The income gap between the rich and poor is growing. So is the gap in how much they buy.

October 26, 2012

Everyone knows that the rich have been pulling away from the poor in terms of income and wealth. Thomas Piketty and Emmanuel Saez, not to mention the CBO, have established that pretty definitively.

But Kevin Hassett (a key Romney adviser) and Aparna Mathur at the American Enterprise Institute argue that that doesn't matter. Even if the rich are making more and more, they aren't spending more and more. Hassett and Mathur claim, citing their own work as well as research by Dirk Krueger and Fabrizio Perri, that "the consumption gap across income groups has remained remarkably stable over time."

There's actually a great deal of debate about whether that's true. For one thing, the Krueger and Perri finding that consumption inequality hasn't increased over recent decades has been debunked by a couple of subsequent studies. Mark Aguiar and Mark Bils used the same Bureau of Labor Statistics dataset as Krueger and Perri, but noted that the data implies that savings shot up in recent years, which we know didn't happen. Using a corrected version of the data, they conclude that consumption inequality has increased since the early 1980s, mirroring the increase in income inequality: 


Source: Aguiar and Bils

A study* this year by Orazio Attanasio, Erik Hurst and Luigi Pistaferri found that consumption inequality tracked income inequality even more tightly than the Aguiar and Bils study found, if you correct for still more error in the BLS numbers. The blue line is consumption inequality, and the red line is income inequality. They track each other eerily well:


Source: Attanasio, Hurst and Pistaferri

So the Krueger and Perri study doesn't really hold up. What about the AEI paper? It relies both on BLS data, which the more recent studies have shown to be fairly unreliable, as well as on energy expenditure data from the Energy Information Agency. The latter data asks households if they own certain durable goods: houses, TVs, washing machines, cars, etc. Hassett and Mathur found that more poor people own goods like that, which they argue suggests consumption inequality is declining.

But the EIA survey doesn't ask how much those goods cost. So more poor people could be owning TVs because they're earning more money, or just because TVs are getting cheaper. And that data is entirely consistent with rich people owning much nicer, more expensive TVs -- that is, it's entirely consistent with high levels of consumption inequality, as well as low ones. That's why inequality analysts generally discount findings that rely on this kind of data. It just doesn't tell you anything about consumption inequality, in dollar terms.

The counterintuitive story that Hassett and Mathur tell is comforting, but the best evidence suggests it's mistaken. The rich are pulling away from the poor both in terms of income and in terms of consumption.

* Hat-tip Matthew O'Brien

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Brad Plumer | October 26, 2012