]

"what we are willing to accept as a minimum standard of living - must also rise."

Mark, that's the ticket!!!!!!

[robertdfeinman]

I'll repeat what I said below when I mentioned this article in the links of the day thread (with some minor editing).

Two economists from the FRB Dallas show that things aren't really as bad as some might think for the bottom fifth since they are spending twice what their income is. Not only is the idea heartless and thoughtless, but their analysis is so biased as to make one wonder how they can hold down their jobs. A choice quote:

The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? A look at the far right-hand column of the consumption chart, labeled “financial flows,” shows why: 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.

The part that I've emboldened shows the disconnect between ideologues and reality. There is one dramatic characteristic of those on the bottom of the economic ladder, they have no assets. So how can they be selling homes, securities and collecting capital gains?

Now if you include the suddenly poor (rather than just the chronically poor) it's true that they may be selling off assets to avoid immanent starvation or health collapse, but that is not a sign of a minor problem, but of an even greater problem to come.

Other gems include comparing the speed at which electricity was adopted with consumer purchases of cell phones. In one case the entire country needed to have a new infrastructure created, something that an individual has no control over, in the latter case one can get a cell phone for $10. This shows nothing about the relative wealth of individual economic classes, nor of the benefits of international trade (their ultimate point).

If the Fed bases economic policy on analyses like this we are really in for trouble.

[mik]

One first sights the trout in the milk when the comparison is only made at the quintile level. That "top 20%" sweeps in a lot of folks whose incomes aren't that spectacular

Very true.
Average income of top 20% is about $150K, given that top 1% and top .1% have so much income, bottom of top quintile, 15% - 18% have incomes below $150K.

How many of them are two-income families? Probably most.
So we have lots and lots of two wage earner families with each making $50K, mixed with Bill Gates and hedge fund managers.

It is no surprise that 2 folks in family together earning $100K in CA or NYC, do not spend money much differently than poor folks.
They have to save for their old age and their kids education, they often have to pay quite a bit for health services.
After that not much remains, believe me.

Whole article is idiotic. One can compare apples and soccer balls all he wants, it will provide no new insight.

Authors are virtual PR people for the establishment, they will say almost anything for the right amount of geld.

[robertdfeinman]

A point about the Gordon and Dew-Becker article cited by Krugman. They try to find factors that explain the poor wage performance of workers in the lower half of the economic scale by measuring factors which include union density, immigration levels and the minimum wage.

They treat these all as separate factors, but I think this may be incorrect. One could make a strong argument (based upon a simple reading of the newspapers over the past 30 years) that the decline in the power of organized labor has meant that this sector has been less able to influence the type of legislation passed. Therefore, the lack of a federal rise in the minimum wage is the result of lower union density.

There is some additional evidence in that those regions where unions are still (relatively) strong have had minimum wage levels which are consistently above the federal requirement. In some cases this has occurred at the city or county level in response to local pressure.

If one keeps the basic maxim in mind that economic strength leads to political power then many trends become clear. Why have CEO earnings exploded? Could it be because CEO's now control huge sums of money that can be directed at candidates and political parties and thus legislation or regulation which would rein in such large compensation packages has not been forthcoming?

Would any firm spend huge sums on lobbying and political support if they weren't seeing a return on their investment?

Follow the money.

[save_the_rustbelt]

"On the other hand..."

One more reason not to have too much confidence in economists.

Seems politics has infected the research cycle - just one man's opinion.

[evagrius]

Not addressed is the issue of where people live.

It's one thing to live in a state or county where the "average" income is, say, $50k a year. It's another if one lives in a state or county where the "average" income is $150K a year.

Using the Fed measure of poverty, one can argue that the poverty rate of the first county will be higher than the second, ( and this is so shown in Fed statistics).

However, it overlooks the fact that the second county, having higher average income, will also be more expensive to live in.

It's easy to observe- just look at the S.F. Bay area where housing prices are easily twice to three times the national average and where incomes are higher. Does anyone really think that the poverty rate there is really less than the national average? If they do, I invite them to visit food banks and other aid agencies.

