Income and Consumption Inequality

by John Quiggin on December 9, 2005

I’ve spent a lot of time trying to work out what’s been going on with income and consumption inequality in the United States. Partly that’s because the subject is of interest in itself and partly because social and economic developments in the English-speaking world often (not always) follow the lead of the US.

However, there seem to be lots of contradictions in the data, and between data and popular perceptions, for example regarding social mobility and consumption inequality. I’ve finally managed to sort out what seems (to me, at any rate) to be a coherent account of what’s going on. A list of the main points follows, with supporting links, some of which may require registration/subscription. I’ve tried to indicate which bits of the story reflect my judgements, and which are drawn from the literature.

Comments and criticism on this are most welcome.

Here’s the outline

  1. Measures of inequality, mobility and so on reflect a combination of transitory variations and more stable effects arising from social class, occupation, education and so on.
  2. Although the US displayed exceptionally high social mobility in the 19th century, social mobility declined from the beginning of the twentieth century the US and is now comparable to that in European countries.
  3. Because of greater income inequality in the US, mobility within the income distribution is lower in the US than elsewhere.
  4. Wage inequality in the US has grown greatly since 1970. Income inequality has also grown, but not as much since low-wage households have increased hours worked.
  5. (Annual) Consumption inequality has not changed much since 1970. In my judgement, this reflects increased use of credit markets to smooth out short term fluctuations in income, which offsets increased long-run inequality
  6. In my judgement, increased reliance on credit has been the main cause of the dramatic increase in bankruptcy, particularly evident since 1990.
  7. Bankruptcy laws act as a kind of income insurance, and generous (to debtors) bankruptcy laws are a substitute for redistributive taxation.

Obviously, More Research Is Needed™

{ 38 comments }

1

pdf23ds 12.09.05 at 8:41 am

Link in point 7 is broken.

2

Daniel 12.09.05 at 9:02 am

Bankruptcy laws have recently changed to the disadvantage of debtors. Our current regime does not like any redistribution down the income ladder; up is fine with them.
Item: Supreme Court upheld taking part of retired, disabled person’s social security check to pay off student loans.

3

Kim 12.09.05 at 9:06 am

A few corrections to #4:
— wage inequality grew for both men and women in the 1980s [not "since the 1970s"]. In the 1970’s, it was virtually stable.
— After 1990, wage inequality among women has been increasing, although not at the same pace as in the 1980s. Wage inequality among men bounced around, but with no clear trend that is robust across data sets and inequality measures. See, e.g., Card & DiNardo 2002.
— There is some evidence (e.g., David Lee, 1999) that much of the increase in wage inequality near the bottom of the wage distrubution was because of the declining real value of the minimum wage.

And on point 2, you really should clarify whether you’re talking about absolute mobility or relative mobility (aka, structural mobility or social fluidity), because this matters for how the US stacks up in terms of mobility. And, mobility across what? (Classes? occupations? education groups? income deciles?).

Good luck with the project.

4

Tom 12.09.05 at 9:34 am

Good luck also – untangling these things is a worthwhile effort.

You probably know this already, and I cannot see behind the institutional wall of the NBER for point (4), but some countries (eg Canada) tend to report income on an individual basis rather whereas others (eg US) tend to report on a household basis. Things look better for households because the number of single-income households has fallen. Perhaps that is what you were getting at anyway.

5

Javier 12.09.05 at 9:34 am

Excellent set of observations. However, it seems that the last link you provided is not working. I would be interested on reading the paper it is supposed to link to.

6

roger 12.09.05 at 10:02 am

Nice points. But doesn’t credit act as the redestributor in your schema, rather than bankruptcy law? I imagine the use of credit to make up short term income shortfalls is much more extensive than the use of bankruptcy to escape the insupportable burden of debt. Credit would also operate to explain, in part, the willingness of wage earners to work longer hours, rather than demand higher wages, since workers do possess, immediately, the benefits of higher wages, while the price they pay for that benefit is disguised — thus blocking the focus on the immediate wage deficit to pay for achieving consumption “equality”.

