Academic journal article Journal of Forensic Economics

It's All about Income! A Response to "Patton & Nelson Personal Consumption Revisited: Is Income Important?"(future Earnings Calculation)(response to Kenneth Boudreaux, Journal of Forensic Economics, Vol. 12, P. 255, 1999)

Academic journal article Journal of Forensic Economics

It's All about Income! A Response to "Patton & Nelson Personal Consumption Revisited: Is Income Important?"(future Earnings Calculation)(response to Kenneth Boudreaux, Journal of Forensic Economics, Vol. 12, P. 255, 1999)

Article excerpt

In wrongful death and survival actions, the task of the economist is to calculate what future earnings might have been, given the facts and assumptions of the case. Then estimated future earnings must be reduced by the portion of those earnings that would have been consumed by the decedent. Therefore, any factor or percentage, which is used in this estimation process must necessarily relate to the earnings stream and family size of the decedent.

In his 1999 article in this Journal, Boudreaux identifies three alleged biases in the Patton & Nelson Personal Consumption Tables (P&N), which he feels "causes their direct personal consumption percentages to exhibit a misleading strong and negative relationship with household income." (p. 264) He then uses each of his alleged biases to adjust the components of the P&N Tables to support his argument. Each of these is discussed in the following section.

Boudreaux's Adjustments of the P&N Tables

The first adjustment calls for the replacement of pretax income with household expenditures net of pensions and Social Security, both as reported in the 1994-95 U.S. BLS Consumer Expenditure Survey (CES), as the denominator in recalculating the results in the P&N Tables. Boudreaux's reasoning is that this adjusts for "expenditures deriving from sources other than income." (p. 256) While this may be true, such an adjustment is inappropriate in determining personal consumption percentages. At issue is the determination of what portion of family income would have been personally consumed by the decedent, not what percent of expenditures were attributable to the decedent. Thus, this adjustment is not helpful and is a significant flaw in Boudreaux's analysis.

As a result of this adjustment, Boudreaux calculates a consumption percentage that reflects the relationship between his expenditure-based independent variable and the direct personal consumption of an individual. Therefore, it is household expenditures, as adjusted by Boudreaux, not household income that his consumption percentages should be multiplied by to estimate direct personal consumption in a given set of circumstances. Unfortunately, as shown in Boudreaux's Tables 3 & 4, the R-square's that his "Adjusted Patton & Nelson" model achieved are not significant and well below those achieved by Patton & Nelson both in 1991 and 1998. Boudreaux's search for a model based on expenditures rather than income appears misdirected and leaves an economist with a consumption percentage which could not be applied to income. …

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