[pgl]

Mankiw alert! Greg posts Cox-Alm sine comment as if this is the only new discussion on this topic. I would place a comment under his post, but that's not allowed any more.

[gordon]

Consumption-based analysis doesn't address the "productivity wedge" that the Economic Policy Institute has been pointing to for years now. Here's an extract from their "State of Working America" for 2006/7 (.pdf):

"Between 1947 and 1973, a golden age of growth for both variables [productivity and real median family income], productivity and real
median family income grew in just about lockstep, both doubling. Over this era, there is no doubt that the typical family fully benefited from productivity growth.
Yet starting in the mid-1970s, this close relationship broke down. From 1973 to 2005,
median family income grew at less than one-third the rate of productivity. As we discuss
in detail below, relative to the earlier years, this was a period of growing income inequality, which served as a wedge between productivity and the living standards of the median family. That is, while faster productivity growth led to a larger economic pie, growing inequality meant that slices were divided up such that some income classes—those at the top of the income scale—claimed most of the income growth (and, as emphasized below, this gap between income and productivity occurred at a time when families were greatly increasing their time spent in the paid labor market)".

[bakho]

What point are they trying to make?

What many of the bottom 1/5 don't have is health insurance. The health insurance is unaffordable (without subsidy). A 2003 institute of medicine study concluded that "if an uninsured individual gained insurance coverage, they would obtain improved health valued at between $1,645 and $3,280 each year. For the entire population, that health improvement translates into $65 billion to $130 billion in savings each year."

While the poor can make ends meet on low income, one big health care bill is the tipping point that can put people into destitution. Inadequate health care can lead to low lifetime earnings and cripple people into not being able to leave poverty.

What ARE the wealthy doing with their money? A lot of it is spent on themselves and members of their family to perpetuate the plutocracy. They manipulate the system so that their own can get a leg up by denial of service to others. No where is this more apparent than in the disparity in our education system.

Maybe the writers should try "nickel and dimed" living on $750 per month?

[dissent]

Since the conservatives came to power with Reagan, there has been a broad, deep, and unsustainable rise in debt financed consumption. Our prosperity, for the middle and working classes, has come to rely increasingly on debt.

The latest bubble is now bursting, and it looks this era may now be ending.

How convenient then, to argue away soaring poverty by pointing at the increase in debt financed consumption. Not only is it heartless (and dumb!) to imply an equivalence between debt and income financed consumption, it's also very likely not going to work in the new era that is dawning. Because there won't be much debt financed consumption!! (It will be replaced by bankruptcies and foreclosures.) Their argument seems flawed now: in 6 months or so, it will be laughable.

[plschwartz]

Lets just say you were having a bad day today.
It certainly shows in your post.

Couple of random thoughts
1.You make a case for using income as a proxy for poverty even though you see its limits. Isn't that like the drunk looking for his keys under the streetlight? There is a great difference between a variable being reliable and being valid.
I submit that using a measure known to be of limited validity because of the ability to have a longer baseline is at best questionable. To take the results of that study and then try to use it for some public purpose without major caveats is .....

2. Your offhand comparisons of rates of decline of UK and US poverty has a bunch of implicit assumptions. First and foremost is the idea that the curve of poverty reduction is linear rather then curvilinear. I suggest that this curve will be asymptotic (have you ever worked with the homeless?)( I suggest you read Knut Hamsun Hunger)

3. And then there is your crowning assumption that your view of Social Happiness is so MATERIALISTIC. I cannot
be a fully functioning member of our society without a TV and VCR? Does the ability to watch CNBC and FOX make me a more informed citizen.
I better just end here

[donna]

I'm sure my friend in LA who has been out of work the last six months and lives in a studio apartment and is down to the last of his savings will be thrilled to know he isn't poor because he owns a 12" TV and a DVD player and a ten year old computer.

Geez, these people are idiots.

