Macro Roundup

Dr. Ed channels Andrew Field’s “Great Leap Forward”“…Today’s doomsters could be confounded by biotechnological innovations that deliver not only a vaccine for COVID-19 but for all coronaviruses. Scientists are investigating a dizzying array of approaches to fight COVID-19. Hopefully, beyond finding a cure or a vaccine, one of beneficial outcomes of all this research will be that scientists learnmany more ways to combat illnesses in general and viruses in particular. Typically, it takes roughly a decade for a new vaccine to go through the various stages of development and testing. However, the urgency of the pandemic has mobilized global medical resources as rarely seen in human history. Billions of dollars, provided by both the public and the private sectors, are funding the global campaign to develop tests, vaccines, and cures for the virus….The awesome range of futuristic “BRAIN” technological innovations includes biotechnology, robotics and automation, artificial intelligence, and nanotechnology. There are also significant innovations underway in 5G for cellular networks, 3-D manufacturing, electric vehicles, battery storage, blockchain, and quantum and edge computing…. consider the follow stats on technology capital spending in the US: High-tech spending on IT equipment, software, and R&D rose to a record $1.32 trillion (saar) during Q2-2020 (Fig. 1). It jumped to a record 50.1% of total capital spending in nominal GDP during the quarter (Fig. 2). Equipment and software accounted for 31.1%, while R&D accounted for 19.1% of capital spending in nominal GDP (Fig. 3). The 1920s ended with a stock market meltup followed by a meltdown. The 2020s may already be seeing a meltup, begun on March 23. We live in interesting, though not unprecedented, times. The Roaring 1920s could be a precedent for the Roaring 2020s. As Mark Twain observed: “History doesn’t repeat itself, but it often rhymes.”….”

Nicole Gelinas, "Sorry, Mayor de Blasio: NYC desperately needs its billionaires,"New York Post, August 18, 2020, https://nypost.com/2020/08/18/sorry-mayor-de-blasio-nyc-desperately-needs-its-billionaires/

Sorry, Mayor de Blasio: NYC desperately needs its billionaires

Who wants to be a New York City billionaire? Contrary to what the mayor thinks, Gotham needs its superrich.

Last week, The New York Times asked: Which political leader, in this crisis, is going to champion New York as a place where businesses and wealthy people want to be? Kathy Wylde, head of the Partnership for New York City, a coalition of business interests, said we need “a plan.”

To City Hall, the request smacked of outrageous entitlement. “Kick rocks, billionaires,” said the mayor’s spokesperson. The mayor himself was more circumspect. “I am not going to beg anybody to live in the greatest city in the world,” he said.

It’s one thing to opine that the rich must pay their “fair share,” as de Blasio ineffectually nattered on about for years. It’s another thing to say that New York doesn’t need — or want — them.

OK, so what does New York without billionaires — and their envious relations, millionaires — look like?

First, taxes. In 2017 (the last year for which full data is available), 65,053 New York households — about 1.7 percent of tax filers — made above half a million dollars, according to the city’s Independent Budget Office. They paid a whopping $6.1 billion in income taxes to the city, or 53 percent of local income taxes.

If this share of personal-income taxes has held up, they likely paid $6.7 billion in income taxes for the fiscal year that just ended — or more than 10 percent of the city’s total tax collections.

The richest of the rich? In 2017, 1,818 families earned above $10 million each — and paid $2.8 billion in local income taxes, or nearly a quarter of total income taxes.

It’s fine if New York City doesn’t want that cash — but city leaders will have to explain to middle-class people why trash isn’t being picked up as often, explain to poorer residents why it can’t keep crime down and explain to uniformed public-sector workers that they can no longer retire in their 50s.

But taxes are only one aspect. Wealthier people get to choose where they live, more so than many people can. They want to live here, for the same reasons many normal people do: restaurants, shopping, Broadway, the opera, museums, baseball games.

They just also happen to fund those things more than the rest of us. An opera-goer’s ticket doesn’t cover the cost of the show, just as a museum admission price doesn’t cover the cost of displaying its paintings.

