Kevin Hassett and Aparna
Mathur argue that consumption inequality has not increased along with income
inequality. That's not what recent research says, but before getting to that, here's their argument:
Consumption and the Myths of Inequality, by Kevin Hassett and Aparna Mathur,
Commentary, WSJ: In multiple campaign speeches over the past week, President
Obama has emphasized a theme central to Democratic campaigns across the country
this year: inequality. ... To be sure, there are studies of income
inequality—most prominently by Thomas Piketty of the Paris School of Economics
and Emmanuel Saez of the University of California at Berkeley—that report that
the share of income of the wealthiest Americans has grown over the past few
decades while the share of income at the bottom has not. The studies have
problems. Some omit worker compensation in the form of benefits. And economist
Alan Reynolds has noted that changes to U.S. tax rules cause more income to be
reported at the top and less at the bottom. But even if the studies are accepted
at face value, as a read on the evolution of inequality, they leave out too
Let me break in here. Here's what Piketty and Saez say about Reynold's work:
In his December 14 article, “The Top 1% … of What?”, Alan Reynolds casts doubts
on the interpretation of our results showing that the share of income going to
the top 1% families has doubled from 8% in 1980 to 16% in 2004. In this
response, we want to outline why his critiques do not invalidate our findings
and contain serious misunderstandings on our academic work. ...
Back to Hassett and Mathur
Another way to look at people's standard of living over time is by their
consumption. Consumption is an even more relevant metric of overall welfare than
pre-tax cash income, and it will be set by consumers with an eye on their
lifetime incomes. Economists, including Dirk Krueger and Fabrizio Perri of the
University of Pennsylvania, have begun to explore consumption patterns, which
show a different picture than research on income.
Let me break in again and deal with the Krueger and Perri Krueger and Perri (2006)
paper, which followed the related work by Slesnick (2001):
Has Consumption Inequality Mirrored Income Inequality?: This paper by Mark
Aguiar and Mark Bils finds that "consumption inequality has closely
tracked income inequality over the period 1980-2007":
Has Consumption Inequality Mirrored Income Inequality?, by Mark A. Aguiar
and Mark Bils, NBER Working Paper No. 16807, February 2011:
Abstract We revisit to what extent the increase in income
inequality over the last 30 years has been mirrored by consumption inequality.
We do so by constructing two alternative measures of consumption expenditure,
using data from the Consumer Expenditure Survey (CE). We first use reports of
active savings and after tax income to construct the measure of consumption
implied by the budget constraint. We find that the consumption inequality
implied by savings behavior largely tracks income inequality between 1980 and
2007. Second, we use a demand system to correct for systematic measurement error
in the CE's expenditure data. ...This second exercise indicates that
consumption inequality has closely tracked income inequality over the period
1980-2007. Both of our measures show a significantly greater increase in
consumption inequality than what is obtained from the CE's total household
expenditure data directly.
Why is this important? (see also "Is
Consumption the Grail for Inequality Skeptics?"):
An influential paper by Krueger and Perri (2006), building on related work
by Slesnick (2001), uses the CE to argue that consumption inequality has not
kept pace with income inequality.
And these results have been used by some -- e.g. those who fear
corrective action such as an increase in the progressivity of taxes -- to
argue that the inequality problem is not as large as figures on income
inequality alone suggest. But the bottom line of this paper is that:
The ... increase in consumption inequality has been large and of a similar
magnitude as the observed change in income inequality.
So they are citing what is now dated work. They either don't know about the more recent work, or simply chose to ignore it because it doesn't say what they need it to say.
Okay, back to Hassett and Mathur once again. They go on to cite their own
work -- more on that below. One thing to note, however, is that the recent research
in this area says the data they use must be corrected for measurement error or you are
likely to find the (erroneous) results they find. As far as I can
tell, the data are not corrected:
Our recent study, "A New Measure of Consumption Inequality," found that the
consumption gap across income groups has remained remarkably stable over time.
While this stability is something to applaud, surely more important are the real
gains in consumption by income groups over the past decade. From 2000 to 2010,
consumption has climbed 14% for individuals in the bottom fifth of households,
6% for individuals in the middle fifth, and 14.3% for individuals in the top
fifth when we account for changes in U.S. population and the size of households.
This despite the dire economy at the end of the decade.
Should we trust this research? First of all this is Kevin Hassett.
How much do you trust the work once you know that? Second, it's on the WSJ
editorial page. How much does that reduce your trust? I'd hope the answer is
"quite a bit." Third, big red flags when researchers cherry pick start and/or
end dates. Fourth, as already noted, recent research shows that the no growth in consumption inequality result is due to measurement error in the CES data. When the
data are corrected, consumption inequality mirrors income inequality. They don't say a word about correcting the data.
Next, we get the "but they have cell phones!" argument:
Yet the access of low-income Americans—those earning less than $20,000 in real
2009 dollars—to devices that are part of the "good life" has increased. The
percentage of low-income households with a computer rose... Appliances? The
percentage of low-income homes with air-conditioning equipment...,
dishwashers..., a washing machine..., a clothes dryer..., [and] microwave
ovens... grew... Fully 75.5% of low-income Americans now have a cell phone, and
over a quarter of those have access to the Internet through their phones.
Before turning to their conclusion, let me note more new research in this
area from a post earlier this year,
But They Have TVs and Cell Phones!, emphasizing the measurement error problem:
Consumption Inequality Has Risen About As Fast As Income Inequality, by Matthew
Yglesias: Going back a few years one thing you used to hear about America's
high and rising level of income inequality is that it wasn't so bad because
there wasn't nearly as much inequality of consumption. This story
started to fall apart when it turned out that ever-higher levels of private
indebtedness were unsustainable (nobody could have predicted...) but Orazio
Attanasio, Erik Hurst, and Luigi Pistaferri report in a new NBER working paper "The
Evolution of Income, Consumption, and Leisure Inequality in The US, 1980-2010"
that the apparently modest increase in consumption inequality is actually a
They say that the Consumer Expenditure Survey data from which the old-school
finding is drawn is plagued by non-classical measurement error and adopt four
different approaches to measuring consumption inequality that shouldn't be hit
by the same problem. All four alternatives point in the same direction:
"consumption inequality within the U.S. between 1980 and 2010 has increased by
nearly the same amount as income inequality."
Here's Hassett and Mathur's ending:
It is true that the growth of the safety net has contributed to massive
government deficits—and a larger government that likely undermines economic
growth and job creation. It is an open question whether the nation will be able
to reshape the net in order to sustain it, but reshape it we must. ...
After arguing (wrongly) that consumption has kept pace with income, they say
it's only because of the deficit -- but it's not sustainable. So suck it up middle
class America, consumption inequality has increased despite the claims of
denialists like Hassett, and if they get their way and reduce the social safety
net, it will only get worse.
Hassett and company denied that income inequality was growing for years
(notice their attempt to do just that in the first paragraph by citing
discredited research from Alan Reynolds), then when the evidence made it
absolutely clear they were wrong (surprise!), they switched to consumption
inequality. Recent evidence says they're wrong about that too.