[Mark Thoma]

plschwartz: Speaking of bad days (and bad arguments), uhm, on 3, what part of it "isn't just about stuff" don't you understand? (The fact that you had to distort what I said by throwing in a VCR to make it seem like this was about time-shifting sitcoms or something trivial like that rather than about being able to political participate in the political process shows how weak your argument is. If you want to argue that you don't need access to media to participate in society (as you use your computer to read this...), fine, make that argument, but I strongly disagree. Along those lines, you seem to be saying that because of Fox etc. the poor are better off without a TV at all, but I tend to give everyone - poor or not - more credit than that, they can handle it. Or is it that you can handle it, but they can't?) On 1, no, it's not like that at all - reread the argument made by the people at the Minneapolis Fed. On 2, that's Krugman, not me, but the point I was making is about moving poverty lines. In any case, the comparison is not an important part of the argument, not in the least, so take it or leave it, it doesn't matter.

[Ben Stein the Hack]

Also wanted to point out that a likely source of much of the gap between consumption and income was borrowing, and that this likely came from 2 sources which are about to come due: subprime refinancings and credit card debt.

This oped by Cox and Alm is about to look real stupid, real soon. I suppose we can expect to see an oped from them in about a year arguing why the increasing number of homeless people in bankruptcy shows the poverty gap is shrinking.

Also, in response to plschwarz, you might consider that TV entertainment is actually far cheaper than any alternative. And if you're a poor family (particularly single parent and/or multiple jobs) it probably acts as the cheapest form of babysitting you can get.

[anne]

Mark Thoma:

"To me, being poor isn't just about stuff, it's about being able to participate fully in society."

Brilliantly incisive and succinct.

[Bupa]

Mark, I agree with the thrust of your argument but perhaps one doesn't need a TV to "participate fully in society." I am not poor so perhaps using myself as an example is not appropriate, but I haven't owned a television in 20 years. It is not just FOX... I find it all mind-numbing. Television news is not very informative and is often misleading. It can also be dangerous. The main-stream media, especially television media is one of the reasons that Americans were duped into supporting the Iraq war and one of the reasons that the worst president in history managed to obtain 80 percent approval ratings at one point.

[Mark Thoma]

Bupa: But you have a computer so you can participate, that's an effective substitute ... those cost a lot more?

[plschwartz]

1.As Paul Krugman notes in comparing the change in poverty in the U.S. and in Britain:

And Britain’s poverty rate, if measured American-style — that is, in terms of a fixed poverty line, not a moving target that rises as the nation grows richer — has been cut in half since Labor came to power in 1997.
********* (end of Krugman quote)******** This is data

For the same time period, and using the best case consumption based measure, the rate has only fallen by a little over a percentage point over the same time period in the U.S. (see graph). *******(this is a second source of data)********

Thus, while it's easy to see why the administration prefers the consumption based measure, even using this measure the U.S. has not done as well as Britain has over the same time period. ***** (analysis of two data sets by Thoma)*****

As Paul Krugman also notes, this is partly due to a difference in the priorities of the two administrations.
*******(Krugman brought in as an authority but analysis continues to be Thoma)*******
At what level of poverty did the two data sets start at. My maths are many years ago but IIRC that in a non-linear"ceiling effect" curve to compare two segments one would need to transform the data into a linear form.

I do not know your background but I grew up in a working class environment. I read several newspapers and used the Carnegie endowed library. I did consider myself an informed member of society from about age 10.

During one period we had to give up our phone. We used a neighbors for incoming calls and emergencies and a pay phone for out going calls.As a struggling grad student I certainly lived below the poverty line and certainly was involved.
Feeling like an involved member of society is a psychological or perhaps sociological question.

[Mark Thoma]

That one person walked ten miles barefoot in the snow to school everyday is not an argument that everybody should have to do that.

Going to the library to read the paper when you were 10 years old may have worked when you were a kid, we didn't even lock our doors when I was a kid even when everyone was gone, and good for you, but are you seriously suggesting that should be the norm for 10 year old children in the inner city today, or any city?

Notice that when you gave up your phone, you actually didn't - you couldn't - you had to use a neighbors. And that was way back then (my mom ran a switchboard plugging the wires in when I was just a toddler, phones are kind of different - and used differently - today). If you couldn't go without a phone, not really, what is your argument?

I grew up in a working class environment too. My town had 3,500 people. Carnegie? Ha. We were lucky that our library had books.