Arts organizations depend on the people whose names are on the walls. Donors, in turn, don’t act entirely out of selflessness: They give to a cause whose product they and their peers enjoy.

You may never go to the opera, or Saks, or the museum — but wealthier people cross-subsidize these attractions with big donations or spending, attracting tourists and upper-middle-class residents to the city, further firming up the tax base.

Finally, there’s livability. The wealthy New Yorker perusing The Post from his Hamptons or Florida “second home” may read the article about a robbery spree on the Upper East Side — and decide it’s yet another reason not to return right now.

New York needs wealthier people to stay and care — partly because people in poorer neighborhoods, focused on survivability, have less time and resources to organize themselves in favor of better policing.

Nearly two decades ago, then-Mayor Michael Bloomberg clumsily called New York a “luxury city.” But he had a point: Wealthier people would pay higher taxes here because they got a good quality of life.

Now what’s the calculation? Come back to New York — and worry about getting sick from a second wave of COVID-19 (keep in mind you’re probably old), worry about being mugged on the street, be unable to attend a classical-music show at least until next year and have protesters target you at home with deafening middle-of-the night protests?

The rejoinder from the socialists is: People shouldn’t be so rich. On a practical level, wealth distribution cannot be achieved on locally, when financial assets are mobile — and especially when that locality is falling apart.

The rejoinder from the urbanists is de Blasio’s line: Disloyal people should be shamed for being disloyal. But nobody has signed a blood oath to a New York City that doesn’t want them. That leaves poorer New Yorkers who can’t leave — with fewer education and job opportunities, and a greater risk of being felled by a stray bullet.

Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.

Anthony Carnevale Megan Fasules Michael Quinn and Kathryn Peltier Campbell, “Born To Win, Schooled To Lose: Why Equally Talented Students Don’t Get Equal Chances To Be All They Can Be,” Georgetown University Center On Education And Workforce, 2019, https://cew.georgetown.edu/cew-reports/schooled2lose/

“….Less than one third (31%) of tenth graders in the lowest SES quartile earn the income, educational attainment, or occupational prestige to be in the top half of the SES distribution among same-age young adults 10 years later. Meanwhile, 74 percent of young adults whose families were in the highest SES quartile remain in the top SES half as young adults (Figure 16)…..Low-SES students with top-half math scores appear to be more economically mobile than those with bottom scores. However, top math scores alone are not enough to overcome the influence of family SES on economic mobility. Among tenth graders, those from the lowest SES quartile are less likely than their highest SES counterparts to be in the upper SES half after 10 years, regardless of math scores. A tenth grader from the highest SES quartile with bottom-half math scores has a 56 percent chance of remaining in the top half of SES, whereas a tenth grader from the lowest SES quartile with top-half scores has a 47 percent chance of reaching the top half of SES by age 25 (Figure 17).Simply stated, success isn’t based strictly on academic merit: a lowest-SES student with top-half scores is less likely to “make it” than a highest-SES student with bottom-half scores….”

Georgetown study you asked about that found kids from wealthy backgrounds with low test scores were more likely to be well-off by early adulthood than kids from low-income families with high math test scores by a measure of Socioeconomic Status (which is a measure of parental educational attainment, family income, and occupation).

“…After years of Russian collusion, Ukraine and impeachment, the Democrats have arrived at saying that Donald Trump—in his apparently limitless infamy—is now intent on destroying the U.S. Postal Service so that he can “sabotage” mail-in voting and steal the election….”

Daniel Henninger, "The Postal Service Democrats,"Wall Street Journal, August 19, 2020, https://www.wsj.com/articles/the-postal-service-democrats-11597877645

An eon ago, Nancy Pelosi entered national politics as the host committee chairwoman of the 1984 Democratic National Convention in San Francisco. Other than sending former Vice President Walter Mondale to defeat by Ronald Reagan (Mr. Mondale carried one state, his own, plus the District of Columbia), the convention survives in memory only for being branded by Jeane Kirkpatrick at the Republican convention as “the San Francisco Democrats.” Never has so much political derision filled eight syllables as “the San Francisco Democrats.”

