On Income and Consumption Inequality

Will Wilkinson has a new paper out on inequality, which I will be blogging about later.  But Ezra Klein has an interesting response, which focuses on the difference between income inequality and consumption inequality.

I broadly agree with Will that consumption inequality, not income inequality, is what matters.  If the rich have access to broad classes of goods that the poor can't have, I find this worrying.  On the other hand, if the problem is that Bill Gates has a really awesome 80 inch flat panel television, while the poor have to be content with a 32 inch CRT, well, I can't say my heartstrings are plucked very tight by this injustice.  So it's important to know what the real differences are.

This theory was very popular with conservatives and libertarians over the last few years; I'm sure I referenced it myself.  But of course, as Ezra points out, some of that consumption inequality may well have been due to rising credit inequality: people borrowed money from their houses to buy consumption goods.

But I think it's easy to overstate the contribution of debt, for two reasons.  First, many of the discussions on consumption equality focus on the poor, who were still relatively credit constrained even at the height of the bubble.  And second, income inequality figures exclude both taxes and government benefits.  Things like the EITC and Section 8 vouchers really have made a quite substantial improvement in the ability of the poor to consume.

So I don't think we actually know how much of a difference consumer credit made to equalizing consumption between rich and poor.  I suspect that the continued mechanization of formerly labor-intensive tasks has made a greater difference, but then you'd expect me to say that.  The data we want will not be available for several years, especially since period immediately following the financial crisis will be very atypical*, and therefore not useful in assessing the longer term trend.

Before you accuse me of cherry-picking, I expect that the data following the financial crisis will actually show income and consumption inequality falling, because financial crises tend to make bigger relative cuts in the income of the wealthy.  That doesn't mean that they "suffer more" in any meaningful sense--losing 5% of a $30,000 annual salary is almost certainly a greater hardship than losing 25% of $300,000.  But the numbers will still show shrinkage.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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