According to the best available data, in 1979 the average after-tax income of the top 1% of American households was approximately $340,000. By 2006, at a similar point in the business cycle, it had risen to $1,200,000 [1]. The average for the bottom 60% of households rose much more modestly, from $29,000 in 1979 to $35,000 in 2006. Over this period the share of total income going to the top 1% of households jumped from 7% to 16%, while the share for the bottom three quintiles fell from 36% to 28%.[2] This is a substantial rise in income inequality. Very few social scientists deny its existence. The debate among them focuses on its characteristics, timing, magnitude, and causes.[3]
But there is far less consensus about whether, and if so to what extent, we should worry about this development. Inequality skeptics have offered a number of reasons for downplaying its significance: inequality is the product of free choices, what really matters is equality of opportunity, measures of income inequality ignore upward mobility, higher inequality boosts economic growth, focusing on a single country fetishizes national borders, and others.
Will Wilkinson emphasizes the distinction between income and consumption:
As far as I can tell, when most people are worried about economic inequality, they’re usually worried about inequalities in real standards of living — in the real material conditions of life… An individual’s or household’s standard of living is determined rather more directly by the level of consumption than by the level of income… Different datasets and analytical methods produce somewhat different results, but most stories of consumption inequality are stories of stability or a relatively mild rise.
Wilkinson makes other arguments in his piece, and additional ones in his earlier Cato essay. But I want to focus on this point. I don’t find it compelling.
One reason is that existing analyses of consumption inequality suffer from a problem similar to that which, until recently, hindered the study of income inequality: limited data on those at the top. Consumption data come from the Consumer Expenditure Survey (CEX). Like its income counterpart, the Current Population Survey (CPS), the CEX is not designed to effectively capture developments at the top end of the distribution. Since this is where a good bit of the rise in income inequality is centered, researchers may have underestimated the degree to which consumption inequality has increased.
Suppose, though, that the very rich have been consuming relatively little of their additional income. Should we then conclude that the economic inequality we care about hasn’t risen much? No. The fact that income isn’t spent doesn’t render it irrelevant. If my income were to balloon to more than a million dollars, my household might not increase its consumption by much. But it’s not as though the additional income would thereby disappear. I could cut back on teaching and devote more of my time to research, or take an unpaid sabbatical. My wife could quit her job and spend more time with our children or do more volunteer work. Or we could invest the money, which might produce considerable additional income in future years.[4] This could help ensure that, among other things, we’d be able to afford to send our kids to expensive private colleges. Or we could retire early. Or simply accumulate assets and pass them on when we die. None of these uses would show up as consumption in the survey data (except the college payments, though that would come some years down the road). But they surely would enhance our well-being.
The point is that income adds value even if it is not spent right away. Consider, as a potentially helpful analogy, political freedom. On virtually every scoring or classification of political liberties, the United States receives the highest possible score.[5] Yet many Americans make little use of these liberties. Only about half of those eligible actually vote in presidential elections, and the share is much smaller for off-year national elections and smaller still for local elections. Many who do vote have limited knowledge of key issues, and they tend to be heavily myopic in their thinking.[6] Few Americans participate in politics in other ways, such as active involvement in a party or other political organization, campaigning for a candidate, engaging in organized political discussions, or giving money to a political party or candidate. Only a small portion of Americans, in other words, make much use of the political freedoms they enjoy. If we care about political liberty only insofar as people make use of it, perhaps we should judge our country to have far less political freedom than is commonly thought.
I don’t think that’s the right interpretation, though. It matters a great deal that Americans have the right to vote, to assemble, to join a political organization, and to demonstrate, even if many don’t exercise these liberties. Similarly, it matters if the incomes of those at the top triple or quadruple, even if they use only a limited part of the additional income to boost their consumption.
There also is the issue of how increased consumption among households at the low end and in the middle has been financed. Consumption smoothing over the life course — borrowing when young, repaying later when income is greater — is one thing. But if growth in consumption inequality among the bottom 99% has been suppressed by poor and middle-income Americans borrowing too heavily, this ought to be of concern.
I am not suggesting we shouldn’t care about the distinction between income and consumption. It matters that huge income increases at the top helped propel a housing bubble that raised the price of expensive homes, especially in and around the cities where a disproportionate share of the top 1% live. It matters that Wal-Mart and imports from China have reduced the prices of many consumer goods for low-income Americans. It matters that many people now have access to communication via e-mail and cell phones, information via the Internet, and entertainment via cable TV and iPods. And it helps when government services enhance material well-being — by reducing violent crime or expanding access to health insurance, for instance. Here’s how I put this latter point in a recent comment:
Imagine an America in which high-quality public services raise the consumption floor to a high level: most citizens can put their kids in high-quality child care followed by good public schooling and affordable access to a good college; they have access to good health care throughout life; they can get to or near work on clean and efficient public transportation or roads with limited congestion; they enjoy clean and safe neighborhoods, parks, roads, museums, libraries, and other public spaces; they have low-cost access to information, communication, and entertainment via reliable high-speed broadband; they have four weeks of paid vacation each year, an additional week or so of paid sickness leave, and a year of paid family leave to care for a child or other needy relative. Even if the degree of income inequality were no less than today and we still had CEOs, financiers, and entertainers raking in tens or hundreds of millions of dollars in a single year, that society would be markedly less unequal than our current one.
I agree that we should pay attention to consumption in assessing changes in economic inequality. But we need better data on consumption at the top. And even if consumption inequality has increased only modestly, that by no means renders the large rise in income inequality moot [7].
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Notes
[1] These figures are in 2006 dollars. The top 1% includes about 1.1 million households.
[2] These data are from the Congressional Budget Office. They are estimates created by merging IRS tax records with Current Population Survey data on incomes. 2006 is the most recent year for which these data are available. For additional discussion, a much longer time series on incomes at the top, and cross-country comparison, see the recent paper by Anthony Atkinson, Thomas Piketty, and Emmanuel Saez (free version here).
[3] Wilkinson mentions a recent paper by Robert Gordon as questioning this conclusion. But as is clear from the passage Wilkinson cites, while Gordon raises questions about the timing and nature of the rise in inequality among the bottom 99% of households, he does not challenge the consensus view that with the top 1% included income inequality has risen sharply.
[4] This is a key part of the reason why the distribution of wealth is much more unequal than the distribution of income.
[5] See, among others, the Freedom House scores.
[6] See Larry Bartels’ Unequal Democracy.
[7] For my views on why we should be concerned about rising income inequality, see my “Rising inequality: what’s the problem?” and chapter 2 of my book Jobs with Equality.