Why So-Called Consumption Inequality Misses the Point

I've been meaning for a while now to comment on the efforts some have made to dismiss rising inequality by using consumption measurements. For those unaware, the argument is that even though income inequality is rising, the difference between what the various economic classes actually consume has not. So, by this argument, middle-income stagnation has not been a reality because even with flat incomes, falling prices in basic necessities have still led to rising levels of actual consumption.

The easiest response -- and one generally opted for by critics of the view -- is that, as a factual matter, consumption inequality has increased. That is, the fundamental empirical premise of the whole argument is just wrong. Indeed, the latest research on consumption inequality shows that it has grown in lock-step with income inequality over the last 30 years. (I, II). For all practical purposes, the argument is dead in the water given the data.

But even if it weren't, the right-wing's convenient focus on consumption over income is itself deeply misguided for a host of reasons. First, consumption is not the only important feature of income or the only thing that matters for an individual's economic well-being. Being economically secure and stable is extremely important, especially for families with children. Unless income sufficiently outpaces consumption, the savings necessary for achieving economic security will be out of reach.

Second, consumption might increase while incomes are stagnant due to debt-financed spending. That is what we saw from 1980 to 2009: household debt went from 50% of GDP to 100% of GDP. Since 2009, households shedded a considerable amount of debt, driving the figure down to 85% of GDP. In the short-term, debt-financed consumption for middle-income and lower-income households will show up as keeping pace with higher-income consumption, but it can't last forever. If incomes are diverging while consumption isn't, that will usually be a good sign that something unsustainable is going on, probably a household debt run-up.

Finally, income turns into wealth. Policy people mainly talk about income inequality, but wealth inequality is an equally troubling problem. In addition to an unsustainable debt runup, one of the ways income inequality might increase while consumption inequality does not is if the rich convert their massive income gains into massive wealth gains. In 2010, the top 20 percent of households held 95% of the financial wealth in the country. Wealth translates into political power, distorting our democratic pretensions; it provides compounding, passive income streams for those who hold it; and, it creates severe imbalances between kids who win the birth lottery and those who lose it.

So the consumption metric is a ridiculous distraction. Not only does it turn out that consumption inequality has mirrored income inequality over the last few decades, but the focus also misses so many of the things that income is about. Of course, the conservatives who bring it up do so for motivated reasons: most of them don't care about rising inequality period, whatever its form. It deserves pointing out though, given its coverage in allegedly serious outlets, how misplaced the consumption focus actually is.