The role of consumption in economic inequality

In conversations about economic inequality, the kind of inequality discussed is almost always that of income or wealth. But when it comes to economic wellbeing, wealth and income aren’t the only shows in town. Consumption is also important, especially considering consumption is the primary reason to earn income and acquire wealth. Unfortunately, trends in consumption inequality aren’t as well understood as trends in wealth and income. But what we do know is quite interesting.

Josh Zumbrun at The Wall Street Journal digs into data from the U.S. Bureau of Labor Statistics’s Consumption Expenditures Survey to look at how consumption differs up and down the income ladder. Some of what he finds probably isn’t shocking to most readers: the poor spend a higher share of their income on food than the middle class and especially the wealthy, and the rich spend more relatively on entertainment. But another interesting trend he shows is that rich households spend significantly more on retirement programs and insurance plans than the poor or the middle class. In this case, the rich appear to be consuming with the future in mind.

Building off Zumbrun’s post, The Atlantic’s Derek Thompson writes about the worry that overall trends in consumption inequality result in higher-income households spending more on their children and therefore harming social mobility. Parents who can spend more on enrichment activities for their kids, such as on books, tutors or summer camp, can give them a leg up. This dynamic is one of the channels through which income inequality might affect economic mobility.

Of course, this isn’t to say that these parents are wrong to buy these things for their kids. But in the absence of some sort of help for low- and medium-income parents to do the same such spending by the wealthy could put low- and medium-income children at a disadvantage.

Thompson sees consumption and income inequality moving together. But if consumption inequality hasn’t moved along with income inequality then the rich might just be stashing money away instead of spending it on their children. A glance at the official Consumption Expenditure Survey data reveals that consumption inequality hasn’t increased nearly as much as income inequality. In other words, it looks like the rich are saving at a higher rate compared to the rest across the income spectrum than in the past.

Yet there appear to be flaws in the CEX data. Research has shown that this data set underestimates the increase in consumption inequality over the past 30 or so years. In fact, the rise in consumption inequality seems to mirror the rise of income inequality. Given the problems with CEX data and the intertwined nature of consumption, income and wealth, a harmonized data set about these concepts seems like it would be useful. And in fact, researchers funded by an Equitable Growth grant in 2014 will be working to make a combined dataset that will help researchers understand the connection between the three concepts. More clarity on these issues would be very much appreciated.

April 9, 2015


Economic Inequality

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