So it is astonishing to see Speaker Pelosi in the twilight of her career as party leader presiding over a political convention in the same week that she transformed her party into the Postal Service Democrats.

Being on vacation last week, I took a few days to focus on the fact that the Democrats were indeed betting the party’s public standing on a nonstop defense of, believe it or not, the post office.

Mrs. Pelosi gave a press conference in front of a San Francisco post office, at a lectern draped with the Democrats’ new logo: “#DontMessWithUSPS.” She is requiring Democratic House members to abandon their re-election campaigns and return to Washington this weekend to vote $25 billion in spending for the post office.

Probably every adult in the U.S. has a favorite post-office story. Mine is the letter delivered here in New York City from a woman in California addressed to her friend in... Sacramento. At least the numbers on the street address were the same. I mailed it back to her.

After years of Russian collusion, Ukraine and impeachment, the Democrats have arrived at saying that Donald Trump—in his apparently limitless infamy—is now intent on destroying the U.S. Postal Service so that he can “sabotage” mail-in voting and steal the election.

Joe Biden, who earlier said he would order the military to remove Mr. Trump from the White House if necessary, claimed from a Delaware fever swamp that the president was responsible for “tractor trailers picking up mailboxes.”

Rep. Alexandria Ocasio-Cortez, an unimpeachably reliable guide to where the party winds are blowing, said: “An attack on our Postal Service, and an attempt to dismantle our Postal Service, out of a selfish desire to sabotage our democracy, and maintain a grip on power, is an attack on all of us.”

Now that the Democrats have adopted the Postal Service as a party paragon, voters are obliged to consider the implications.

At their convention, the Democrats have elevated an array of policy goals—eliminating fossil fuels in 15 years and making health care “affordable” for everyone and public college “free.”

No such grandiose goal is required of the Postal Service, whose single task is delivering envelopes or boxes from here to there. Still, with the post office now coequal with the donkey as the Democratic Party logo, it’s worth considering where they are taking us.

It means that for all the airborne rhetoric of their convention speakers, the Democratic Party in power will settle for doing less. A lot less.

It means the benchmark of achievement for the party’s programs isn’t excellence but something more akin to mail delivery. It means they have no interest in setting incentives to improve. And no matter how many years, or decades, pass of subpar performance, there will be no serious effort at reform. Reform is “sabotage.”

The USPS has seven unions, which makes the idea of effective management an oxymoron. Work-rule modernization, such as ending overtime abuse, can’t happen. Structural inefficiency becomes the norm, as do massive operational deficits.

California is experiencing rolling power blackouts this week because the state’s alternative-energy subsidies suppress efficient changeovers to natural-gas plants, which have closed. When the breakdown of the power supply came, Gov. Gavin Newsom blamed the grid operators.

No surprise that when Postmaster General Louis DeJoy tried to put in place reforms recognized as necessary years ago, Mrs. Pelosi and Senate Minority Leader Chuck Schumer forced him to revoke them. Don’t expect the party’s wind farms to be run any more efficiently.

Speaker Pelosi is making her members vote $25 billion for the Postal Service just as her urban counterparts are voting to defund police departments in Seattle; Portland, Ore.; Austin, Texas; New York; Los Angeles; Baltimore and Philadelphia. Joe Biden is upset about at-risk mailboxes, but don’t expect him to say anything in his acceptance speech about children being shot in cities across America.

In San Francisco and New York, the Democratic post-office solution to homelessness caused by addictions or mental illness is to ship these people from one neighborhood to another, with no real effort to fix the problem.

U.S. students in K-12 underperform their foreign counterparts in standardized tests year after year. So just as people use FedEx now to ensure timely delivery, parents put their kids in private, parochial or charter schools to bypass the post-office-like public schools. Naturally the Biden-Sanders Unity Task Force proposes to suppress that competition.