Finally, I doubt the poor have much sympathy for struggling graduate students who can look forward to a time when such struggles are a thing of the past. Okay, maybe you are a struggling adjunct or something now and barely getting by, but your choice was and is voluntary. At any time, you could have quit graduate school and likely gotten a job and done much better. Not really the same when you already have a college degree to fall back on.

[Mark Thoma]

I don't want the larger point about participation to be lost in one specific example used to try to illustrate it, the TV thing, but this article from tomorrow's paper is kind of interesting in that regard:Putting Candidates Under the Videoscope, By BRIAN STELTER, NY Times: ...Mr. Conroy, whose job title is “off-air reporter,” (because he does not normally appear on television) is one of many young journalists hired by the networks to follow the candidates across the country, filing video and blog posts as they go. Originally hired to cut expenses — their cost is a fraction of a full television crew’s — these reporters, also called “embeds,” have produced a staggering amount of content, especially video. And in this election cycle, for the first time, they are able to edit and transmit video on the fly.

As a result, the embeds have changed the dynamic of this year’s election...

“There have always been cameras around campaigns. What is different now is how much more portable they’ve become and how much more prevalent,” said Eric Fehrnstrom, who was the traveling press secretary for Mr. Romney’s campaign until the Republican candidate dropped out last week.

Through cable television, network news sites and video sharing sites, these unexpected and unguarded moments at rallies and during campaign stops have become part of the narrative of the election. ... The off-air reporters for ABC even post their itineraries on the social networking Web site Facebook. ...

The off-air reporter role became especially prominent in 2004 when NBC News renamed them “campaign embeds,” in an allusion to the embedding of correspondents during the Iraq war. During that election, hand-held cameras became ubiquitous, but the reporters did not have a ready-made outlet for their video.

Four years later, the 2008 presidential campaign is being conducted in the era of YouTube. Spurred by the proliferation of inexpensive hand-held video cameras and broadband Internet access, the dispatches that were once distributed internally are now published on blogs, and the video clips that would have wound up on the cutting room floor are posted on Web sites. ...

[german_reader]

A really tricky article. To define poverty based on consumption figures is a nothing but a simple fraud. It masks the social explosive which is hidden behind these numbers.

First of all they say that households in the lowest quintile had incomes of $9,974 a year and spent $18,153 a year. This would mean $8,179 in borrowing or dissaving every year. But even that is not the real picture. If you look at the chart that is linked in the text,

http://graphics8.nytimes.com/images/2008/02/10/opinion/10chart.large.gif

you'll see that the average financial flows of households in the lowest fifth are -$10,719, for the middle fifth +$2,395 and for the highest fifth +$47,191. Rising debt or declining wealth are typical accompanying symptoms of persistent income poverty.

I don't know how they exactly calculate it, but $10,716 in dissaving or new debt every year looks like a significant number even for middle class households to me.

It's not only a single year, it's the trend that matters. While the poor often must borrow, the wealthy and especially the rich can save a lot. That results in rising social contrasts and an ever widening gap in wealth. The society is drifting more and more apart ( and not only in the US ). For most poor households the longterm perspectives are definitely not very rosy and the implications for the social stability of the country certainly not positive.

And this trend is aggravated because the poor spend most of their income on basic needs like housing, transportation, food, energy or health care. In the US and many other countries the inflation for basic needs is higher than the general inflation. This leads to additional income losses in real terms for the poor. The wealthy can buy more less inflation affected luxury goods or save more.

Another aspect is that they talk about averages of "quintiles". Averages in income statistics normally means that half or more of the reference group are below the average. Even the average of the lowest quintile isn't very impressive. $18153 per year means $1513 per month and household or $890 per person in living expenditures. And that includes health care, housing, food, transportation etc.. For "entertainment", probably what Mark Thoma means when he is talking about social participation ( radio, newspapers, books, television, internet, concerts, restaurants etc. ), remain $879 per year and household or $43 per person and month. Not directly a "luxury" life. And financed with ever rising debt or declining savings.

[ken melvin]

What choice? One simply can't live on $10k/year. Whether begged, stolen or borrowed, the $20 is more realistic. $10k/yr should be the punishment for Msrs. Cox and Olm.

