The So-Called Hidden Prosperity of the Poor

The presence in the United States of 42.6 million people officially living in poverty — no matter that they have access to a trickle of consumer goods — must be recognized as a powder keg.

New York Times, January 30, 2013

A concept promulgated by the right — the notion of the hidden prosperity of the poor — underpins the conservative take on the ongoing debate over rising inequality.

The political right uses this concept to undermine the argument made by liberals that the increasingly unequal distribution of income poses a danger to the social fabric as well as to the American economy.

President Obama forcefully articulated the case from the left in anaddress on Dec. 6, 2011 at Osawatomie High School in Kansas:


This kind of gaping inequality gives lie to the promise that’s at the very heart of America: that this is a place where you can make it if you try. We tell people — we tell our kids — that in this country, even if you’re born with nothing, work hard and you can get into the middle class. We tell them that your children will have a chance to do even better than you do. That’s why immigrants from around the world historically have flocked to our shores.

The conservative counterargument – that life for the poor and the middle class is better than it seems – goes like this: Even with stagnant or modestly growing incomes, the poor and middle class benefit from the fact that a stable or declining share of income is now required for basic necessities, leaving more money for discretionary spending. According to this theory, consumption inequality – the disparity between the amount of money spent on goods and services by the rich, the middle class and the poor — remains relatively unchanged, even while income inequality worsens.

In its definition of consumption, the Bureau of Labor Statistics includes “expenditures for food, housing, transportation, apparel, medical care, entertainment, and miscellaneous items.” In an e-mail to The Times, Mark Perry, an economist at the University of Michigan-Flint, goes further to make the conservative case:

For the consumer products, goods, and services primarily produced/provided by the private sector in competitive markets: air travel, foreign travel, food and beverages, restaurant meals, housing, clothing, footwear, household appliances and utensils, furniture, electronics (TVs, iPods, DVDs, BlueRay, Tivo, home theater systems), cameras, GPS, computers, cars and trucks, recreational vehicles, motorcycles, sporting goods, household tools and equipment, cell phones and cell phone service, LASIK surgery, cosmetic surgery, musical instruments, jewelry and watches, luggage, toys, books, information (Wikipedia, Internet, etc.), Cable TV, Internet service, car wash, oil changes, etc. those products and services keep getting cheaper and cheaper, and better and better, and with greater variety, relative to: a) the general price level, and b) average income, and in other words, keep getting more and more affordable over time to the average person. And the average consumer benefits the most, and is most satisfied, with those products/services provided by the market.

Perry and Donald Boudreaux, an economist at George Mason University, elaborated on this theme in a Jan. 23 op-ed in the Wall Street Journal, “The Myth of a Stagnant Middle Class.” The two economists contend that the “favorite progressive trope” of middle and lower class stagnation “is spectacularly wrong” – that American families today have substantially more discretionary income than ever before because the cost of basic necessities has been steadily falling as a proportion of income:

According to the Bureau of Economic Analysis, spending by households on many of modern life’s “basics” — food at home, automobiles, clothing and footwear, household furnishings and equipment, and housing and utilities — fell from 53% of disposable income in 1950 to 44% in 1970 to 32% today.

Kevin Hassett, director of economic policy studies at the American Enterprise Institute, and Aparna Mathur, an A.E.I. colleague, declared in an earlier Wall Street Journal op-ed that warnings by Democratic politicians of rising inequality

echo a standard left-wing critique of capitalism: Economic growth does not serve all classes of society. In the mid-19th century, socialists of various stripes asserted that capitalists grow richer while exploiting workers, who grow poorer. Today we hear that the gains from economic growth accrue to the highest-income earners while the standard of living of the poor and middle America stagnates and the gap between the richest and the poorest grows ever wider. That portrait of the country is wrong.

Instead, Hassett and Mathur argue that liberals are asking the wrong question. They point out that according to data from the Consumer Expenditure Survey compiled for the Bureau of Labor Statistics

if you sort households according to their pretax income, in 2010 the bottom fifth accounted for 8.7% of overall consumption, the middle fifth for 17.1%, and the top fifth for about 38.6%. Go back 10 years to 2000 — before two recessions, the Bush tax cuts, and continuing expansions of globalization and computerization — and the numbers are similar. The bottom fifth accounted for 8.9% of consumption, the middle fifth for 17.3%, and the top fifth for 37.3%.

The consumption theory is powerfully attractive to the right for a number of reasons. It undermines the legitimacy of government action to ameliorate rising income inequality. And it is based in part on the premise that existing welfare programs – food stamps, Medicaid, temporary cash assistance — are doing their job.

These conservative analyses have drawn heated criticism. My colleague Paul Krugman was harsh in his assessment of Boudreaux-Perry – “The BR piece is, in short, a complete non sequitur” — andscathing in his view of Hassett’s qualifications: “the co-author of ‘Dow 36,000’ doesn’t exactly have a reputation to destroy.”

In fact, other respected economists have been raising serious questions for some time about the consumption thesis and the so-called hidden prosperity of the poor.

In February 2011, the National Bureau of Economic Research published a paper, “Has Consumption Inequality Mirrored Income Inequality?” by Mark A. Aguiar, of Princeton, and Mark Bils of the University of Rochester. The authors concluded that “consumption inequality has closely tracked income inequality over the period 1980 – 2007.” In other words, the growing gap between what rich and poor spend parallels the growing gap in the money they take in.

