Opinion and Economic Analysis

Hicks: Consumption inequality is the real issue

January 25, 2014

Last week’s column on income inequality drew a great deal of moralizing comments, but calling rich people greedy and poor people lazy is intellectual indolence. It is happiness and a meaningful life we mostly all pursue, and income probably matters little in that.

No economic facts are likely to steer the policy debate away from income inequality. This is mostly because today’s discussion is simply a convenient way to change the subject from other policy failures.

The grown-up discussion we should be having is not about income, but consumption inequality.

Well-being is determined from how much you benefit from consumption, not how much you earn.

To no surprise, government anti-poverty payments mostly target consumption. There are hundreds of these programs, the biggest of which are Medicaid, SNAP (formerly food stamps), and Temporary Assistance for Needy Families. The costs of these programs run in excess of $60,000 per family in poverty. So, a single woman with two kids who makes $20,000 is eligible to consume about four times her family income in federal and state benefits.

These programs are poorly managed, and this family would be far better off with a check for half that amount. Still, it is pretty obvious that a progressive tax system and generous benefits to the poor flatten inequality in consumption.

There is more to the story, though.

As our population ages and more people retire, we should expect incomes to fall for many. But, Medicare and the use of a home that is paid off means that consumption ($10,300 per person annually in health care alone) will be far less unequal than income.

The best research finds less unequal consumption over the past decade or so, which is why you won’t read about this issue in the New York Times.

It isn’t just the dollar value of the consumption that matters, but the benefits of that consumption on households. Today, effectively all households have telephone service, adequate heating, refrigerator, stove and oven, and a color TV. It isn’t really clear how much better off one is with a $14,000 professional chef’s stove than with a $250 set from Best Buy.

Also, inflation-adjusted prices for basics like food, transportation and clothing are lower now than a generation ago (thank you, Walmart).

Finally, leisure inequality is real. Even after accounting for involuntary part-time work, poor households work fewer hours than richer households. There’s no economic sin in that, just different choices. We ought not worry about the choices of others, unless we are compelled to spend public dollars to remedy poor choices.•

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Hicks is director of the Center for Business and Economic Research and a professor of economics at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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