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A COLUMN BY MICHAEL HICKS

Consumption inequality, not income inequality, is the real issue

Friday, January 24, 2014 - 4:38 pm

Michael J. Hicks

Not surprisingly, last week’s column on income inequality drew a great deal of moralizing comment. I am not sure it is helpful to connect moral principles directly to economic decisions about income. No matter whether you are angry or disappointed at rich people or poor, the simple fact that individual choice makes most of the difference in income is just that, a simple fact. Calling rich people greedy and poor people lazy is intellectual indolence. It is happiness and a meaningful life we mostly 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. That won’t happen because the facts here do little to incite anger and division.

Income tells us how much you earn, not how much you consume. Well-being is determined from how much you benefit from that consumption, not how much you earn.

Not surprisingly, government anti-poverty payments mostly target consumption. There are hundreds of these programs, the biggest of which are Medicaid, SNAP (formerly Food Stamps), and TANF. 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 if she takes federal and state benefits.

Now 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 on the matter 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 for 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, Wal-Mart).

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.

Michael J. Hicks is the director of the Center for Business and Economic Research and professor of economics in the Miller College of Business at Ball State University.