The San Francisco Democrats represented only a slice of America. The Postal Service Democrats will subsume the entire country into an ethos of mediocrity.

"...An enduring puzzle is why I’m supposed to be especially outraged about Mr. Trump’s shameless birtherism. Is it because an outsider was competing with insiders at their own game of nonstop mendacity and disingenuousness?.... Back to the subject: There’s little evidence of mail-in or absentee-ballot fraud, goes a standard media talking point. This is like saying bank robberies are rare so let’s move the money from the vault and pile it up in the middle of the lobby. Elections, in fact, are high on the list of things that people like to steal and will steal if opportunities are available...."

Holman Jenkins, "Obama’s Mail-In Campfire Tale,"Wall Street Journal, August 18, 2020, https://www.wsj.com/articles/obamas-mail-in-campfire-tale-11597792361

In any war the propaganda battle can at times be hard to relate to developments on the ground. This is true of the Postal Service skirmish that has emerged in the 2020 presidential election.

Donald Trump, as he does, said something dumb, conflating unrelated things. Of postal bailout legislation in Congress, he said he didn’t support the bill because he doesn’t like the idea of universal mail-in voting. It’s not unusual for politicians to use symbolic occasions to make rhetorical points, but the truth remains: the Postal Service is adequately funded for the next 77 days. Any voting-related mail will be a small fraction of normal mail volume. A potential disaster arises not because of any unusual deficiency at the post office but because of unrealistic ballot deadline and validation standards imposed recklessly by the states.

But Barack Obama is not one to be deterred by mere factual considerations from seizing on Mr. Trump’s dumb remark. And he does have a knack for calling the tune and knowing that the self-lackeying in the media will fall in line.

In his podcast riff, he started off with Mr. Trump trying to “starve” the post office to sabotage the election, and ended with seniors not getting their Social Security checks and veterans their lifesaving medications.

All this is completely made up, as well as ironically detached from the fact that the 32% collapse in first-class mail volume happened on Mr. Obama’s watch. He’s as guilty as anyone of not forcing the post office to adapt to a changing market.

An enduring puzzle is why I’m supposed to be especially outraged about Mr. Trump’s shameless birtherism. Is it because an outsider was competing with insiders at their own game of nonstop mendacity and disingenuousness?

Back to the subject: There’s little evidence of mail-in or absentee-ballot fraud, goes a standard media talking point. This is like saying bank robberies are rare so let’s move the money from the vault and pile it up in the middle of the lobby. Elections, in fact, are high on the list of things that people like to steal and will steal if opportunities are available.

In the U.S., election stealing and rigging now are activities dominated by lawyers. The parties have their favorite ballot rules depending on partisan advantage, but, if truth be told, metastasizing ballot ambiguities also gives them a way to fight over outcomes after the vote has been cast. The very nature of cheating may be changing. Why not dump a bunch of illegibly signed, unpostmarked ballots into the process knowing they will be rejected so you can accuse your opponent of disenfranchising voters? Why not target your best districts with extra efforts to lure unqualified or questionable ballots that perhaps can be mined later to reverse a narrow loss?

President Obama’s ads against Mitt Romney would have been castigated by the media as demagogic and dishonest if Mr. Obama hadn’t been a Democrat. He played down Russian meddling when he thought Hillary Clinton was going to win, then did all he could to launch the Russia-collusion fraud on his way out the door.

Don’t forget the divorce scandals he ginned up against two more-prominent Senate contenders, one from each party, in his initial Senate race. He is not the angel his packaging pretends.

Nor should it escape notice that leading the Democratic charge in numerous voting-related lawsuits already filed around the country is lawyer Marc Elias, last seen overseeing creation of the Steele dossier and then lying about it until forced to fess up by circumstances beyond his control.

Republicans are all about winning too. And they have lawyers. Let’s face it, ballot confusion is an insurance policy both parties can deploy after Election Day. Muddying the waters, of course, is the repeated disenfranchisement of minority voters in badly administered elections in jurisdictions ruled by Democrats. This is a separate problem of Democrats taking black voters for granted, now being addressed in many blue-run cities by street demonstrations against longstanding inequities.

