SOCIAL INDICATORS 2007
Consumption Analysis
So far I’ve been looking at economic status from the standpoint of income. Many economists and social scientists have long had misgivings about accessing poverty in this way. First of all, poverty statistics do a poor job of reflecting actual income. Non-cash assistance like food stamps or housing subsidies is not reflected. Earned Income Credit transfers are as much as $4,400 into poverty households, raising millions above the poverty line, but EIC is not reflected in poverty statistics. Second, not everyone with low-income in a given year is in poverty. Some retirees are drawing on savings without substantial income. A reasonably wealthy person unemployed for a few months may make the poverty ranks but still be living a comfortable by drawing on savings. Meanwhile, a person with modest income may spike into the top echelons of the income brackets any given year with an inheritance or capital gains windfall. Informal contributions, personal loans, gifts, or cost-sharing efforts are not included yet studies indicate this is a significant factor in low income households. (*)
Consumption appears to be a more accurate reflection of actual living standards. Two economists from the Federal Reserve Bank recently published a report about consumption by quintiles, summarized in the New York Times. What follows is largely a review of their findings.
The article reports that:
The top fifth of American households earned an average of $149,963 a year in 2006. As shown in the first accompanying chart, they spent $69,863 on food, clothing, shelter, utilities, transportation, health care and other categories of consumption. The rest of their income went largely to taxes and savings.
The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? A look at the far right-hand column of the consumption chart, labeled “financial flows,” shows why: those lower-income families have access to various sources of spending money that doesn’t fall under taxable income. These sources include portions of sales of property like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts. While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status.
This means that there was a 15 to 1 ratio of wealthiest to poorest in income but only a 4 to 1 gap in consumption. For middle income households to poor households the gap was 4 to 1 and 2 to 1 respectively. But even this still overstates the case.
Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1. The average person in the middle fifth consumes just 29 percent more than someone living in a bottom-fifth household.
The following chart breaks down the consumption patterns comparing the top, middle, and bottom quintiles:
The Times article goes on to illustrate how the quality of living has changed for the poor and why consumption is a superior measure.
To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households.
As the second chart, on the spread of consumption, shows, this wasn’t always so. The conveniences we take for granted today usually began as niche products only a few wealthy families could afford. In time, ownership spread through the levels of income distribution as rising wages and falling prices made them affordable in the currency that matters most — the amount of time one had to put in at work to gain the necessary purchasing power.
At the average wage, a VCR fell from 365 hours in 1972 to a mere two hours today. A cellphone dropped from 456 hours in 1984 to four hours. A personal computer, jazzed up with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours to 25 hours. Even cars are taking a smaller toll on our bank accounts: in the past decade, the work-time price of a mid-size Ford sedan declined by 6 percent.
The “second chart” the article refers is the informative one below.
The Wirtz article reports:
Rising consumption is also apparent in the material possessions of low-income households. A 2005 report by the Census showed that among households ranked in the bottom 10 percent by expenditure, the percentage with microwaves almost doubled to 77 percent from 1992 to 2002; washers went up from 45 to 54 percent; dryers from 30 to 47 percent; computers from 4 to 21 percent; and videocassette recorders up to 56 percent. As of 2002, 92 percent had color televisions, and the average household in the bottom decile owned 1.3 of them. Other reports universally show the same consumption trend: Poor households own more stuff and utilize more services than ever before. (*)
In the previous post we saw that there is a considerable fluidity up and down the economic scale. Consumption analysis tells us that very few people are in chronic deprivation. When it comes to the basic amenities of everyday life there is far more similarity than might there might first seem on a per person basis. The absolute living standard of those at the bottom of the economic ladder has improved significantly in recent decades. Or referring back to my previous analogy, while a wider distance may have opened up between the ceiling and the floor of the economic house, the floor has risen considerably.
Finally, we need to take a look at the changing face of poverty and what is contributing to the change.
(*) Ronald A. Wirtz. Poor by what standard? Fedgazette. Federal Reserve Bank of Minneapolis. November, 2006.
