Sunday, February 10, 2008

Consumption Inequality

is much lower than income inequality. The Dallas Fed's W. Michael Cox and Richard Alm explain in the New York Times, with the aid of a nifty chart. They write:
[I]f 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 average person in the middle fifth consumes just 29 percent more than someone living in a bottom-fifth household.

Update: Paul Krugman is skeptical.

Update #2 (2/11): So are Mark Thoma, Dean Baker and Free Exchange.

Update #3 (2/12): And Barry Ritholtz.

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