7

Slocum 12.09.05 at 11:07 am

Consumption inequality has not changed much since 1970.

I think there’s another related factor here that’s important (at least psychologically)–namely that consumer goods have grown so dramatically cheaper at the low end that ‘posession inequality’ has shrunk even as income inequality has grown. A generation ago, when I was a kid, there categories of goods and services where middle-class people typically did without. Before I was 10, in my family, those included: color TV, clothes dryer, air-conditioning, second car, microwave oven (and my father had a secure white-collar job during that whole time). We’d also never taken a trip on an airplane, and restaurant meals (even fast food) were fairly rare. My blue-collar brother, on the other hand, now has all those things (and, of course, many more that hadn’t yet been invented in the 60s and 70s).

And comparing in the present only, in terms of consumer goods, a lower-middle class family tends to have nearly all of the same categories of things as an upper-middle class family, even though they tend to be older/cheaper/lower-quality. This was not true 30 years ago, and I suspect it has a significant effect on the way inequality *feels* to people in the U.S. Perhaps we don’t perceive the full extent of the inequality because lower-income people often have the ‘same things’ as rich people (which things were luxuries when they were growing up).

This is related to John Edwards’s hypothetic 10-year-old girl out there somewhere shivering because her family can’t afford a coat. That IS the way poverty used to be, but now everybody can afford a coat (even if only a coat from Walmart or Goodwill). That doesn’t mean differences in income don’t matter (clearly they do), but the effects are different now, and I don’t think our perceptions have quite caught up.

8

John Lederer 12.09.05 at 11:25 am

To what degree has economic inequality become a matter of choice?

In historical terms, those not well off economically, excluding perhaps the very bottom, are quite well off. Necessities, and at least a minimal level of comfort, are available at very low relative economic levels.

Are there increasing numbers of people who say that “this is enough” and choose what to them are more renumerative goals than economic ones?

As perhaps a poor example, most academics I know are convinced that they would make far more money in a non-academic job, but choose for various non-monetary reasons to stay in academia. Is this really an example of “less mobility”, or does it have more to do with our definition of mobility.

9

Tom 12.09.05 at 11:41 am

slocum – with zero evidence to back this up, I feel that the decreasing cost of shirts and gizmos that you point out has been overemphasized while the increasing cost of some other things, like houses (seems like a big one to me), schooling (all those additional fees – at least here in Canada – add up), and so on. It seems to me that 50 years ago a wider group of people owned or could expect to own their own homes compared to now.

10

Tom 12.09.05 at 11:46 am

john lederer – I am unconvinced that “Necessities, and at least a minimal level of comfort, are available at very low relative economic levels.” Compared to the 18th century, maybe, but compared to even 40 years ago, I think that this too has been overstated. For example, the use of foodbanks has increased dramatically in Canada in the last ten years. Is this a reflection of the fact that some necessities are not to available.

11

Slocum 12.09.05 at 12:05 pm

slocum – with zero evidence to back this up, I feel that the decreasing cost of shirts and gizmos that you point out has been overemphasized while the increasing cost of some other things, like houses (seems like a big one to me), schooling (all those additional fees – at least here in Canada – add up), and so on. It seems to me that 50 years ago a wider group of people owned or could expect to own their own homes compared to now.

Homes are, indeed, a partial exception. Land is sometimes a fixed commodity (in the Northeast, in coastal California), though in ‘flyover land’ buildable land is plentiful and residential areas expand freely with demand (hence sprawl). Compared to 30 years ago, rates of home ownership are up and the average (and median) home size is WAY up. So more people own homes and the homes they own are bigger and better equipped.

With respect to schooling — that’s a mixed bag, too. A greater percentage of Americans go on to higher education than did 30 years ago, even as nominal tuition rates have increased much faster than inflation (though many students, especially low income students, pay rates well below ‘retail’ — which, BTW, could be considered another non-trivial form of income redistribution).

Have the decreases in the cost of clothing, appliances, electronics, food, entertainment, been overemphasized? I don’t know. I’m not saying that because of this, the financial measures of increasing inequality don’t matter–I’m saying that both phenomena are important and we don’t seem to have a good grasp of how to put them together into an integrated picture.