Murphy’s law also plays a role. Our electorate is characterized as “polarized,” but a better description might be divided down the middle. Mr. Trump would not be president without millions of Obama voters. This can lead to outcomes so narrow that they occasionally make a spectacle of our inability to count votes with precision.

What’s a strategic voter to do (one who votes not necessarily for the candidate she likes best)? In recent years, she might have voted for the expected loser’s party to keep the expected winner in check (gridlock). This year, she might vote for the candidate who seems most likely to win. Why? To provide a big enough margin to stop the election lawyers from creating chaos and spinning tales to delegitimize the victor as Hillary Clinton and Democrats did after 2016.

Cited in CBS Q&A“…According to the Congressional Budget Office, prior to the pandemic, middle-class incomes had grown 60%more than inflation since 1980. Theincome of the poorest 20% had doubled..”

“Projected Changes In The Distribution Of Household Income, 2016, to 2021,” Congressional Budget Office, December 2019, https://www.cbo.gov/system/files/2019-12/55941-CBO-Household-Income.pdf

CBS Q&A In 1995, America’s middle-class incomes were 19% larger than Germany’s—the most prosperous economy in Europe. Today, America’s middle-class incomes are 28% larger than Germany.They are 65 to 70% larger than Southern Europe(wages less taxes plus government services).

OECD, “Household Disposable Income: Gross Adjusted US Dollars/Capita, 2019 Or Latest Available,” OECD National Accounts At A Glance,” Accessed August 20, 2020, https://data.oecd.org/hha/household-disposable-income.htm

“…8.5 percent of adult Americans score at the highest numeracy levels, and 28.7 percent score at the lowest skill levels. America has 0.3 high-scoring adults for every low-scoring adult. In contrast, 14.2 percent of German adults score at the highest levels and 18.4 percent score at the lowest.Astonishingly, Germany has nearly three times more high-scoring adults per low-scoring adult than the United States. Scandinavia has more than four times as many. Japan has nearly eight times as many America has half as much talent per capita as the other most successful high-wage economies and twice the supervisory needs….”

Organisation for Economic Co-operation and Development, “Numeracy Score, Survey Of Adult Skills,” PIAAC Data, Accessed August 20, 2020, https://www.oecd.org/skills/piaac/

OECD, “GDP Per Hour Worked, USD Constant Prices, 2015ppP,” OECD, Accessed August 20, 2020, https://stats.oecd.org/index.aspx

OECD, “Labour Force Total Thousands Persons, 2019 Or Latest Available,” OECD, Accessed August 20, 2020, https://data.oecd.org/emp/labour-force.htm

Bruce Meyer and James Sullivan, “Consumption And Income Inequality In The US Since The 1960s,” Center For Economics And Policy Research, January 15, 2018, https://voxeu.org/article/consumption-and-income-inequality-us-1960sWhat explains these sharp differences in inequality patterns?ImplicationsReferencesEndnotes

The statistics are based on the authors’ calculations. All income data are from the Current Population Survey and all consumption data are from the Consumer Expenditure Interview Survey.

For other studies of pre-tax and after-tax income inequality, see Heathcote et al. (2010), Fisher et al. (2015), Armour et al. (2014). Adding non-cash benefits (such as the value of food stamps and housing and school lunch subsidies as calculated by the Census Bureau) leads to slightly lower inequality, but the changes over time are similar to those for after-tax money income (Meyer and Sullivan 2017).

For studies of consumption inequality, see Johnson and Shipp (1997), Slesnick (2001), Krueger and Perri (2006), Heathcote et al. (2010), Attanasio et al. (2007), Attanasio et al. (2015), Aguiar and Bils (2015).

https://www.ohio.com/akron/pages/trump-blames-immigrants-for-income-inequality;https://www.washingtonpost.com/opinions/tax-reform-is-the-best-way-to-tackle-income-inequality/2014/01/10/112710ea-68ca-11e3-a0b9-249bbb34602c_story.html.

