Consumption Inequality: 1960-2014

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Economists Bruce D. Meyer and James X. Sullivan have a brand new NBER paper on inequality; specifically consumption inequality. From the abstract:

Official income inequality statistics indicate a sharp rise in inequality over the past five decades. These statistics do not accurately reflect inequality because income is poorly measured, particularly in the tails of the distribution, and current income differs from permanent income, failing to capture the consumption paid for through borrowing and dissaving and the consumption of durables such as houses and cars. We examine income inequality between 1963 and 2014 using the Current Population Survey and consumption inequality between 1960 and 2014 using the Consumer Expenditure Survey. We construct improved measures of consumption, focusing on its well-measured components that are reported at a high and stable rate relative to national accounts. While overall income inequality (as measured by the 90/10 ratio) rose over the past five decades, the rise in overall consumption inequality was small. The patterns for the two measures differ by decade, and they moved in opposite directions after 2006. Income inequality rose in both the top and bottom halves of the distribution, but increases in consumption inequality are only evident in the top half. The differences are also concentrated in single parent families and single individuals. Although changing demographics can account for some of the changes in consumption inequality, they account for little of the changes in income inequality. Consumption smoothing cannot explain the differences between income and consumption at the very bottom, but the declining quality of income data can. Asset price changes likely account for some of the differences between the measures in recent years for the top half of the distribution.

Meyer and Sullivan have been updating their data over the years. As the 2013 version (which measures inequality from 1960 to 2011) concludes,

Consumption inequality is less pronounced than income inequality and changes in consumption inequality differ considerably from changes in income inequality. While income inequality falls in the 1960s, consumption inequality rises slightly. Both consumption and income indicate rising inequality during the 1980s, but the rise is more noticeably for income. Since the mid-2000s, income inequality has risen while consumption inequality has fallen. Over the past three decades, both income and consumption inequality have risen, but the rise is much more noticeable for income (45 percent) than for consumption (19 percent). Differences between income and consumption are also evident for different parts of the distribution. Income inequality in the top half of the distribution rose steadily between 1980 and 2011, while consumption inequality for the top half of the distribution rose between 1980 and 2005, but then fell noticeably. Although changing demographics can account for some of the changes in consumption inequality, they do not account for changes in income inequality.

Comparisons of survey data to administrative records and national income accounts data indicate under-reporting of both income and consumption. There is evidence of considerable under-reporting of government transfers in income surveys, and the extent of under-reporting has grown overtime. Such under-reporting could lead to significant bias in the level and pattern of income inequality. There is also evidence of under-reporting of consumption data, although major components of consumption such as food at home and housing are reported at a high and stable rate relative to aggregate data. The differences between income and consumption inequality changes through 2005 are almost exclusively in the bottom half of the distribution, indicating that the under-reporting of consumption by the rich is not an explanation for the differences (pg. 21).

To quote Tyler Cowen, “This is one big reason why you can believe income inequality is high and/or rising, and not see it as the most significant normative issue.”