12

Walt Pohl 12.09.05 at 1:10 pm

Sprawl is not costless, though I’m not sure how to put a price tag on it. I live in the Dallas suburbs, and it feels like I spend all of my time in my car.

13

Ozma 12.09.05 at 1:19 pm

Can someone explain point (5) to me? I don’t understand how — in the aggregate — short-term smoothing of income fluctuations can “offset” long-term increases in inequality? Is this a real offsetting or just an impression generated by the kinds of measures used for “consumption”?

Is it possible that the wrong markers (and I have no idea what these are) for “consumption inequality” are being used? that is to say, as inequality increases and as people use credit to keep up a consumer lifestyle that is out of step with their real purchasing power or whatever, and that — as a commenter has already pointed out — effectively nearly everyone owns the same set of consumer goods (two cars, a computer, vacations via airplane) — the markers of “consumption inequality” have to be re-set to include high-end hyperconsumption, in which only a tiny minority can participate?

14

roger 12.09.05 at 2:02 pm

I don’t think certain social goods, such as higher education, are so straightforward that its greater availability, demonstrated by the greater number of participants, shows greater consumption equality. It seems to me that this is much more the result of a job market from which the manufacturing sector that existed thirty years ago has been, in large part, subtracted. The cost of education was cheaper thirty years ago, but its benefits were highly stratified: to become a lawyer you went to college, but to become a secretary you didn’t have to. Today, secretary’s do go to college, which speaks of the higher entry cost for becoming a secretary, even as the gap in the benefits of being a secretary, in comparison with being a lawyer, widen.

15

paul 12.09.05 at 2:05 pm

Indeed, what are the markers for consumption inequality? What strikes me when I think about high-end consumption is that much of it is in real property or durable goods or intangibles that may well be classed as investments. Are houses consumption, for example, or only the imputed rent thereon (which would be a bad measure in bubbly times)?

At the high end there’s also been a massive increase in personal consumption funded as ostensible business expenses.

But definitely interesting. Anyone remember the days when people used to save up for something first and buy it later, instead of the other way around?

16

Uncle Kvetch 12.09.05 at 2:09 pm

This is related to John Edwards’s hypothetic 10-year-old girl out there somewhere shivering because her family can’t afford a coat. That IS the way poverty used to be, but now everybody can afford a coat (even if only a coat from Walmart or Goodwill).

Slocum, I urge you to get in touch with these folks at your earliest convenience and pass this exciting bit of news along. I’m sure they’ll be more than happy to hear that they’ve been wasting their time.

17

Brandon Berg 12.09.05 at 2:38 pm

I wrote an essay on a theoretical explanation for point 2 at Catallarchy. The point raised by John Lederer (comment 8) is also interesting, and one I hadn’t considered.

I do suspect that the most significant kind of inequality—differences in utility derived from consumption—has decreased substantially. As Slocum mentions, nowadays practically anyone can afford the low-end versions of many goods that were unavailable even to the middle class thirty years ago, and very often there just isn’t that much difference between the low-end and high-end versions.

18

mpowell 12.09.05 at 2:58 pm

Can someone explain how bankruptcy law can substitute for redistributive taxation? I see how it functions as income insurance, but since the credit markets can distinguish b/w low and high risk borrowers, I don’t see how it can be redistributive. High risk borrowers pay for the bankruptcies of other high risk borrowers. So there should be no redistribution of wealth b/w economic classes here.

19

John Quiggin 12.09.05 at 3:23 pm

Thanks to everyone who’s contributed. Due to some timezone oddities in my posting software, I was asleep before the post went up. Here are some quick responses. Please keep comments coming

pdf23ds, Broken link fixed now, thanks.

I broadly agree with Slocum and Tom. The decline in the price of goods relative to housing and services has had a big impact on certain perceptions of poverty. Cox and Alm Myths of Rich and Poor relied heavily on measures of how many households had washing machines and so on, which are highly misleading in this context. Estimates of the numbers missing out on, for example, routine medical and dental care would be much more relevant.