Similarly, in “The Evolution of Income, Consumption, and Leisure Inequality in the US, 1980-2010,” Orazio Attanasio of University College London, Erik Hurst of the University of Chicago and Luigi Pistaferri of Stanford declared that their analysis of the data shows that “the increase in income inequality was matched by an increase in consumption inequality of comparable magnitude.”

The polarized conflict over the measurement of inequality goes to the heart of a much larger debate in terms of public policy – a debate that has raged for almost a century. Boudreaux puts the conservative case with verve:

Even if we were to grant that both income and consumption inequality has risen over the past few decades, that fact alone says nothing about the absolute economic well-being of middle-income and poor Americans. While we believe that consumption inequality has in fact declined, our larger, more central, and most important point is that middle-class Americans are today far better off economically than they were 30 or 40 years ago, regardless of how their well-being today compares to that of rich Americans.

In contrast, David Autor, an economist at M.I.T., wrote in an e-mail to The Times:

My concern is not about inequality at a point in time per se but about the effect of rising inequality on disequalizing the life chances of kids born into affluent versus non-affluent households. There’s a real danger that the U.S. — which is not an economically mobile society by western standards — is going to become more dynastic. Already the gradient between household income and college attendance has steepened substantially between cohorts born in the early 1960s and those born in the early 1980s. Since educational attainment is the key predictor of lifetime earnings, this suggests that the link between circumstances at birth and lifetime incomes will be magnified in the current generation relative to the earlier one.

Autor goes on to concede the positive incentives that inequality can generate, but stresses that, in excess, inequality becomes dangerously destructive:

If the U.S. has a civic religion, it is our belief that society should be meritocratic — everyone should have a fair chance at success based on their smarts and their hard work. As the inequality of household resources becomes more skewed, the likelihood that kids starting at the bottom get a decent shot at the top gets more remote. Of course, there are and will be exceptionally successful people from every possible background. But if you walk the campuses of most top colleges in the U.S., you will discover that the vast majority are from upper income households. You don’t have to take a moral stance on inequality per se to be deeply worried that this may ultimately inhibit the American ideals that bind us together. Inequality within reason is a good thing; it creates incentives so that people work hard to reap rewards. But if more inequality today reduces the equality of opportunity for the next generation by skewing the playing field and disequalizing opportunities faced by kids from low v. high income households, that’s a tradeoff that many people would not want to make.

Politically, with the victory of Barack Obama over Mitt Romney, Autor’s argument has trumped Boudreaux’s. Joseph Stiglitz, a professor of economics at Columbia and former chief economist of the World Bank (who is also the moderator of a new series of Times opinion pieces on inequality called The Great Divide), makes the case that rising levels of disparity are wreaking havoc.

In a Project Syndicate column on Jan. 7, Stiglitz wrote that growing inequality

is one of the reasons for the economic slowdown, and is partly a consequence of the global economy’s deep, ongoing structural changes. An economic and political system that does not deliver for most citizens is one that is not sustainable in the long run. Eventually, faith in democracy and the market economy will erode, and the legitimacy of existing institutions and arrangements will be called into question.

So where does this leave us on the question of the hidden prosperity of the poor? And why should we care?

You’ve heard the case from the right. What says the left?

Here are three charts from the Economic Policy Institute, a liberal think tank. When you look at the level of poverty in the United States compare with other developed countries, it is not pretty:

Economic Policy Institute

When you focus on child poverty, you go from bad to worse:

Economic Policy Institute

And how much of an investment does the United States government make in reducing poverty, compared with other Organization for Economic Cooperation and Development countries?

Economic Policy Institute

Jared Bernstein, who served as chief economist and economic adviser to Vice President Joe Biden during the Obama administration’s first term, has gone head-on at conservative claims regarding consumption inequality and reached striking conclusions. Below is a set of graphs produced by Bernstein “for research purposes” that were published in 2010 by the Bureau of Labor Statistics. Key consumer costs, Bernstein found, have far outpaced the rate of income growth:

Bureau of Labor Statistics

In effect, those at the bottom took a double hit as their incomes shrank and prices rose:

Bureau of Labor Statistics

The September 2012 report on income and poverty released by the United States Census provides the left with additional ammunition. It found that household income in 2011 fell 1.5 percent, to its lowest level in 16 years, $50,054. Most arresting, the gap between the incomes of rich and poor expanded further than it had at any time in the past 40 years.

Redistributive conflict is the essence of politics, and ultimately the data debate – in effect, the debate over who should get what — will be resolved politically. All signals point to a fierce running battle over the coming years as the shape and direction of government tax and spending policies are decided. This is a fight that only shared economic growth can defuse. President Obama was wary of engaging this debate directly during his first term. Now, decisively re-elected, he appears to be girding for action. Republicans are defensive and ill-prepared. But as the abrupt emergence of anti-Obama, anti-Democratic sentiment in 2009 and 2010 demonstrated, the balance of partisan power remains highly volatile.

Meanwhile, beneath the political battleground, the presence in the United States of 42.6 million people officially living in poverty — no matter that they have access to a trickle of consumer goods — must be recognized as a powder keg.

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1 comment

  1. David C Mace

    still a problem with your piece
    you do not come out and directly analyze the discrepency betweeen say Berstein’s picture and the conservative claims
    do you say they are simply lying ?
    probably not
    what part of the numbers the right makes claims about are the basis of their distortions of the reality faced by the lower levels of our society

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