[bakho]

Broadband is an example of the poor being shut out of participation. Those that don't have access will not be as proficient with the new technology. The poor lack acess to a lot of other things that many of us take for granted. This affects the children, a large part of the population that lives in poverty. The overall US poverty rate is just over 12%. The percentage of children in poverty is over 17% (1 in every 6). The child poverty rate in America is often two to three times higher than that of other major industrial nations.

In developing countries, children that grow up without electricity are probably not going to become computer engineers or web masters. Children that grow up with no internal combustion engines are probably not going to become auto mechanics. People with access to resources often underestimate the advantage they have.

[Gene O'Grady]

I am one of those rare people whose children grew up in the same town he grew up in. For better or for worse my socio-economic status was significantly below my father's, but I have to say that the things my kids missed that I had were things that aren't purchased by money, mostly the very broad range of things from open space to swimming pools to classes and social opportunities, not to mention time issues, that had little by little moved from the public to the private (read "wealthy") sphere in the intervening thirty years.

[calmo]

O dear...I [plschwarz] did consider myself an informed member of society from about age 10. I was only slightly less well informed and considered myself to be the only Boy Scout Cub hoisted by handkerchief to eye level of Mr Maxwell, somewhat offended teacher who thought I should not be testing Irene's so nifty 'til then, lawnmower Salt & Pepper Shaker down the isle a near model boy scout.
Ben scares the snot out of me:Also, in response to plschwarz, you might consider that TV entertainment is actually far cheaper than any alternative. And if you're a poor family (particularly single parent and/or multiple jobs) it probably acts as the cheapest form of babysitting you can get. I shall not B led astray...any further...by that commanding observation other than to note that Ben escaped...right, Ben? RIGHT??
Nothing much gets by Killus, not that quintillity nor the "charitable works" making such strides against this ever-present menace, poverty...nor our need for Bat Masterton quips on the distribution of ice.
There's poverty and then there's Grim...which for me needs constant cracking and I'm glad JK provides some here.
I'm done with the War on Terror, you?
Let's try the War on Grim.

[reason]

One possible thought that comes from this article is that price indexes are causing a distortion at the moment. If the poor are having to dissave heavily at the moment in order to survive, it could be that they are experiencing a real income fall of a larger scale than is generally believed. (i.e. They are adjusting to falling real income but too slowly.)

[Lafayette]

Interesting chart.

We learn the following as regards the Consumption / Income ratio:

Lower 20% (of population) : 1.82
Middle 20% : 0.76
Upper 20%: 0.46

How is it that the lower 20% consumes 80% more than it earns? Or, perhaps we are looking at the roots of the sub-prime mess?

And the following regarding family size:

Lower 20% (of population) : 1.7
Middle 20% : 2.5
Upper 20%: 3.1

Which means the family size of the poor are not as large as a century and a half ago, when the country was still mostly agricultural in nature. And, that, quite logically, richer families are also larger families -- all the better to create family dynasties that, not knowing what to do with themselves, can afford to go into politics.

[Lafayette]

g-r: To define poverty based on consumption figures is a nothing but a simple fraud. It masks the social explosive which is hidden behind these numbers.

We notice the same riddle regarding the lower 20%, and I would agree with your conclusion. What would be interesting to know is at what percentile the Income and Consumption numbers are equal.

I think as well that Consumption is not necessarily a good indication of "wellness". In France, for instance, if I depend upon Socialized Medicine and my neighbor prefers Privatized Medicine, I probably get the same treatment but at far less cost than my neighbor. The cost of my neighbor shows up in his/her Consumption numbers, but not mine.

So, the cost of wellness is substantially different.

And, on this matter, it is possible that the intrinsic unfairness of the American Health Care is most apparent. The middle and upper range 20-percentiles quite likely benefit from HC-insurance. So, the lower 20-percentiles may have a higher HC component cost.

It is all the more unfair when one considers that HC-insurance is recuperated from product/service pricing by corporations. Meaning the lower 20-perentile consumers are contributing to the Health Care that the upper-percentile are enjoying -- without benefiting from it themselves. [Which presumes, of course, that the lower 20-percentile does not have company paid HC-insurance.]