Ozma, on point 5, these two effects will cancel out in measures of the variance of consumption across households in any given year, since this variance can (roughly) be partitioned into the sum of long-term differences between households and short-term fluctuations in the consumption of individual households. That doesn’t mean, of course, that the two things cancel out in their long-run effects.

Mpowell, the claim is that the two are political substitutes. As you say, there is no redistribution between classes, but easy bankruptcy nevertheless provides a kind of safety net and therefore reduces pressure for redistributive policies.

20

Barry 12.09.05 at 7:07 pm

“As Slocum mentions, nowadays practically anyone can afford the low-end versions of many goods that were unavailable even to the middle class thirty years ago, and very often there just isn’t that much difference between the low-end and high-end versions.”

Posted by Brandon Berg ·

Things that I can point out which have humungous differences, from personal experience:

Housing – good area of town/bad area of town; convenient/long, expensive and uncomfortable commute; large, spacious, well-maintained/small, cramped, things don’t work; many comfortable, useful and good-looking furnshings/few, uncomfortable, ugly and unserviceable furnishings.

Medical care – I’ve got excellent benefits; I was at an appointment today where the resident was considering a CAT scan for some headaches, but decided against it due to good performance on neurological tests; cost seemed to be secondary.
I’ve got abundant prescriptions, therapies, etc./Emergency room, when the pain gets too bad. No therapy, no prescriptions, and lose a day of pay for spending time away from work.

Cars – I spent many student years driving junkers, pumping money into the, suffering their problems, and getting stranded. And that was with my parents giving me the junkers (hand-me- downs)/Nice, clean, new cars which look good, work well, have lots of standard features which felt like luxuries, and ***didn’t break down***.

Jobs – I haven’t cleaned the floor of a restaurant kitchen, not breathing through my nose lest I vomit, for almost 20 years.

I could go on – clothes, entertainment, travel, but I think that the point’s been made.

21

Brandon Berg 12.09.05 at 8:50 pm

Barry (comment 20):

Housing is a special case because you can fit only so much of it in a given amount of space. As long as population increases, so will competition for housing in desirable areas. As for the furnishings and esthetic aspects, I disagree that there’s really that much of a difference. My apartment’s pretty Spartan, and I don’t mind at all.

Medical care is a good counterexample. Cars, I’m not so sure. I had a similar experience with the first car I bought, but if you’re always having to pour money into it, then it’s not really cheaper. Also, I gather that cars have gotten a lot more reliable recently. I don’t think that a top-of-the-line new car (say, $50,000) is that much better than a $6,000 used car. They both get you where you’re going, and everything else is gravy.

Jobs aren’t consumer goods, but point taken.

You can get decent clothes cheaply, especially if you go to a thrift store. I’m not sure what you mean about travel and entertainment.

I spend only about half my after-tax income, and I can’t imagine that my life would be appreciably better if I spent the other half on a bigger apartment, a nicer car, better clothes, or anything like that. Pretty girls, maybe. But none of the other things.

22

Crystal 12.09.05 at 11:28 pm

Elizabeth Warren and Amelia Tyagi, in The Two-Income Trap, mention that while food and clothing has become more affordable since the 1950’s, and cars have become more reliable, the costs of housing, education and health care have skyrocketed. Parents in particular engage in bidding wars for houses in decent school districts.

So while a meal out was a very special treat instead of a routine in my childhood, one didn’t need to produce a “renter’s resume” in order to find an apartment.

A poor kid today might not lack a warm coat, but she is very likely to be homeless.

There was also an article in the Los Angeles Times a year or so ago which talked about how even college-educated people with good jobs are going through much more financial upheaval – being downsized, becoming self-employed with consequent feast-or-famine income – than they once were.

23

nolo commentre 12.10.05 at 2:55 am

“Anyone remember the days when people used to save up for something first and buy it later, instead of the other way around?”

