Tone-Deaf Economics

A piece in today's New York Times titled "You Are What You Spend" tries to make th case that we shouldn't measure the differences between rich and poor in terms of income (which stands at at 15:1 ratio from the top quintile to the bottom) but in consumption. This lowers the difference to a 4:1 ratio. Yes, the top quintile only spend an average of four times as much as the bottom. This is supposed to be comforting to those who have been concerned that wealth distribution is becoming dangerously imbalanced in this country.

First of all, if the wealthy can afford to spend four times as much as the poor, that alone should be cause for concern. A four to one ratio doesn't sound so bad in raw numbers, but let's translate it to goods. Let's say we're talking about cars. If the poor can afford a $10,000 car, the rich can spend $40,000. Think about the differences in models between $10,000 and $40,000. But wait, do the wealthy spend four times as much as the poor on bread? On toilet paper? If the proportion is less than 4:1 for some goods, it must be even greater for others. Instead of thinking in terms of the size of a house (one expects the house of a wealthy person to be significantly larger than a poor person's) think of it in terms of a mortgage payment. If the poor person spends a thousand dollars a month on housing, the wealthy person is spending four thousand. That's a lot of house.

If this isn't disturbing enough, let's consider the real danger here. The article argues that this movement from 15:1 to 4:1 should be comforting, but why the huge differential between the income and the spending of the wealthy? Shouldn't that be the crux of the article? It isn't. The article gives this issue a single sentence: "The rest of their [the wealthy's] income went largely to taxes and savings." Well, how much of that is taxes? If it's mostly taxes, that would seem to imply a very progressive tax structure keeps the wealthy from outspending the poor 15:1. Imagine the social consequences of a 15:1 world. Try to imagine people who buy bread that is 15 times better than yours. What would butter that's fifteen times more expensive than mine even taste like? What would toilet paper that's fifteen times better than yours feel like? Talk about two Americas. These quintiles would be on different planets.

But what if it's not mostly taxes? What if it's mostly savings? The writers of the article, W. MICHAEL COX and RICHARD ALM, seem to be implying that there is not a significant difference between people who can save such a vast portion of their income, and people who can't afford to save anything. If we measure the differences in our social classes merely by consumption, this implies that the amount saved is irrelevant. But it shouldn't take an economics degree to know that savings matters. Not only do people who have massive amounts socked away sleep better at night, but they can make better long term financial choices (improving their financial situations and widening the gap), and they can weather larger economic downturns while the folks on the bottom get hit without any protection.

But luckily we're not in for any recession anytime soon.

Oh, wait.