Lane Kenworthy on Consumption Inequality

by Will Wilkinson on October 14, 2009

Today at Cato Unbound, University of Arizona economic sociologist Lane Kenworthy replies to my lead essay. That consumption inequality has risen less than income inequality is a point Kenworthy says “I don’t find 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.

I’ll be responding to all the reaction essays next week, so I’ll wait until then to comment. But I’m definitely interested in hearing what y’all think.

DG Lesvic

urstoff,

Hayek wrote:

" Redistribution...is the crucial issue on which the whole character of future society will depend...and "it would be disingenuous to avoid discussing" it.

urstoff

Why is this even a discussion? The world isn't zero-sum, so income inequality isn't actually a meaningful issue.

Also, Kenworthy dodges the main issue of Will's paper, so it's a bit of a contentless reply.

DG Lesvic

Adstein,

You have me a bit stymied, at the moment. For, while I think what you were saying was right, and more so than what I was saying, I'm still struggling to find some reason to keep saying it. Why? Maybe just because it feels good to call the bastards communists, but I really think, at bottom, that 's what they are, knowingly and deliberately so or not.

But I still think this all misses the most important point about inequality, that the market, always tending toward equilibrium, always tends toward the inequalities that would bring it about, and that taking from the rich to give to the poor cannot reduce but only increase inequality.

You're one smart fella, so I hope you'll follow through on this with me.

cournot

Kenworthy seems to be conflating the psychological gain from having more unspent income to the discounted consumption value of that income. If the unspent income is really a measure of "true" (real price adjusted inequality) it should show up as consumption differences at some point or another. If the argument is that this wealth can be spent on something that socially differentiates the rich -- like going to an Ivy at full cost or buying up choice land -- then we're getting into the positional goods story that Nye discusses today. Rather than refute Wilkinson, it supports him. Just do the thought experiment. Assume dollar inequality were the same, but all people were given all the food and clothing they wanted for free, then by definition, the rich would differentiate themselves on non-food or clothing margins. But also by construction, that world would have fewer poor people and consumption inequality would be greatly diminished. But you might perceive inequality as worse than today.

j r

i will begin by saying that i find most discussions of income inequality to be obtuse to say the least. the only inequality i really care about is that which exists in those very areas that government intervention was supposed to "fix" in the first place: education, housing, healthcare, financial and legal services, etc.

to that end, i find all the obsession with income inequality to be a costly diversion that mostly serves to justify any number of inadequate and specious interventions; mostly involving the transfer of wealth from individuals into an ever-growing government leviathan. i take will's piece as an attempt to move the convsersation away from the latter and towards the former. now, this definitely places the honus on will, but i can't help but think that kentworhty completely punts. he grants that there any number of ways in which income inequality fails to capture important dimensions in the goods and services availabe to the average person, but then just defaults back to some strange "unicorns and fairies" comment about how it would be great if the government could level the playing field and make all our dreams come true.

income vs. consumption is an interesting academic conversation, but it would suggest that you keep focus on what is really at stake. and that is just what sorts of interventions and corrective methods best serve the interests of justice. we've been aggressively transferring income and funding government programs for how many years? and many people are still trapped in shitty and unsafe neighborhoods, living in shoddy housing, and sending their kids to sub-standard housing.

adstein

The concern over a widening income or consumption gap seems to derive less from the aim of achieving a perfectly equalitarian society in terms of the stated metrics, but rather from an underlying feeling that the wealth acquired by the top 1% over the past three decades or so has been extorted from the general public via embezzlement on the part of the financial, health care, and arms manufacturing industries (aided and abetted, of course, by the US gov). In short, that after the advent of supply-side econ. and the Fed's acceptance of monetarist critiques, a historic transfer of wealth away from the lower and middle classes and toward the upper-upper classes took place, leaving the average American in a less advantageous bargaining position to achieve his or her goals. I don't necessarily agree with this and I'm obviously glossing over a lot, but I think this is the substance of the liberal/social democratic argument, rather than "income/consumption inequality is inherently bad."

MarkD

Regarding the gap between what is consumed and what is earned - this is the amount of income saved or invested. That non-consumed cash is put to further productive uses be it into the stock market or into the bank. It ultimately fuels business capitalization.

Does this not propel job growth and add to what is then consumed? Just because the "rich" are deferring consumption of their income it doesn't gather dust in non-productive uses.

Joey

Why has no one noted that Kenworthy did not attempt to address the upshot of Will's article?

Will's thrust is that measurement of income inequality is not at all straightforward, and so the picture of what is happening beneath the numbers is murky. However, even if real standards of living are wildly diverging, this is a morally dubious criteria for redistributionist policies because this divergence would be a mere symptom of the real underlying injustice (such as poor access to healthcare, education, or whatever).

I understand that Kenworthy is a social scientist and not a philosopher, but he is making definite moral claims about the desirability of equality. Most of Will's effort was to question the foundation of these claims, and Kenworthy offered absolutely no response.

Will, I would love to see you ask him about this ommission in your response.

passdegn

not really related:

If the richer save more and live longer (and spend these extra years retired) the average lifetime consumption "rate" of the rich and poor might be more similar than their average lifetime income suggests. I'm sure someone has tought of this already.