Sometimes in my car when I tire of my Kevin Ayers cd’s I turn to the local sports-talk station, and when I tire of that, I switch to the Dave Ramsey Show. Of course Ramsey’s whole schtick is promoting this very philosophy – living without debt. (Sell your car if you have to, and above all don’t declare bankruptcy). I wonder if it’s a movement that will catch on, or just one guy that will soon disappear.

To listen to the Ramsey show, or to read the newspaper, you get the feeling that there an awful lot of Americans making poor financial-planning decisions – buying cars, educations and other things without properly factoring in the cost of credit. I wonder if this doesn’t make income inequality slightly worse than the basic stats would suggest – for every bankruptcy, aren’t there just a lot of lower-income people wasting much of their income on interest payments?

Then again, Ramsey does seem to feature a lot of folks from, say, the second quintile who seem to badly need someone to tell them not to spend as if their income was in the first quintile….

Btw after Ramsey … NPR!

24

Uncle Kvetch 12.10.05 at 9:59 am

I have to say that I’m baffled by the apparent consensus that “poverty” in the US is pretty much a matter of not being able to afford a nice car, or having to live in a crappy apartment.

From a USDA report on “food security” in the US:

Eighty-eight percent of American households were food secure throughout the entire year 2004. The prevalence of food insecurity was 11.9 percent in 2004, up from 11.2 percent in 2003. The prevalence of food insecurity with hunger was 3.9 percent in 2004, up from 3.5 percent in 2003.

So, is 3.9 percent a negligible figure for the purposes of this discussion? Or is the USDA lying? Or is somebody going to chime in with an explanation of how “hunger” doesn’t mean what it did 50 or 100 years ago? I eagerly await some clarification on this.

25

y 12.10.05 at 10:10 am

The paradox of “houses in decent school districts” is this:

- for most people, “decent school district” is measured largely by scores on standardized tests;

- district-wide scores on standardized tests are determined largely not by anything that teachers do, but by the test-taking skills of the students, especially by the number of poor-performing students in the district;

- the test-taking skills of the students are strongly correlated with family SES.

So, to a great extent, a “good school district” is one that is populated entirely by rich families. This means that the more expensive a house is, the more desirable it is, independent of any other feature about it. (Of course, what really matters is prices district-wide, but those also are strongly correlated.)

Wasn’t it Marginal Revolution that just had an item about demand curves sloping upward, with everyone pointing out how impossible that was?

26

Barry 12.10.05 at 10:59 am

Brendan, most of what you’re saying either isn’t true, or misses the point:

Furnishings – there is a big difference between choosing to live spartanly, presumably with things that you want, and which work well, and having to live with worn, ugly, unserviceable stuff. For example, does ‘spartan’, in your case, mean not having hot water to shower in, frequently? Occasionally throwing out food because the refrigerator doesn’t work well? Having a couch which earned its retirement well before you got it, and which is dirty and saggy?

Housing – declaring it a ‘special case’ exempts something which is the major cost in most people’s budgets. And the zero-sumness does make for greater consumption equality, but rather greater consumption inequality.

“You can get decent clothes cheaply, especially if you go to a thrift store. I’m not sure what you mean about travel and entertainment.”

One can get certain serviceable clothing at a thrift store, for some items. I’ve been to two local thrift stores recently, and to a few new clothing stores (Sears, Mervyn’s, lower-middle class at the highest). There’s a huge difference in the quality, functionality and looks of the clothing. Not to mention getting your size immediately, rather than after several weeks of combing the racks.

Travel and entertainment – why don’t you understand what I mean? I have a friend arranging a trip to DC, for a job interview. The airline trip will cost $500, and that’s a major sum for her; it hurt her. For me, that’s one month of being truly thrifty, or two months of not being a spendthrift.

Entertainment – can you casually spring for $9 for a movie ticket, or are you waiting for the dollar theater? Is a $50 ticket/admission to some event a minor expense, or prohibitive? Can you casually take off for a weekend trip, or are you working on the weekend, because you need the overtime, and your car isn’t up to it, and you can’t afford to spend an extra $100?

