You’re Only as Poor as You Spend
15th October 2011
One intriguing part of the answer as to why income inequality has not played a big role in current American politics may be supplied by Dallas Federal Reserve economist Michael Cox and Dallas Federal Reserve economics writer Richard Alm in a column in Sunday’s New York Times. They argue that our focus should be on consumption inequality rather than income inequality. The bottom fifth of American households earned $10,000 while the top fifth averaged $150,000 per year. However, spending for the bottom fifth averaged $18,000 per year and the top fifth $70,000 annually.
Note the imbalance between ‘earnings’ and ‘spending’ for the bottom fifth. How do people earning $10,000 spend $18,000? The obvious answer is taxpayer-funded benefits. These are the ‘poor’ over whom there is much hand-wringing among the bleeding hearts.
So, bearing this in mind, if 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.
So, if they aren’t spending it, what are the rich doing with their money? Hiding it under the mattress? They are, of course, investing it — in various financial investments that create jobs and economic growth. So ‘soak the rich’ doesn’t mean that Algernon has to give up his fifth Maserati, but that businesses don’t get started and unemployed people don’t get employed. This is why Democrat class-warfare winds up hurting us all.