Consumption inequality (13 December 2006)

The debate about increasing income inequality continues and the rationalizations for it are always being refined. (See Paul Krugman's recent Rolling Stone article for a cogent explanation of the situation.) The social Darwinist notion (sometimes masquerading as a paean to meritocracy) underlying most defenses is that unequal distributions of the gains from an economy's growth and productivity mirror the just deserts of the fittest; outcomes are unequal because some people are smarter and some people work harder than others. Extending that, some people come from a lineage that is rich in social and human capital, providing them with networks of well-connected people to exploit and habits that connote success and attract rewards; these people have inherited "fitness" and are rewarded accordingly. The alternative would be to punish them unjustly for their inherent advantages, to dim their bright light when we should really let it shine.

This explanation is hard for most people to swallow, particularly when they suspect that not only are outcomes unequal, but so are opportunities. The problem is outcomes and opportunities are often blended, such that one of the perks of being on the better side of unequal outcome is greater opportunity. In other words, we could measure outcomes in terms of opportunities, rather than presume we all begin from some par level and achieve to different levels. Social advantages, and the attendant opportunities, accrue to those already privileged, and these become entitlements, protected by wider access to state power. And those lacking such fortuitous placement in the social hierarchy are consigned to a permanent underclass, all while being told they earned their place there. This is a recipe for political unrest, as the growing fears among the privileged classes of a rising tide of economic populism, heralded by 2006 election results, can attest.

So other excuses for income inequality are put forward. One is that it is an inevitable result due to the scale of the American economy, which allows small differences in talent to be leveraged to yield massive differences in resulting incomes. This yields a handful of superstars, reaping what appears to be a disproportionate income, and a mass of average earners falling behind them. So should we tax that disproportionate earning and redistribute it through lower tax rates for the lower classes or through the purchase of much-needed public goods (environmental protections, parks, services, transportation infrastructure, etc.)? Some say yes, but some argue this will discourage those uniquely positioned to have such superstar effects on the economy from making the maximum use of their talent. Then we all suffer: CEOs would less ruthlessly squeeze efficiency from their companies; Allen Iverson might take fewer shots; Tom Cruise might deliver his lines with slightly less gusto. The productivity gains yielded by superstars at the top of their game working their magic at the largest scale would ideally trickle down, raise all of our boats. The rewards given to the true innovators, the argument goes, provoke them to do and make things that ultimately benefit us all and increase our own purchasing power -- we get cheap TVs and computer chips, so it doesn't matter that we aren't making our fair share relative to the national increase in productivity (all economic gains, theoretically, derive from increased productivity -- we make more goods and services from the same total inputs, thus there is more to go around; in recent years, that surplus has been going disproportionately to the economic superstars). We're getting our share in barter, essentially. Gains are embedded in the cheap stuff we can buy more of. The message: "Be happy with your consumer goods, since really, what more do you want? What is fairness, anyway, but an utopian ideal that's caused nothing but trouble in this fallen world? Be glad that you can come home from your job, open a cheap beverage and turn on a technological marvel in your living room and experience top-notch entertainment to whisk you away from it all." We shouldn't worry that other people have more stuff, more leisure time, more opportunity. Such comparisons will make us needlessly unhappy. (Fortunately, we are so atomized by the workings of consumer capitalism that we have far fewer interactions with people outside our households. Unfrtunately, we compensate by watching TV, where we learn to make comparisons with even more unrealistic analogues for ourselves.)

An editorial in yesterday's NY Times broached this myth.

Conservative economists often argue that wage stagnation and income inequality are not as big a threat to Americans’ standard of living as they’ve been made out to be. In their view, how much one buys — rather than how much one makes — is a better measure of economic well-being.
In a recent article in The National Review, researchers at the American Enterprise Institute asserted just that, saying that when you look at how much the middle class is consuming, they’re “even doing better than the upper crust.”
Why make a fuss over other grim economic statistics if everyone manages to keep buying things?
Here’s why. The assertion — that the middle class has out-consumed the “upper crust” during the Bush years — is false, the result of rosy assumptions that turned out to be wrong.

What is in fact happening is this: "Overall consumption is growing. But the growth is unbalanced, consistent with the wide disparity in wages and income that has characterized the Bush years. Consumer spending by low-income households is way down since 2001. Over the same period, spending by high-income Americans has been robust, supported, in part, by generous tax cuts. In 2005, the top 20 percent of households made 39 percent of all consumer expenditures, the highest share since the government started keeping track in 1984."

This kind of statistic puts me in a bind. On the one hand, consuming less seems like a good idea; the hedonic treadmill of unsatisfying shopping and spending and consuming and rejecting goods seems like an enormous waste of energy. So it shouldn't matter that rich people are doing more of what I have generally argued is a counterproductive thing. But I think my arguments stemmed from a non-economic definition of consumption that excluded everything but retail shopping -- leisure, public goods, etc. Fold those back in, and then these statistics about consumption inequality seem to provide you a picture of what feels like is happening: The rich are getting more of the things produced by society that enhance the quality of life, and everyone else is getting better acquainted with the insecurities that rob us of it.