“Cars, I’m not so sure. I had a similar experience with the first car I bought, but if you’re always having to pour money into it, then it’s not really cheaper. Also, I gather that cars have gotten a lot more reliable recently. I don’t think that a top-of-the-line new car (say, $50,000) is that much better than a $6,000 used car. They both get you where you’re going, and everything else is gravy.”

Ah, a $6,000 used car – for many people, they can’t afford that. Of if they do, they have to drive it for 5 years or more, and by then it’s a certifiable junker. As to getting you where you’re going, I used to have regular breakdowns, towing and stranding, until I got a much nicer job, and could afford a decent car. In the past 10 years, I’ve not been stranded by a breakdown at all. The 10 years before that, it was at least once a year, and maybe twice.

“I spend only about half my after-tax income, and I can’t imagine that my life would be appreciably better if I spent the other half on a bigger apartment, a nicer car, better clothes, or anything like that. Pretty girls, maybe. But none of the other things.”

Chop your income by 70%, and see what happens. And from your posts, I gather that you’re not married, and don’t have any children. That’s a major set of expenses that you don’t have; a bachelor can live large on a salary that a married man with children struggles on.

27

Ozma 12.10.05 at 11:16 am

wow, I really did not understand the answer to my question. How can “annual” consumption inequality not change very much only thanks to short-term strategies on the part of people not doing well, while at the same time consumption inequality as of 1970 looks pretty much the same as consumption inequality as of 2005? I mean, at some point the effects of “real” inequality have to turn up, right? 35 years seems like more than enough time in which this could happen. So one of three things must be the case:

(1) the wrong markers of consumption inequality are being used

or

(2) a direct comparison is not being made between 1970 and 2005. Instead, a comparison is being made between, say, 1969/1970/1971 vs. 2004/2005/2006 and the relative inequality across the former period looks similar to the relative inequality across the latter period, but due to very different underlying causes

or

(3) I am missing something because I just don’t get it in some basic way.

all seem equally possible — anyone willing to give explaining another go?

28

Barry 12.10.05 at 11:18 am

Brendan, I don’t mean to rag on you, but to point out that you seem to be in a decent situation – good income (not great, but good), with minimal needs. That’s a nice spot to be in, but most people aren’t there. I took a number of years to get there, and I was in a better situation than many of the people around me; whenever I was throwing a good pity party, there’d be people I worked/studied with who’d have been delighted to be me.

29

Slocum 12.10.05 at 1:01 pm

I have to say that I’m baffled by the apparent consensus that “poverty” in the US is pretty much a matter of not being able to afford a nice car, or having to live in a crappy apartment.

Kvetch, I think started that part of the thread, and that’s not what I arguing. What I’m saying is that poor and lower-middle-class life (and the differences between rich and poor) are qualitatively different than a generation or two ago–then, ‘stuff’ was expensive and people in lower and middle classes went without many ‘luxury’ items which are now very much cheaper and all but universal. And that this change affects people’s intuitive sense of inequality. So being disadvantaged now doesn’t mean you don’t have a warm coat (or, generally speaking, air-conditioning, microwave, color TV, DVD player, car) and it doesn’t mean not having enough calories, but it may mean that you tend to have long commute in an unreliable car to an unpleasant job with marginal benefits, and that your kids attend an underperforming school. And you are far more likely to suffer from obesity (and obesity-related health problems) than hunger.

From a USDA report on “food security” in the US:

The problem with the term ‘food insecurity’ is it is intended to suggest ‘doesn’t know where the next meal is coming from’ whereas if check the definition, it includes things like not having convenient access to nutritious, low-cost foods (which is the situation for many inner-city residents, and it’s a real problem, but it ain’t famine–what they need is a Wal-Mart nearby, but that’s another argument).

As for genuine hunger–how many kids are there in the U.S. who are undersized because of long-term lack of calories? Except for the ones with insane parents who are found to have kept them locked in a closet, the answer is essentially none.

Poverty advocates continue to emphasize issues like ‘hunger’ and ‘warm coats’, I think, because these things are traditional and visceral. But even so, strategically, I think it’s a mistake because those aren’t the issues and people realize that they’re being deceived (as with John Edwards’s fictional shivering girl). Better to base appeals on the real problems of the disadvantaged.

