Academic journal article AEI Paper & Studies

A New Measure of Consumption Inequality

Academic journal article AEI Paper & Studies

A New Measure of Consumption Inequality

Article excerpt

FOREWORD

As the election draws closer, the buzz about inequality and middleclass welfare is reaching a crescendo. The perception of a rapidly growing gap between the nation's wealthiest and poorest citizens has created fervent discussion in the media, along with outrage in some circles. For example, in a recent New York Times article, economist Thomas Piketty states that the "United States is becoming like Old Europe" with extreme levels of income inequality. (1) Coauthor Emmanuel Saez adds, "Absent drastic policy changes, I doubt that income inequality will decline on its own." (2) Their proposed solution to the growing income gap is to dramatically raise taxes on the wealthy by setting top marginal tax rates at 70-90 percent, significantly higher than the current top rate of 35 percent. In this study, Kevin A. Hassett and I set out to refute the common claim that inequality has grown to the extent suggested in Piketty and Saez's work.

Economists have widely acknowledged that consumption is a better measure of economic welfare than income. In general, individuals are better able to smooth consumption rather than income over their lifetimes, making consumption a more informative indicator in the study of inequality. Unlike income, consumption remains relatively steady throughout life since individuals borrow during years with low income and save in high-income years. Using consumption as the relevant measure of inequality, most studies conclude that, contrary to popular belief, inequality has remained fairly steady over the past thirty years. Our study retains the focus on consumption inequality and arrives at a similar conclusion.

We use two sources of data to assess changes in consumption inequality. The Consumer Expenditure (CEX) Survey shows aggregated changes in consumption expenditures for households at all levels of the income distribution. Using this data, we find that consumption inequality has increased only marginally since the 1980s. Further, consumption inequality narrows in periods of recessions such as the recent recession of 2007-2009. The second data source we use is the Residential Energy Consumption Survey (RECS), which allows us to assess consumption inequality in durable goods. To our knowledge, the RECS has not been used in the economic literature assessing inequality.

The RECS survey includes questions on household use of appliances such as microwaves, dishwashers, computers, and printers. Simple tabulations of these data across years suggest that a higher percentage of low-income households is able to afford and possess these items. Our analysis suggests that the conditions of the low-income households are improving. To see if these differences are statistically significant, we calculate the change in the likelihood that a household owns any of these items. Our results suggest that the consumption of durable goods can be divided into three categories. First, the gap between low-income and other households has narrowed significantly for certain durable goods. In other items, the gap was small to begin with but widened as usage became more widespread. For a third category of items, the gap has tended to be fairly stable over time.

Overall, our analysis reveals a trend toward narrowing of the consumption gap between low-income and other households, contrary to the popular perception of the issue. Public discourse can often become skewed in one direction; therefore, it is especially valuable to explore new methodologies in evaluating important issues such as the inequality gap. Our conclusion in this study debunks the claim of widening inequality. I hope that studies such as this one will introduce a new perspective and create a more informed and thoughtful debate on the issue.

--Aparna Mathur, AEI Economic Studies Editor

EXECUTIVE SUMMARY

In recent times, the debate surrounding middle-class welfare has tended to focus on the issue of income inequality. …

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