[hari]

For us non-residents but interested audience this is a very useful thread in which poverty of the working class is the centre piece. Yet, it seems to me, the evidence is more or less submerged - not really transparent!

Mark, I suspect, grew up on a family ranch in Yuba City and may've also milked a cow or two (like me - although I also liked goat milk!). There was no toys in our youthful age...we invented it on the river bed with floating banana trunks and whatnots!

However, you've to give credit to Mark for his arguments that poverty in America is sadly increasing with inequality. The side issue of TV (or no TV) is really relevant for the working class people - since they've no other form of entertainment. Basic necessitites are also essential part of working class life - but hardly any luxury item (let someone define it!).

I, for one, haven't owned TV since mid-1970s! Yet, I read a lot and get my news from sources I trust. With PC I can get it from the horses mouth! I don't need a camera or a stupid idiot interpreeting the news for my consumption.
[But then I've a ph.d. to boot].

There's underclass in much of OECD bloc. I don't know how they're being aggregated today. It's invariably so that statistical evidence can be misleading sometimes, from country to country, as I recall from my undergraduate days, when one in the class decided to write on "how to lie with statistics". That was time of Ike and Nixon...

I'd suggest to Mark to assign simple term paper(s) to his senior students (I like the way he handles his class on video!) dealing with different aspects of the growing poverty class in America - start right in Oregon.

There's need for more detailed studies to understand the nature and form of poverty creeping into a free market capitalist society.

[Lafayette]

A sociological approach

GO'G: but I have to say that the things my kids missed that I had were things that aren't purchased by money

Quite right. But, for as long as econometricians are tied hand and foot to their statistical base, they will do the sort of analysis that is shown here.

If we wanted to look at Quality of Lifestyle, we need to have a sociological approach that is more holistic -- meaning it takes into account a great deal more than Consumption/Income numbers may indicate.

One can be rich and still living a hell of loneliness. And, it remains a startling fact that the number of suicides in comparatively Wealthy Countries remains high. Largely, perhaps, due to the fact that the poor are scrambling hard just to make a living, not having time to reflect upon their wellbeing.

Besides, I have never been convinced that having ever more to chose from is beneficial to mankind -- given its ability to befuddle the mind. It is nonetheless fairly axiomatic amongst populations of Developed Countries that More Is Better.

Which ain't necessarily so (according to Sportin' Life).

[hari]

Greg identified his blog with the study. But gave no comments (nor does he allow anymore comments on his blog).
Why would he identify with selection of this particular subject...there must be someone here who understands the question!

[Real Person from the Real World]

I have a TV, 15 yrs old, and non-working, in my front room. To heavy for me to carry out, and I haven't got a relative to help. I have a small TV working, but no cable, and there is nothing but sales crap, reruns, and one lone gem: House. My Refrig acts funny, and I get scared.... I am not sure where to get the money to buy a new one, if it clunks out.... I really need a new car, but..... We recently hired a sales lady at our staffing firm. She had to get emergency money to pay off credit card and mortgage, and apparently the another credit company was taking money out of their accounts. Husband is in a seasonal job, when he gets paid they go shopping and nightclub hopping. And of course, she gets more pay than I, and, commissions. Sales jobs are a lousy swap for real ones. Any other jobs out there, are flunky jobs that barely keep you afloat: working at walmart, clerical, customer support, et al. We've exported all the jobs that made the economy, while a lot of economists and republicans all lecture us all, on how good globalization actually is, for the economy. I don't see it, and I am getting closer to a poverty stricken retirement, as my saving dwindles and dwindles to keep up.

[calmo]

Such a joyful post Real Person from the Real and Grim World...how did you ever manage to put your mits on a retirement bundle that is substantial enough to not only take a dwindle but dwindling and dwindling?
I can leave that mystery for this plonk:Sales jobs are a lousy swap for real ones. You figure we (homo sapiens...accept no subsitutes) are not cut out to feel the satisfaction of successful shopping?...that we need to make something in return rather than just market somebody else's work?...that those happy housewives are just sprouting a facade of delirium about those 39 cent/lb bananas...but deep down wishing they had carrots to slap back down on the counter and not that plastic card?
I can see the front lawns bein "done over" for carrots wheat, the Next Big Thing cash crop.
Maybe

[Julio]

So, let me get this straight:

Say I'm a high school kid,

- My parents have just informed me that they can no longer afford to put a little extra for college every month. This measure says I'm not any poorer?
- My parents in fact had to use my college nest-egg, such as it was, to buy food. Now I'm RICHER??