I’ve been to two local thrift stores recently, and to a few new clothing stores (Sears, Mervyn’s, lower-middle class at the highest). There’s a huge difference in the quality, functionality and looks of the clothing.

Heh. Barry, — I buy a lot of my clothes at Mervyn’s. Can I claim to be lower-middle class at best? ;) Seriously, I don’t care about the logo, don’t like being ripped off, and find that Mervyn’s clothing looks and holds up just fine (the ‘falls aparts’ argument strikes me as a rationalization for people who want to be able to tell themselves they’re buying more expensive brands for ‘practical’ reasons).

Entertainment – can you casually spring for $9 for a movie ticket, or are you waiting for the dollar theater?

Dollar theater? No, I tend to wait for the DVD. Not because I couldn’t casually spring for $9 movie tickets, but because it seems like a waste of money. (My teenaged kids, on the other hand, don’t think twice about going to the movies, and naturally they’re almost always broke).

30

Uncle Kvetch 12.10.05 at 1:11 pm

As for genuine hunger—how many kids are there in the U.S. who are undersized because of long-term lack of calories?

Thanks for proving my point, Slocum. It all depends on what your definition of “hungry” is.

Poverty advocates continue to emphasize issues like ‘hunger’ and ‘warm coats’, I think, because these things are traditional and visceral.

And as I pointed out, in New York City alone, tens of thousands of “warm coats” are collected and distributed every year to people who presumably would otherwise not have a “warm coat.”

Kvetch, I think started that part of the thread, and that’s not what I arguing.

It is precisely what you’re arguing, Slocum. You’re arguing that poverty used to mean “not having access to the basic necessities like food, clothing, and shelter,” but that today it means “having to drive an unreliable car. I’ve provided two examples that suggest that there are still people in this country who lack the basic necessities, and still you go on waving that notion away as “fiction.”

It’s all in keeping with you standard MO here, which is to pounce on any suggestion that life in these United States is not only perfect, but getting perfecter by the day. I’m not interested in having that discussion one more time with you.

31

John Quiggin 12.10.05 at 3:25 pm

Food insecurity is still a real issue. What complicates the discussion is that people who literally don’t know where their next meal is coming from may nonetheless own a (colour) TV set and other consumer durables. That would have been pretty much inconceivable in 1960 when the poverty line was calculated on the basis of food expenditure. The problem is that the price of a TV set then would have fed a family for a year, and now it might feed a family for a week.

The big relative price movements have been down for manufactured goods and up for skilled-labor-intensive services.

32

John Quiggin 12.10.05 at 3:32 pm

Sorry for the bad explanation, Ozma. Let me try again. Roughly speaking the inequality of income can be measured by the variance.

Suppose there are two groups of people in the economy, say those with and without a college education. Within each group, everyone gets the same long-run income, but there are variations from year to year.

If you take a sample of incomes in a given year, the variance will arise from two sources
(i) the difference between the two groups
(ii) the year-to-year variations within the groups.

In the absence of credit or savings, consumption equals income so the two have the same variance.

Now suppose you introduce credit markets, so people whose income is temporarily (they hope) low can borrow and maintain their average level of consumption, paying back the debt in a year when their income is above its long-term average. This means that the variance (inequality) of consumption declines, even though the long-term difference between the groups is unchanged as is the variance of income.

What has actually happened is that both kinds of income variation have increased, but the use of credit has also grown. As far as measures of the inequality of consumption in any given year are concerned, the two effects more or less cancel out.

33

Crystal 12.11.05 at 12:57 am

A lot of people who are food-insecure are so because they have to spend almost all their income on housing-related expenses – rent (or mortgage) and energy. Add in medication costs out the wazzoo – I’ve known seniors who have to spend US$500 a month out of pocket on meds – and there’s very little left over for food, transportation and everything else.

Food is one of those expenses that people will pare to the bone because it is more elastic than housing or energy. So rather than get kicked out of the apartment or have the utilities turned off in bad weather people cut back on eating. And pawning the TV won’t bring in enough to make a difference.