DG Lesvic

I haven't read all that through, but at first glance it seems like the same old communism to me. Inequality is evil and equality must be our goal.

seff suffer

I think DG is on to something, even if overstated. Kenworthy cannot deny the consumption wealth that everyone has benefited from in the past 20 years (e.g. cellphones, internet, more food choices, flat screen tvs, health care improvements, etc), so instead he kvetches about the disparity of income creates a chasm of consumption between rich and poor without taking into account that today's poor >>> the rich from 100 years ago.

At any given moment the rich will be able to do more with their disposable income, but over time downward pressure on prices spreads that wealth to the poor. I wonder how Kenworthy feels about Wal-Mart.

seff suffer

I guess I should have read the main article. Scratch that last line about Wal-Mart. Kenworthy says, "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. "

Right, so what's the ploblem?

griffin13

http://www.csus.edu/indiv/m/mayesgr/phl4/Tutori...

adina

I don't know whether or not we can accurately determine the level of consumption among the ultra rich, but I also don't know why it matters so much. Whether or not their brandy is very special or very special old pale is kind of meaningless, because the marginal gain in pleasure of increased consumption among the very rich is pretty small. When you can afford to live and dine in a 5 diamond hotel every night, then your limiting commodity is time, not money. We should focus on whether or not someone who makes $40,000 per year has been able to increase his consumption over the years, rather than whether or not someone really rich can get $40 million worth of goods or $60 million.

Eric H

"Whether or not their brandy is very special or very special old pale is kind of meaningless, because the marginal gain in pleasure of increased consumption among the very rich is pretty small."

How does one find out someone else's marginal gain in pleasure?

adina

Blind taste tests.

Of course that excludes the placebo effect, i.e. the intrinsic pleasure of spending money. But such pleasure can only feed off of inequality. If the brandy doesn't taste any better, the only thing that makes it taste better is that you are among those who can afford to buy the pricier one.

Hedons gained solely from lavishing in money, rather than actually getting more stuff, are not applicable, in my opinion. Absent status-anxiety, Scrooge McDuck would have had more fun swimming in a water-filled pool.

blackadderiv

I guess my question is: if consumption inequality (or income inequality) is so hard to measure, isn't that a reason to doubt that it is a significant social phenomenon? Is the idea that the common man has some accurate gauge of inequality that can't be captured in the statistics?

Matt C

Most individuals who work in fields focusing on empirical evidence would agree that garbage in = garbage out.

Eric H

Does it make me a kooky Austrian to believe that all income is used for consumption? I don't understand the logic behind the distinction Kenworthy makes between income and consumption. With a fatter bank account, he would consume more of goods that are more value to him, and less of what he values less--more research, less teaching, or more family-time, less work. Consuming more of something he values more and less of something he values less isn't an equal trade-off. The scales don't balance. Or am I totally wrong?

UOJim

I think you're restating Kenworthy's point, but in even stronger form.

Eric H

"The point is that income adds value even if it is not spent right away."

Income doesn't add value by itself--if income is adding value, it's being consumed in some fashion. It is used to produce annuities, change lifestyles, boost self-assurance by getting stuffed in a mattress. Saving for a rainy day is not only deferring consumption but using--consuming--money in the present to satisfy one's need to plan for the future.

I think Kenworthy is pretending that income doesn't get consumed. It is always consumed.

UOJim

Forgive me, but I'm genuinely amazed that you seem to have this so exactly backwards. If you believe, as is reasonable, that "all income is used for consumption," then your beef is with Will, not Kenworthy. Kenworthy is not using Austrian vocabulary, but he's the one saying that the income not going toward *measured* consumption is nevertheless "buying" some array of goods, goods that the present reckonings of "consumption" don't capture.

Eric H

I guess what I was clumsily, blindly driving at--in Will's defense--was that consumption ought to be measured--period. No one works merely to pile up green pieces of paper. But the examples Kenworthy gives of what he would do with an extra million if he had it are measurable, aren't they? That paragraph just jumped out at me. It seemed to me like Kenworthy was arguing against his own case.

Kenworthy: Suppose that the rich consume relatively little of their additional income. Should we then conclude that the economic inequality we care about hasn't risen much? No.

This just seems absurd to me. "Relatively little of their additional income?" Kenworthy is piling on fantasy variable after fantasy variable. Whose to say what portion of someone's income is "additional" or marginal? His point that the portion of rich people's income that isn't spent still adds value is fine...but he's saying that that portion accounts for the income gap. I'm saying, no, if you're going to consider unspent wealth as "value adding" then it should count as consumption, not income.

To quibble: Kenworthy adds that "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." This is crazy. Cities have a large share of all income strata. And the housing bubble wasn't merely a bunch of latte-sipping, boat-shoe wearing nouveau riche dudes named Sterling foreclosing on their McMansions!

Will Wilkinson

I think Jim's right. Kenworthy's saying there's utility in savings not captured by nominal consumption measures. I think this is obviously true. The question is the extent to which this fact complicates consumption as a proxy for material welfare. As an issue of usage and communication, I think it's confusing to label as "consumption" the utility derived from savings. Judging by his usage, I think Kenworthy would agree.