Where is Dickens when we need him?

[Roger]

What I'm not seeing, and I think is at the heart of the debate, is a discussion of consumption on the high end; i.e., the ones with incomes and assets that are actually driving the increase in relative income disparity. There's a point where, aside from some of the nouveau riche, big money earners don't spend nearly as much relative to income as the rest of the population, especially at the bottom end. They don't need to, since many expenses are picked up by their businesses and in any case there's an effective limit to what the rich normally consume or spend on, idiosyncracies aside.

[Holly W.]

This consumption argument from Cox and Alm strikes me as a disingenuous red herring.

First of all, they focus on the Top 20% of income earners, where it seems fairly innocuous to state that their share of national income has increased only 6% in 30 years, from 43.6% to 49.6%. How about mentioning the Top 1%? Or the Top 0.1%? That's where the breathtaking income gains have accrued.

More importantly, it is very clever of these guys to distract us by talking about incomes and consumption rather than wealth. Poor people may own cars, washing machines, refrigerators, cell phones, or what have you, but none of these things is an asset in the sense that it will gain value and be worth more later. These items do not make money while their owners do something else; they do not provide income at a discounted tax rate; they cannot support their owners in old age; they are unlikely to be worth anything as an inheritance to one's children.

I have never liked the phrase "standard of living" for this reason. Owning stuff, even alot of stuff, does not make a person well off. Owning assets is what counts. I would like to see a discussion of the wealth gap in this country, rather than idiotic reassurances that just because people own a refrigerator and a color TV, they are doing fine.

[Alan Reynolds]

One reason the bottom fifth consistently spends twice as much as their apparent earnings is that money income is defined to exclude in-kind transfers such as food stamps, housing allowances and Medicaid, and (importantly)the EITC. Those with access to these programs can buy more groceries, rent and medical care than their money income would lead you to believe. Among the top fifth, of course, money income overstates disposable income because it leaves out all taxes, which partly accounts for the seemingly low ratio of consumption to income at the top. Consumer spending is not necessarily a better measure than disposable income, except that is counts spending out of wealth (which is important among seniors like me).

[messels]

great to see this got as much attention as it deserves. also great to see that nobody else was fooled by the silliness of their conclusions.

i linked back to you; here's the link to the post:
http://www.positionmakers.com/2008/02/11/wheres-the-product-your-company-sells-on-the-adoption-curve

cheers!

[Lafayette]

Holly: How about mentioning the Top 1%? Or the Top 0.1%? That's where the breathtaking income gains have accrued.

Yes, indeed. The incomes of the top 1% increased from 8% (1953 through 1986) to 14 – 17% in 2000/2002. That is, about doubling.

This period coincides with Reaganomics in the US (and Thatcherism in the UK), as well as the dot.com boom in the 1990s, which made fortunes for some Silicon Valley entrepreneurs but also the Golden Boys on Wall Street. (Let's remember, the Bonus Pool at Goldman Sachs last year was 17 billion dollars. Read all about the jackpot "earned" by the Masters of the Universe, here.)

Source of income data: Atkinson, Anthony and Piketty, Thomas. “Top incomes over the twentieth century”; Oxford University Press,

[Lafayette]

AR: Those with access to these programs can buy more groceries, rent and medical care than their money income would lead you to believe.

For as much as twice their income, each and everyone of them? Yeah, right. (And, maybe they are all inveterate gamblers who spend their weekends winning jackpots at their local casino?)

C'mon, there's something else going on behind these lowest percentile income numbers. Either they are entirely wrong or we are missing something VERY important.

[wjd123]

In what spirit are Alm and Cox offering this better measure of poverty. Are they saying that if it wasn't for those tricky statisticians we would realize how much better off we really are and how much more equality we enjoy, so be happy. Or are they saying here is a better measure do with it what you will.