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roger 12.11.05 at 12:56 pm

This post has emphasized children, but my gut feeling is that the indicators of consumption inequality have not gone up, even as wages have stagnated, for a whole other reason: American success in eliminating, or at least mitigating, poverty among the elderly. Social security, pensions, Medicare have all done their part to limit a major pre-New Deal part of poverty. The effect of poverty on the elderly is not confined to the elderly — the situation used to be solved by a wage earner taking in the elderly parent(s), a la Charlie and the Chocolate Factory. This is why the attack on Social Security and the corporate decision to dump pensions is a major deal. The joke, of course, is that the right is very happy to talk about how the U.S. has become richer and richer — until the talk turns to, say, retirement for workers, when suddenly the economy is poorer and poorer. The richer we are, the poorer we are argument actually makes some sense — there is a systematic cost to the inflation of the amount of wealth possessed by the top ten percentile. A company that devotes ten percent of its earnings to its top five executives is going to have to squeeze costs from the rest of its working force eventually. The choice is coming up: how long can we afford to support the rich and the famous in the lifestyles to which they have grown accustomed?

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Brandon Berg 12.11.05 at 7:04 pm

Barry (comment 26):
All of this is kind of tangential to my original point. Yes, there are things that the very or even moderately poor can’t afford. I never said there weren’t.

My point was that quality of life is increasing faster at the bottom than at the top because of diminishing marginal returns. The difference between starvation and pasta is much greater than the difference between pasta and lobster. The difference between no car and a cheap car is much greater than the difference between a cheap car and a top-of-the-line car. The difference between a cardboard box and a studio apartment is greater than the difference between a studio and a mansion.

Regarding some of your other points:
-Housing is a special case because the most desirable land will never be cheap. It’s simply not possible to have everyone live in the best neighborhood.
-Air travel still isn’t dirt cheap. But it’s much more affordable than it used to be ($500 for a trip to Washington sounds crazy to me unless she had to book it on short notice; I’ve never paid more than $300 round trip from Seattle to New York), and the low-end version (coach) is almost as good as the high-end version (first-class). Actually, that’s pure speculation; I’ve never flown first-class, but I don’t see how it could be that much better.
-Entertainment: Is seeing a movie when it’s new really that much better than seeing it at the dollar theatre, or at home? Is a live event really that much better than listening to or watching something comparable on radio or TV?

Chop your income by 70%, and see what happens.

Take out 30% for taxes and 35% for savings, and I’m almost there. I could make up the other five percent just by getting a roommate.

a bachelor can live large on a salary that a married man with children struggles on.

I’m sure it is (although the heads of most poor families are neither married nor men), which is why one shouldn’t have children until one can afford them. But my contention is only that quality of life has improved faster for people at the bottom than for people at the top, not that everything’s just dandy for people at the bottom.

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Brandon Berg 12.11.05 at 7:42 pm

A poor kid today might not lack a warm coat, but she is very likely to be homeless.

That’s true only if you use a definition of poverty so narrow as to make it tautological. In the United States, at least, something like 0.2% of the population is homeless at any given time. If we say that 10% of the population is poor, that means that only 2% of poor people are homeless at any given time.

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Zephania 12.12.05 at 9:47 am

I have two points to make on this issue. One is the power law distribution of wealth (Pareto’s 80 20 rule, see Barabasi’s book ‘Linked’). As globalization etc kicks in, more of the curve is seen. So, on a world wide basis the income disparity has always been large (see power law distribution curve) but ring fencing a particular economy skews the appearance of the power curve because the process is Procrustean – in the original sense!

The second point is that the black or Toffleresque economy is larger. People aren’t declaring what they earn and are hiding more and more of their assets.

Of course, I only suspect the above but would be curious to see some sort of discussion of the veracity or otherwise of the points.

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John Quiggin 12.12.05 at 6:27 pm

The hidden economy is certainly large and important. It’s hard to tell whether it’s grown in size. It’s probable that various forms of offshore tax avoidance (mostly by corporations and the wealthy) have grown.

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