Consumption Inequality

April 22, 2014
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There has been a lot of attention on income and wealth inequality in the past few years. But should we care about income and wealth inequality? Presumably we care because we believe that increases in income and wealth inequality lead to higher inequality in outcomes such as consumption, health, or overall well-being. In economics, it is these outcomes that actually enter the utility function, not income or wealth.

Income and wealth inequality in the United States have risen sharply since 1980. This is indisputable. But has this growth in income inequality led to an increase in consumption inequality? In other words, have the poor been buying fewer goods and services as their incomes have declined in relative terms?

At first glance, the answer to this question may seem obvious: if the poor are getting poorer, how could they avoid a reduction in spending? But the answer is not obvious. If government programs provide large amounts of assistance to the poor, then consumption inequality may be muted relative to income inequality. Or if the rich lend vast sums to the poor through the financial system, then the spending of the poor may remain high, at least in the short run until the debt comes due.

There is much less research on consumption inequality relative to income inequality for a simple reason: the data are not nearly as good. The primary data set used by researchers is the Consumer Expenditure Survey, which is based on surveys that ask households how much they spend. As has been well documented, there are major sources of bias in such survey data (see footnote 6 in our study here). For example, Koijen, Van Nieuwerburgh, and Vestman (2012) match actual auto sales data with reported auto purchases in a survey and find an enormous amount of under-reporting by households. They also find biases that systematically understate consumption inequality, because the rich understate how much they spend.

This is why in our own research, we rely mostly on actual spending data rather than surveys. For example, we use new vehicle registrations to measure new auto sales. Actual spending data are the future, and they will give us a better sense of how unequal consumption is for the U.S. economy.

The state of the art study using the Consumer Expenditure Survey is by Attanasio, Hurst, and Pistaferri (2012). They make progress in reducing bias in the survey data by relying on a diary survey, which asks households to record their purchases meticulously for two weeks. They argue that the diary measures spending much more accurately.

When using this data source, they find evidence that there was a substantial rise in consumption inequality from 1980 to 2010. As they write: “In summary, our analysis of a variety of different data sources suggests that the well documented rise in income inequality during the last thirty years was accompanied by an increase in consumption inequality of nearly the same magnitude.” So rising income inequality is associated consumption inequality.

Our next post will discuss the cyclicality of consumption inequality with a particular focus on debt and the Great Recession.

 

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7 Responses to Consumption Inequality

  1. gman on April 22, 2014 at 9:42 ami

    Debt binges to maintain consumption comes to mind as a reason we should pay more attention to wealth metrics rather than income or consumption.

    Sucking home equity dry and credit cards have masked inequity for a decade.

  2. tew on April 22, 2014 at 11:06 ami

    Re: “…have the poor been buying fewer goods and services as their incomes have declined in relative terms?”

    Why would we expect a relative change in income to cause and absolute change in consumption? If my income relative to the Top 1% declines 30% but the income of the Top 1% rises by 100% then my income has risen 70%. Why would anyone expect my consumption to decrease?

    That’s not a meaningful way to phrase the inquiry.

  3. tew on April 22, 2014 at 11:11 ami

    It is also worth remembering that there can be large shifts in activity to the informal economy within cohorts. The percentage of people within the U.S. born outside the U.S. has risen sharply during the period in question. Anyone with even a casual exposure to many of the new immigrant groups has observed quite a bit of informal (off the books) work. This is not a judgement about morality or character. Many of them simply don’t come from cultures attached to a mainstream, regulated economy and many of the people who employ them (within or outside of the community) are happy to pay cash or in kind. (Also, many are not legally in the country and fear that participation in the formal economy would expose them to deportation risk.)

  4. Up the down escalator on April 22, 2014 at 10:37 pmi

    Good points above, but I agree with Atif and Amir that it is important to look at consumption. The reason is that many economists are now coming around to the fact that we are currently demand-constrained. This suggests that consumption is down compared to relatively recent historic trends, and consumption inequality would be an intuitive outcome of wealth or wage inequality: it is well known that the poor spend most of their income while the wealthy save. If in turn the poor make even less due to rising income inequality, their spending must go down (outside of temporary debt bubbles) because they were already spending their entire income just to keep up.

    Most businesses make profit on volume – each wealthy person only needs a few coffee tables, even if they are hand carved out of the best wood. But most people want at least one coffee table. The best businesses sell something that everyone wants and will find a way to afford. See for example smart phones.

    As Krugman points out again and again, your spending is my income and vice versa. If there is significant consumption inequality, this should lead to a massive demand deficit which would require a very different set of economic remedies than is traditionally assumed for supply side problems. And, of course, supply side is all our elites seem to care about, if they ever cared at all.

  5. Jon on April 23, 2014 at 8:15 ami

    Do consumption inequalities capture all forms of consumption? Some forms of consumption include money spent to influence policy. In some ways even charitable contributions are a form of consumption–the giver is getting more votes on how resources are allocated.

  6. Daniel on April 24, 2014 at 6:42 ami

    Consumption misses the biggest problem with inequality: the real rich use their wealth to purchase power, not goods. When wealthy individuals and corporations buy statutes that entrench their wealth and make it easier for the rich to get richer – low minimum wage, no national health insurance, minimum enforcement of health, safety or pollution regulations, legalized finance market scams, extensions in copyright, rules that allow them to make union organizing harder or bar employees from talking about wages, “fast track” internet access – that isn’t consumption.

    Yet that is the real problem of inequality: when the rich are so rich that they can buy loyalty, it endangers republican self-rule and capitalist markets.

    Moreover, when you are rich enough, influence (and even consumption) doesn’t necessarily require spending. Adelman can intimidate by threatening to donate to opponents and can attract by offering to spend even without doing it, just as a baseball team owner can buy the team (which is investment, not consumption) instead of a ticket. Everyone who has dealt with rich donors knows that they expect that the beggar, not the donor, will pick up the tab for the pitch-dinner.

  7. LP on April 24, 2014 at 9:34 pmi

    On a closely related topic, there’s also this study by Olga Gorbachev, which has been published in the AER and uses PSID data

    http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.5.2248