THE economics blogs continue to buzz with the aftermath of Michael Cox and Richard Alm's New York Times op-ed on consumption inequality. The prevalence of technical arcana about weaknesses in various sets of consumption data in the rebuttals of left-leaning economists suggests some measure of desperation to make the key finding go away. But it is more than secure: the level of consumption inequality is much lower than income inequality, and has increased much less, no matter your favourite data source.

Furthermore, as a conceptual matter, it remains that consumption is a much better measure of material well-being than income, and consumption inequality a much better measure of the real differences in standards of living. This should be obvious enough, but it is grating for those who would like to use income inequality data as a political cudgel, but who really know better. Of course, there is also good bit of technical arcana that reinforces the weakness of income measures. For example, Arnold Kling highlights this passage from a new-ish working paper [pdf] by Bruce D. Meyer and James X. Sullivan:

The bottom deciles of consumption exceed those for income, suggesting under-reporting of income. There is a high and rising under-reporting rate for government transfers, a source of income that is particularly important at the bottom.

That is to say, income measures systematically mislead about the level of consumption at the bottom of the income distribution. This just supports what we already know: responsible scholars worried about real inequality will prefer the consumption numbers when good ones are available. Or, if they are disatisfied with the quality of the consumption data sets, will work to see them improved.

The important question to my mind isn't whether real consumption inequality is especially terrible these day, but whether it is still decreasing. There should be no doubt that Americans have become more equal in real standards of living over the long term. (Even Paul Krugman admits this.) But how about since the 1970s? To the question of whether real consumption inequality--or, to get right down to it, welfare inequality--has narrowed or widened over the past few decades, Tyler Cowen is emphatic about our ignorance:

We do not know how inequality of welfare in America is faring over say the last thirty years. This is a point of overriding importance. Just in case you missed it, let me repeat: when it comes to the kind of intra-nation inequality that we should really care about (if we are going to worry about intra-nation inequality at all), we "do not know." As in "know" and "not" put together.



The reason "we" don't know this is that "we" don't agree on how to measure welfare. The popularity of happiness or life-satisfaction measures has blossomed among economists largely due to the conviction that they provide a more accurate measure of welfare than does income or consumption. And we do in fact know that inequality in welfare, measured in this way, has been decreasing in America and other wealthy countries over the last thirty years. Of course, this fact only makes some inequality hawks suspicious of happiness data.

For his part, Lane Kenworthy would like to draw our attention to wealth inequality:

While there is less inequality of consumption than of income, the flip side — because those with high incomes are able to save and invest much more — is that inequality of wealth is much greater than inequality of income. ... If we focus on spending, we miss this key part of the inequality story.

Yes, but the inequality story that really matters is inequality in well-being or welfare. The main way wealth contributes to welfare is by financing consumption, which is why we should look to consumption to understand how people are really doing. Mr Kenworthy suggests that in addition to future consumption "income saved becomes an asset that provides financial and psychological security," and this is true. Money in the bank does create peace of mind. So, is Mr Kenworthy suggesting that there is increasing inequality in peace of mind? How would one measure that? With a life satisfaction survey?

In an excellent post on all this, UC Davis economics grad student Will Ambrosini leaves us with this important throught:

Often times, popular discussions of this topic have an air of back filling and data mining. People have some policy they want to implement and then they go squeeze data until it supports their policy. Call me naive, but I think policy should be guided by the science not the other way around.



A truly excellent idea!