There are many ways of looking at individual well-being, so in the spirit of doing with these statistics what I will, I'm going to look at well-being through the eyes of a utilitarian and see if I can be happy.

Today the mark of a well functioning utilitarian society-one concerned about happiness--would be how well people are able to fulfill their interests. If after paying for fixed expenses the poor only have 2% of their $20,000 income left to spend on education or whatever the members of their families need to fulfill their interests--which might include escaping from their families or their community--they are simply not going to have as many opportunities for fulfilling their interests as someone from a family making $200,000 a year that has 20% of their disposable income to spend on education or whatever they need to help fulfill their interests.

Money is fungible so transfer payments like the earned income tax credit to the poor or social programs such as Medicaid help the poor to have more disposable income. Income they can target to help fulfill their interest. However, the rich will still have much more income to use on fulfillment. The likely outcome of the poor having too little incme is that they will narrow their interests. (Is there some technical reason why Alm and Cox didn't include transfer payments and social programs in their article since it would make their argument stronger?)

I think Mark Thoma is right that people lose out when they can't participate fully in society. But isn't there a reverse reciprocity here. Society loses out when people aren't able to fully participate in it. For instance a poor person with a talent for mathematics and analytical thinking is more likely, because of environment and short term needs, to be touting the odds on a horse race than the stock market.

The point when it comes to social loss isn't that our horse touter didn't become a financial analyst but that he might have been a much better financial analyst than the average bear. Yes, society needs good handicappers. But the big gains for society are to be found in right choices in the financial industries.

It's also true that society can't have interests and needs in a teleological or emotional way but it can be organized in a manner where it's easier for us to surmount change and for people to be all they can be. Considering that most people today no longer live down of the farm but have seen Broadway "it helps to consider how our lives have changed" and how people's interest have grown.

The big opportunities to fulfill our interests have come from changes in the law and to a lesser extent social programs. Compared to these the ability of the poor to consume more is a minor bump on the road to fulfillment.

Looking at the chances for well-being from a utilitarian point of view, I get the feeling that the spirit in which Alm and Cox are offering a new measurement for poverty is to trying to make a mountain out of the molehill of greater consumption. It's not that important for my happiness if it can't help me fulfill my interests in a meaningfull way.

Bernard Yomtov,

What ever happened to the idea that people like to keep cash balances for liquidity, ease of transactions, emergency needs, etc.? Surely the psychological benefit of having some savings stashed away counts toward one's well-being.
Posted by: Bernard Yomtov

As anecdotal evidence, I can say without a doubt that I would a psychological mess if I had to live without some savings no matter how much extra consumption I could ring out of just getting by.

[piglet]

"To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed."

Obviously defining poverty by non-ownership of a TV is nonsense. If you really want to go into detail and see how people are living (how their lives have changed), you have to ask questions like
- Have the schools attended by the poor gotten better or worse?
- Has access to higher education for the poor improved?
- What about access to health care?
- What about leisure time? If the working poor are working longer hours to afford their fridge and TV, they have become poorer.
- What about economic security?
- In the book Free Lunch the author says that most children from poor neighborhoods in LA have never seen the beach. He also describes how public parks in poor neighborhoods were left to deteriorate in recent years while the rich have got better and well maintained parks.

Is there any attempt at assessing the living conditions of the poor in America on a qualitative level?

[Steve Roth]

I don't know why it took me so long to realize this, and I'm utterly at a loss as to why better-equipped souls like Paul Krugman didn't realize it instantly. Cox and Alm do, after all, point out the fundamental failing of their whole analysis:

"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."

Retirees—and the presumably gigantic gap between their collective earnings and spendings—have to be a huge factor. They're in the bottom quintile of earnings, but they're spending everything they've amassed over 65 years. And, uh...students? Who are being supported by well- or at least better-off parents who are nevertheless not part of the "household"?

The sticky issue of "life stages" (my children earn nothing, but the little hoodlums sure seem to consume a lot) is basic to the most freshman-level macro-equity analysis. Why aren't people who know better pointing this out?

Absent this "unclear" information, the whole Cox and Alm thing seems to tell us exactly...nothing.