Slesnick, D T (2001), Consumption and Social Welfare,Cambridge: Cambridge University Press.

Piketty, T and E Saez (2003), “Income inequality in the United States: 1913-1998”, Quarterly Journal of Economics118(1): 1-39.

Meyer, B D and J X Sullivan (2003), “Measuring the Well-Being of the Poor Using Income and Consumption”, Journal of Human Resources38(S): 1180-1220.

Meyer, B D and J X Sullivan (2011), “Further Results on Measuring the Well-Being of the Poor Using Income and Consumption,” Canadian Journal of Economics44(1): 52-87.

Meyer, B D and J X Sullivan (2012b), “Winning the War: Poverty from the Great Society to the Great Recession,” Brookings Papers on Economic Activity, Fall: 133-183.

Meyer, B D and J X Sullivan (2012a), “Identifying the Disadvantaged: Official Poverty, Consumption Poverty, and the New Supplemental Poverty Measure,” Journal of Economic Perspectives26(3): 111-136.

Meyer, B D and J X Sullivan (2017), “Consumption and Income Inequality in the U.S. Since the 1960s”, NBER Working Paper No. 23655.

Meyer, B D, W K C Mok and J X Sullivan (2015), “Household Surveys Household Surveys in Crisis", Journal of Economic Perspectives29(4): 199-226.

Larimore, J, R V Burkhauser, G Auten and P Armour (2017), “Recent Trends in U.S. Top Income Shares in Tax Record Data Using more Comprehensive Measures of Income Including Accrued Capital Gains”, NBER Working Paper No. 23007.

Krueger, D and F Perri (2006), "Does Income Inequality Lead To Consumption Inequality? Evidence and Theory", Review of Economic Studiesv73(1): 163-193.

Heathcote, J, F Perri, and G L Violante (2010), “Unequal we stand: An empirical analysis of economic inequality in the United States, 1967-2006,” Review of Economic Dynamics13(1): 15-51.

Fisher, J, D S Johnson and T M Smeeding (2014), “Inequality of Income and Consumption in the U.S.: Measuring the Trends in Inequality from 1984 to 2011 for the Same Individuals”, Review of Income and Wealthdoi: 10.1111/roiw.12129.

DeNavas-Walt, C and B Proctor (2015), “Income and Poverty in the United States: 2014”, Current Population Reports, P60-252, September.

Bee, A and J Mitchell (2017), “Do Older Americans Have More Income Than We Think?” SESHD Working Paper, US Census Bureau.

Auten, G and D Splinter (2016), “Using Tax Data to Measure Long-Term Trends in U.S. Income Inequality”, Working Paper, Office of Tax Analysis, US Treasury Department.

Attanasio, O, E Hurst and L Pistaferri (2015), “The Evolution of Income, Consumption and Leisure Inequality in the US, 1980-2010”, in C Carroll, T Crossley and J Sabelhaus (eds), Improving the Measurement of Consumer Expenditures,University of Chicago Press.

Attanasio, O P, R Battistin, and H Ichimura (2007), "What Really Happened to Consumption Inequality in the United States?," in E E Berndt and C R Hulten (eds), Hard-to-Measure Goods and Services: Essays in Honor of Zvi Griliches,National Bureau of Economic Research.

Armour, P, R Burkhauser, and J Larrimore (2014), “Levels and Trends in U.S. Income and its Distribution: A Crosswalk from Market Income towards a Comprehensive Haig-Simons Income Approach”, Southern Economic Journal,81(2), 271-293.

Aguiar, M and M Bils (2015), “Has Consumption Inequality Mirrored Income Inequality”, American Economic Review105(9): 2725-2756.

Most of the discussion around recent trends in inequality highlights growing dispersion. However, the evidence from consumption data indicates that changes in inequality in economic wellbeing are more nuanced than a simple story of rising dispersion throughout the distribution. Rather, in the bottom half of the distribution there is little evidence rising consumption inequality, and in the top half of the distribution the rise in consumption inequality has been much more modest than the rise in income inequality, particularly since 2000. In light of the deficiencies of income and the contrast with consumption, policymakers should look beyond income when assessing the need for policy changes.

