Should we measure inequality by comparing income or consumption?

From the American Enterprise Institute.


We argue in this paper that income data are not the best measure of overall welfare. What matters for household well-being is consumption, since households are better able to smooth consumption rather than income over their lifetime. To that end, we use two alternative sources of data to assess changes in consumption inequality.

Our first source, the Consumer Expenditure (CEX) Survey, shows aggregated changes in consumption expenditures for households at all levels of the income distribution. Using these data, we find that consumption inequality has increased only marginally since the 1980s. Further, consumption inequality narrows in periods of recessions, such as during the 2007–2009 recession. We also construct Gini coefficients from the CEX data and find that they have remained relatively stable over time, suggesting that the inequality has not widened significantly.

The second data source we use is the Residential Energy Consumption Survey (RECS), which allows us to assess consumption inequality in durable goods. Consumption of durable goods is recorded less well in the CEX data but is important in thoroughly assessing consumption inequality. The RECS survey includes questions on household use of appliances such as microwaves, dishwashers, computers, and printers. Simple tabulations of these data across years suggest that a higher percentage of low-income households is able to afford and possess these items. In addition, the quality of dwelling spaces has improved and more low-income households have heating and air conditioning today than at any time in the past.

To see if these differences are statistically significant, we present regression tables showing the likelihood that a household owns any of these items. The results suggest a significant narrowing of the gap between low-income and other households in certain durable-goods items, such as color televisions, microwaves, refrigerators, and air conditioners. In other items, like computers and printers, the gap was small to begin with but widened as usage of these items became more widespread and cost of these items declined. However, in recent times, even this gap has narrowed. For a third category of items, including clothes washers, clothes dryers, and dishwashers, the gap has tended to be fairly stable over time. Even in a statistical sense, there is a trend toward narrowing the consumption gap between low-income and other households.

When people measure income inequality, they usually don’t count all of the generous welfare programs, food stamps and other handouts that provide this minimum level of wealth to the poorest of the poor. That’s why the poor have many of the same amenities that the rich have. If you want to see real poverty, go to a communist nation like Cuba, North Korea, Zimbabwe or Venezuela.

3 thoughts on “Should we measure inequality by comparing income or consumption?”

  1. I don’t understand what comparing things like refrigerators and printers has to do with talking about income inequality, especially if your talking about the difference between people in the top income bracket, and the middle class (typically what the conversations of income inequality are about).

    Of course people in the middle class are going to have a refrigerator. And you can get a printer for under $30 these days. Consumption inequality between the elite earners and the middle class would make more sense discussion things like what kind of car they drive (and how many they own). The size of their home, if they own their home and, again, how many they own. A discussion of items that the middle class would consider basics seems like a non-sequitur to me.


    1. Those low prices on goods do not happen by accident. The competition that drives prices down and drives quality up only occurs in a capitalist system where the rich are encouraged to take risks and invent new products and services.

      Here is what you need to understand. In a capitalist society, those who invent goods and services that are cheaper and better become wealthy. Income inequality increases. But in those exact same societies, prices are driven down and quality is driven up as different capitalists take risks and make inventions that people want. Income inequality is the price we pay in order to give the poor more of the things they need. In places like North Korea, there is no income inequality. And people die of starvation.

      Let Mrs. T explain it to you:


  2. This is why the “war on poverty” hadn’t actually made a dent in poverty over the last 40 years: welfare programs are specifically designed to *increase the comfort* of “poverty” rather than equipping people to rise out of poverty.

    Which actually makes political sense for Democrats. Why would they want to reduce the size of their #1 voting block? They have a vested interested in keeping poor people poor.


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