Today, the day after Thanksgiving, is the busiest shopping day of the year. From everything we've read about America's inequality, we might assume that the top 20% of American households are out shopping while the dwindling middle class and the bottom 20% are staying home.
According to Eduardo Porter in last Sunday's New York Times, "The growing share of income devoted to those at the top is leaving less and less to share among the rest of us."
But the new 2005 Consumer Expenditure Survey, released earlier this month by the Bureau of Labor Statistics, shows that differences in per-person spending by the lowest and highest fifths, or quintiles, of income-earners are not dramatically different. Our measures show more income inequality than spending inequality.
And spending is vital because it determines our current standard of living and our confidence in the future. It shows how much money Americans have. The usual pretax measures of income on which most inequality studies are based don't show how much money Americans have and don't provide an accurate measure of inequality.
The top 50% of earners pay 97% of income taxes, so all their income is not available for spending. Lower-income Americans receive transfers such as Food Stamps, housing vouchers, Medicaid, and Medicare, so they consume more than their stated income. Middle-income Americans have assets in pension and individual retirement accounts that are not included in income. Therefore, spending is a far better guide to well-being than pretax income.
Last year Americans in the lowest income quintile spent an average of $11,247 per person, according to the Bureau of Labor Statistics, compared with $15,843 for middle income quintiles, and $28,272 for the top quintile. The top group is spending only 2.5 times as much as the bottom group, and 1.8 times as much as the middle classes. This is not major inequality.
The differences between per person spending are even smaller for food and housing. Those in the top 20% of income earners spend $3,141 on food per person and those at the bottom 20% spend $1,792, i.e. the top group spends less than twice as much. Middle quintiles are somewhat in between. For housing, the lowest spends about half as much as the highest.
With health care spending, an area where conventional wisdom holds that the poor are falling behind, the top group spends about 1.5 times the lowest group. For clothing, the top group spends just over twice the amount as the bottom group.
Some in households with low income levels are not poor. Many are retired and are living off Social Security, pensions, and accumulated savings. The average age of the lowest income group is 52, higher than any other. A full 30% own their homes free of mortgage, compared with only 17% of those in the upper income group.
To be sure, spending done by choice rather than by necessity shows somewhat larger differences. The top group spends almost three times as much on entertainment as does the lowest group, and just over twice as much as middle-income groups. And the top group spends three times as much on transportation as the lowest group, but only 1.6 times as much as the middle groups.
Spending on personal insurance and pensions shows the most inequality. Spending by the top group is more than 15 times the lowest group, and three times as much as the middle groups. This type of spending includes individual retirement accounts, 401(k) plans, and life insurance. It's not that the top group is spending substantially more, but it is saving more.
But these patterns do not show, as Jim Webb wrote in the Wall Street Journal on November 15, that " America's top tier has grown infinitely richer and more removed over the past 25 years. It is not unfair to say that they are literally living in a different country." Rather, data show that spending is not diverging considerably between groups.
Aside from tax payments and transfer receipts, why is spending inequality per person less than many popular measures of income inequality?
The average number of people for a household in the lowest quintile is 1.7. It increases to 2.5 people for the middle quintile and reaches 3.2 people for the highest quintile. If a larger amount of income is divided among more people, the spending per person falls. Look at it this way — if there was complete equality, and all quintiles had the same income, the ones with the larger families would be worse off.
Also, the top group has more earners. The top quintile averages 2.1 earners, compared with 1.4 earners for the middle quintile, and half an earner for the lowest quintile.
Yet a glance at per-person spending over the past 20 years shows that all groups are spending more in real terms. To humbly contradict the soon-to-be Senator Webb, everyone has grown richer over the past 20 years.
The lowest quintile is spending 14% more in 2005 than it was in 1985, the second quintile 16%, the third quintile 11%, the fourth 13%, and the top quintile is spending an additional 16%.
There's no striking inequality there, especially since people don't just stay in one quintile. Many have moved up to other quintiles in the 20-year time period as they get older and more experienced and marry other earners.
The Bureau of Labor Statistics data also provide a window on changes in our society. The bottom quintile is spending 120% more on audio and visual equipment and services, compared with the category of TVs and radios from 1985. The top quintile is spending only 31% more. Comcast and Netflix, take note.
All quintiles are spending less on reading, ranging from 44% less for the top quintile to 52% less for the middle quintile. But all are spending more on education — from 117% for the top quintile, to 29% for the second-lowest, with the rest in between. The self-taught man of letters isn't of the 21st century — books are out, formal education is in.
Predictably, the top quintile has the highest proportion of respondents, 81%, who attended college, a proportion that falls as income declines. Only 40% of the lowest quintile graduated from college. It's no surprise that households with two college-educated earners have more income than those with half an earner without a college education.
Reforming education, as the late Milton Friedman advocated, remains the most effective way of increasing incomes. Today, as we jostle with shoppers in the crowded malls, we should be thankful that inequality is not as severe, nor as intractable, as it is made out to be in the popular press.
This article was featured in The New York Sun edition of November 24, 2006.