For families with substantial asset holdings, changes in asset values could affect consumption even if income is unchanged. Thus, the sharp decline in asset prices after 2006 -first housing and then financial assets - could explain why consumption inequality fell at the start of the Great Recession even though income inequality did not. This explanation is supported by evidence of spending by asset holdings, which shows that between 2006 and 2010 - a period of sharply falling asset prices - consumption rose for the lowest asset quintile, while it fell for the top four.

Many factors likely contribute to the differences between income and consumption inequality. As discussed above, there is considerable evidence that income sources that are particularly important for those at the bottom of the distribution are significantly under-reported in surveys and the extent of under-reporting has grown over time. A story of declining relative quality of income data at low percentiles is consistent with our results that show a much more noticeable rise in the 50/10 ratio for income than the 50/10 ratio for consumption over the past three decades. In addition, the divergence between income and consumption inequality measures is particularly evident for single parent families, a group that receives a disproportionate share of transfer income.

Our evidence of only a modest rise in consumption inequality over the past five decades contrasts sharply with evidence from tax data that an increasing share of the nation’s income is going to the very highest income families (Piketty and Saez 2003); though several papers using broader and more consistent measures of income in tax data do not show large increases in the top 1% income share (Auten and Splinter 2017, Larimore et al. 2017). Our analyses are distinct from these studies that focus on the highest income households. We do not include the extreme tails of the distribution because resources are likely to be poorly measured in survey data for these observations. Tax returns alone are also unsuitable for measuring incomes at the bottom since they miss non-filers and important sources of income such as TANF, SSI, SNAP and housing benefits, which are not taxable.

Figures 2 and 3 show that income inequality has risen for the top (90/50 ratios) and bottom (50/10 ratios) of the distribution, but increases in consumption inequality are only evident for the top. That the patterns of consumption and income inequality at the top are fairly similar from the early 1960s to 2005 suggests that under-reporting of consumption by the rich is not behind the differences.

These differences are evident in Figure 1, where we report the ratio of the 90th percentile to the 10th percentile (the 90/10 ratio) for pre-tax money income, after-tax money income, and well-measured consumption (see Meyer and Sullivan 2017 for more details). Since the early 1960s, the rise in after-tax income inequality as measured by the 90/10 ratio (26%) has significantly exceeded the rise in consumption inequality (7%). Furthermore, this much smaller percentage increase in consumption inequality started from a considerably lower base. In some decades, such as the 1960s and 1990s, income and consumption inequality moved in parallel, but in other decades the differences were sharp. In the 1980s, inequality for both measures rose, but the increase was much greater for income (28%) than for consumption (5%). After 2005, these measures moved in opposite directions, as income inequality rose sharply while consumption inequality fell.

According to official measures, which are based on income, inequality has risen steadily in the US since the early 1970s (DeNavas-Walt and Proctor 2015). An important limitation of the official statistics is that they are based on pre-tax money income, which does not account for tax credits and in-kind transfers such as housing benefits and food stamps, which have increased sharply over time. Income inequality still rises for measures of income that more closely reflect family resources available for consumption, but the rise is less noticeable.3Using our improved measure of consumption, however, a very different story emerges.

Trends in income and consumption inequality

One way to address concerns about the quality of consumption data is to focus on those components of consumption that are well measured, including food at home, rent plus utilities, gasoline and motor oil, the rental value of owner-occupied housing, and the rental value of owned vehicles. In order to draw conclusions about changes in consumption inequality from evidence on the well-measured components, it is critical that these components are equally important for high- and low-consumption households. It is also important that price changes for well-measured consumption mirror the changes for overall spending. In a recent paper (Meyer and Sullivan 2017), we show that both these conditions hold: well-measured consumption is roughly a constant share of overall consumption throughout the distribution, and the price of the bundle of well-measured goods has not changed noticeably relative to the prices for all goods.

