Inequality

Greg Mankiw points to Cox and Alm in the NY Times, and pulls this quote:

So, bearing this in mind, if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.

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 trouble is this: nobody who is concerned about rising income inequality is comparing the top quintile with the bottom quintile. People who are concerned about rising income inequality are comparing the stagnant wages of the bottom 2/3 of the population with the sky-rocketing wages at the very top (i.e. 10%, 5%, & 1%) of the distribution.

Measuring inequality through consumption data is also misleading, since it is only one way to use income. The saving rates of those in the bottom quintile are negative (as Cox and Alm point out, but Mankiw), by a factor of two. In other words, the bottom quintile consumes twice as much as it makes, which makes future consumption impossible. For some -- like the retired, who often have no income but quite a bit of consumption -- that's fine. But for the rest, this means that their children don't have college funds, they don't have retirement plans or investment portfolios, and/or that their future consumption will have to decline. For those at the top of the distribution, the opposite is true.