From: oldnasty@mindspring.com (Grinch)

Newsgroups: sci.econ
Subject: Income inequality, and what Krugman forgot to say about it.
Date: 7 Nov 2002 21:50:07 -0800
Organization: http://groups.google.com/
Content-Type: text/plain
Content-Transfer-Encoding: 8bit
Message-ID: <403da94.0211072150.66861d97@posting.google.com>

It's very odd how what is reported by economists in the back pages of

the NY Times so often goes overlooked by those who compose its

editorial pages, including that economist who writes there.



First we had Alan Krueger reporting how economists have long puzzled

over why political campaign contributions in the US are so small an

ineffectual. (A notion the Times' editors have certainly never

entertained).



Then just recently we have Paul Krugman writing a Sunday Magazine

cover story bewailing the evils of the rise of income inequality and

the "new plutocracy", without ever mentioning that, as is reported in

the Times here, "It is hard to see the effects of increasing income

inequality in how people actually live."

~~



NY Times, 11/7/02

ECONOMIC SCENE

By Virginia Postrel, 



~~ quote~~



.... "Looking at the distribution of current income is probably not a

good enough measure of what you're really interested in, which is the

distribution of well-being, the distribution of resources among

Americans," says Fabrizio Perri, an economist at the Stern School of

Business at New York University.



There are really two different components of income inequality:

permanent differences and temporary fluctuations. People tend to base

their spending on what they expect their long-term prospects to be.



Poor graduate students spend more than equally poor waitresses,

because they can expect higher incomes later. Conversely, professional

athletes have to save some of their big bucks to finance a comfortable

life after sports.



To see how well-being is distributed, consumption provides a better

long-run picture than income.



In a paper titled "Does Income Inequality Lead to Consumption

Inequality?" Professor Perri and Dirk Krueger, an economist at

Stanford, look at the distribution of consumption from 1972 to 1998.

The article, now a National Bureau of Economic Research working paper,

can be downloaded at 

http://pages.stern.nyu.edu/~fperri/research.htm.

...



"We wanted to see whether this rise in income inequality had in fact

given rise to an increase in consumption inequality," Professor

Krueger said. "We were fairly surprised that it hadn't."



The economists expected consumption to fluctuate less than income,

since people can save in good times and borrow in bad times. But the

results were far more marked than they anticipated: Even as the

distribution of income changed significantly, the distribution of

consumption barely budged.



A common measure of how spread out the income distribution is (the

standard deviation of the log of after-tax labor income) increased 20

percent, while the same measure for consumption rose only 2 percent.



To take a single comparison, the poorest 20 percent of Americans made

about 6 percent of all income in 1972-73 but only 4 percent in

1997-98. That substantial drop did not show up in their spending,

however. It stayed flat, at about 9.2 percent of total consumption.



Or consider the ratio between the top and bottom. In 1972-73, the top

10 percent of earners made about five times as much as the bottom 10

percent. In 1997-98, they made more than nine times as much - a sharp

increase that, again, barely shows up in spending. The top 10 percent

of households spent about three times as much as the bottom 10 percent

in 1972-73, a ratio that inched up to 3.35 in 1997-98.



These results are particularly striking because the income figures

include only wages and government benefits. Spending, by contrast, can

come from all sources of money, including the stock market returns and

other investment income enjoyed mostly by the wealthiest Americans.

The high investment returns of the 1990's do not seem to have notably

widened the spending gap between rich and poor.



It is hard to see the effects of increasing income inequality in how

people actually live...

~~~



All of which would seem rather relevant to Prof. K's Times magazine

story, so I guess he just ran out of space before he could fit a

mention of it in there. ;-)

REPLY:

oldnasty@mindspring.com (Grinch) wrote:

>..."It is hard to see the effects of increasing income
>inequality in how people actually live."
>~~
>
>NY Times, 11/7/02
>ECONOMIC SCENE
>By Virginia Postrel, 
>
>~~ quote~~
>
.....

>In a paper titled "Does Income Inequality Lead to Consumption
>Inequality?" Professor Perri and Dirk Krueger, an economist at
>Stanford, look at the distribution of consumption from 1972 to 1998.
>The article, now a National Bureau of Economic Research working paper,
>can be downloaded at 

http://pages.stern.nyu.edu/~fperri/research.htm.
>...
>
>"We wanted to see whether this rise in income inequality had in fact
>given rise to an increase in consumption inequality," Professor
>Krueger said. "We were fairly surprised that it hadn't."

.....
>
>It is hard to see the effects of increasing income inequality in how
>people actually live...
>~~~

Hi,

So if the greater incomes for the top quintile during the last 
30 years has not been spent mostly on consumption, where did it go?

I remember in the early 1980's when Reagan/Roth-Kemp was proposing 
a reduction in the top income tax bracket rates, one argument for 
it was that if people with higher incomes could keep more of what 
they earned, they would invest more and this would benefit people 
of lower incomes.

This idea was denounced as "Trickle Down". 

If they didn't spend most of it on consumption, did they 
invest it?

                     ,,,,,,,
_______________ooo___(_O O_)___ooo_______________
                       (_)
jim blair (jeblair@facstaff.wisc.edu) Madison Wisconsin
USA. This message was brought to you using biodegradable
binary bits, and 100% recycled bandwidth. For a good time 
call:   http://www.geocities.com/capitolhill/4834