There is also evidence that at least some components of consumption are under-reported in surveys. However, recent research has shown that among the eight largest categories of expenditures, six are reported at a high rate in the Consumer Expenditure Interview Survey, the best source of data on household spending, and that rate has been roughly constant over time (Bee et al. 2015). These comparisons also indicate that spending collected through a recall survey compare more favourably to national aggregates than does spending collected via a diary survey that appears too burdensome to accurately complete.

While the conceptual advantages of consumption are clear, previous studies have raised concerns about the quality of both income and consumption data. There is considerable evidence that income is substantially under-reported in national surveys, especially for categories of income important for those with few resources, and the extent of under-reporting has increased over time (Meyer and Sullivan 2003, 2011a, Meyer et al. 2015, Bee and Mitchell 2017). For example, only about half of all dollars transferred through the Temporary Assistance for Needy Families (TANF) programme, food stamps (SNAP), and pensions are captured in the main income surveys in recent years.

Addressing concerns about data quality

Several researchers have documented the patterns in consumption inequality. The evidence from this literature is mixed, with some studies showing little change in consumption inequality over the past few decades and others showing a proportional rise equal to or exceeding that for income.2These differences arise from the use of different data sources or definitions of consumption (i.e. total consumption or non-durable consumption), and different methods of addressing measurement error.

Although income is the most common measure of the economic wellbeing of US households, there are a number of reasons why measuring how much people consume on food, shelter, transportation, and other goods and services provides a more accurate picture of their circumstances. Income typically fluctuates more than economic wellbeing because people can save when income is temporarily high and borrow when it is temporarily low. Income also fails to reflect consumption out of durables such as housing and cars. A retired couple living off the savings they accumulated over a lifetime may be living quite comfortably even if they have no income. Consumption measures will reflect the loss of housing services flows if homeownership falls; the loss in wealth if asset values fall; and the belt-tightening that a growing debt burden might require, all of which an income measure would miss. Furthermore, consumption is more likely than income to be affected by access to public insurance programs. Thus, consumption will do a better job of capturing the effects of changes in access to credit or the government safety net. The data also show that consumption better reflects deprivation. In Meyer and Sullivan (2003, 2011a), we show that measures of material hardship or adverse family outcomes are more severe for those with low consumption than for those with low income, indicating that consumption does a better job of capturing well-being for these families.

Why consumption?

Concerns about rising inequality inform important debates on some of our most significant policy issues, including income tax policy, immigration, and globalisation. President Obama called inequality the defining challenge of our time, while the Trump administration cites high inequality as motivation for changes in immigration and trade policy.1The debate over inequality relies almost exclusively on income data that indicate that inequality has increased sharply in recent decades. It turns out that these data paint an incomplete and at times distorted view of how inequality in economic wellbeing has changed in the US.

Consumption and income inequality in the US since the 1960s

Ed From CBS Q&A“…Nor has America’s middle class been hallowed out. AlthoughPew Research Center claimsAmerica’s middle class has declined from 61% of the population in the 1970s to 50% percent today. Seven of the 11 point decline came from families whose income moved upward. And Hispanic immigrants account for 3 of the 4 points of the decline. So native-born Americans have enjoyed a seven point upward shift in income offset by a single point of decline….”

Rakesh Kochhar and Richard Fry “The American Middle Class Is Losing Ground,” Pew Research Center, December 9, 2015, https://www.pewsocialtrends.org/2015/12/09/the-american-middle-class-is-losing-ground/

Emmanuel Saez, “Taxable Income Slides,” University Of California, Accessed August 20, 2020, https://eml.berkeley.edu/~saez/course/Labortaxes/taxableincome/taxableincome_attach.pdf

Joseph Thorndike, “Soak The Rich Republicans? The Puzzling Persistence Of High Tax Rates In The 1950s,” New York University, http://www.law.nyu.edu/sites/default/files/ECM_PRO_073861.pdf