You Are What You Spend
By W. MICHAEL COX and RICHARD ALM
The New York Times - Published: February 10, 2008
By W. MICHAEL COX and RICHARD ALM
The New York Times - Published: February 10, 2008
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With markets swinging widely, the Federal Reserve slashing interest rates and the word “recession” on everybody’s lips, renewed attention is being given to the gap between the haves and have-nots in America. Most of this debate, however, is focused on the wrong measurement of financial well-being.
It’s true that the share of national income going to the richest 20 percent of households rose from 43.6 percent in 1975 to 49.6 percent in 2006, the most recent year for which the Bureau of Labor Statistics has complete data. Meanwhile, families in the lowest fifth saw their piece of the pie fall from 4.3 percent to 3.3 percent.
Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.
The top fifth of American households earned an average of $149,963 a year in 2006. As shown in the first accompanying chart, they spent $69,863 on food, clothing, shelter, utilities, transportation, health care and other categories of consumption. The rest of their income went largely to taxes and savings.
The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? A look at the far right-hand column of the consumption chart, labeled “financial flows,” shows why: those lower-income families have access to various sources of spending money that doesn’t fall under taxable income. These sources include portions of sales of property like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts. While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status.
So, bearing this in mind, if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.
Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1. The average person in the middle fifth consumes just 29 percent more than someone living in a bottom-fifth household.
To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cell phones have reached more than 80 percent of households.
As the second chart, on the spread of consumption, shows, this wasn’t always so. The conveniences we take for granted today usually began as niche products only a few wealthy families could afford. In time, ownership spread through the levels of income distribution as rising wages and falling prices made them affordable in the currency that matters most — the amount of time one had to put in at work to gain the necessary purchasing power.
At the average wage, a VCR fell from 365 hours in 1972 to a mere two hours today. A cell phone dropped from 456 hours in 1984 to four hours. A personal computer, jazzed up with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours to 25 hours. Even cars are taking a smaller toll on our bank accounts: in the past decade, the work-time price of a mid-size Ford sedan declined by 6 percent.
There are several reasons that the costs of goods have dropped so drastically, but perhaps the biggest is increased international trade. Imports lower prices directly. Cheaper inputs cut domestic companies’ costs. International competition forces producers everywhere to become more efficient and hold down prices. Nations do what they do best and trade for the rest.
Thus there is a certain perversity to suggestions that the proper reaction to a potential recession is to enact protectionist measures. While foreign competition may have eroded some American workers’ incomes, looking at consumption broadens our perspective. Simply put, the poor are less poor. Globalization extends and deepens a capitalist system that has for generations been lifting American living standards — for high-income households, of course, but for low-income ones as well.
W. Michael Cox is the senior vice president and chief economist and Richard Alm is the senior economics writer at the Federal Reserve Bank of Dallas.
Vocabulary
Swinging: changing location by moving back and forth - Synonyms: swing, vacillation
Slashing: cutting
interest rates: taxas de juros (easier to explain in Portuguese)
the haves and have-nots: expression meaning “Os que tem e os que não tem” – “Os ricos e os pobres” (easier to explain in Portuguese)
gap: A space between objects or points
measurement: The act or process of ascertaining dimensions, quantity, or capacity
Meanwhile: The intervening time, at the same time
However: In spite of a preceding event or consideration: all the same, nevertheless, nonetheless, still, yet. Informal still and all. Idioms: be that as it may.
household consumption: use of goods and services – (Gastos domésticos)
taxable income: The taxes (Impostos) paid over the amount of money received during a period of time in exchange for labor or services, from the sale of goods or property, or as a profit from financial investments
capital gains taxes : a tax on capital gains – (Impostos sobre ganho capital)
redeemed: Past Tense of redeem - to extricate from an undesirable state: reclaim, recover, rescue, salvage (neste context significa premio pago por Empresas Seguradoras)
drawing down: retiradas bancárias - (easier to explain in Portuguese)
mired: involved
It’s true that the share of national income going to the richest 20 percent of households rose from 43.6 percent in 1975 to 49.6 percent in 2006, the most recent year for which the Bureau of Labor Statistics has complete data. Meanwhile, families in the lowest fifth saw their piece of the pie fall from 4.3 percent to 3.3 percent.
Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.
The top fifth of American households earned an average of $149,963 a year in 2006. As shown in the first accompanying chart, they spent $69,863 on food, clothing, shelter, utilities, transportation, health care and other categories of consumption. The rest of their income went largely to taxes and savings.
The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? A look at the far right-hand column of the consumption chart, labeled “financial flows,” shows why: those lower-income families have access to various sources of spending money that doesn’t fall under taxable income. These sources include portions of sales of property like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts. While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status.
So, bearing this in mind, if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.
Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1. The average person in the middle fifth consumes just 29 percent more than someone living in a bottom-fifth household.
To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cell phones have reached more than 80 percent of households.
As the second chart, on the spread of consumption, shows, this wasn’t always so. The conveniences we take for granted today usually began as niche products only a few wealthy families could afford. In time, ownership spread through the levels of income distribution as rising wages and falling prices made them affordable in the currency that matters most — the amount of time one had to put in at work to gain the necessary purchasing power.
At the average wage, a VCR fell from 365 hours in 1972 to a mere two hours today. A cell phone dropped from 456 hours in 1984 to four hours. A personal computer, jazzed up with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours to 25 hours. Even cars are taking a smaller toll on our bank accounts: in the past decade, the work-time price of a mid-size Ford sedan declined by 6 percent.
There are several reasons that the costs of goods have dropped so drastically, but perhaps the biggest is increased international trade. Imports lower prices directly. Cheaper inputs cut domestic companies’ costs. International competition forces producers everywhere to become more efficient and hold down prices. Nations do what they do best and trade for the rest.
Thus there is a certain perversity to suggestions that the proper reaction to a potential recession is to enact protectionist measures. While foreign competition may have eroded some American workers’ incomes, looking at consumption broadens our perspective. Simply put, the poor are less poor. Globalization extends and deepens a capitalist system that has for generations been lifting American living standards — for high-income households, of course, but for low-income ones as well.
W. Michael Cox is the senior vice president and chief economist and Richard Alm is the senior economics writer at the Federal Reserve Bank of Dallas.
Vocabulary
Swinging: changing location by moving back and forth - Synonyms: swing, vacillation
Slashing: cutting
interest rates: taxas de juros (easier to explain in Portuguese)
the haves and have-nots: expression meaning “Os que tem e os que não tem” – “Os ricos e os pobres” (easier to explain in Portuguese)
gap: A space between objects or points
measurement: The act or process of ascertaining dimensions, quantity, or capacity
Meanwhile: The intervening time, at the same time
However: In spite of a preceding event or consideration: all the same, nevertheless, nonetheless, still, yet. Informal still and all. Idioms: be that as it may.
household consumption: use of goods and services – (Gastos domésticos)
taxable income: The taxes (Impostos) paid over the amount of money received during a period of time in exchange for labor or services, from the sale of goods or property, or as a profit from financial investments
capital gains taxes : a tax on capital gains – (Impostos sobre ganho capital)
redeemed: Past Tense of redeem - to extricate from an undesirable state: reclaim, recover, rescue, salvage (neste context significa premio pago por Empresas Seguradoras)
drawing down: retiradas bancárias - (easier to explain in Portuguese)
mired: involved
poverty: pobreza (easier to explain in Portuguese)
retirees: One who has retired from active working life – (aposentados)
bearing this in mind: expression: “Tendo isto em mente” - (easier to explain in Portuguese)
narrowing: To make smaller or narrower: constrict, constringe
edge in: Work into a limited space or time; move gradually or hesitantly; insert
stoves: a kitchen appliance used for cooking food – (fogão)
take for granted: take to be the case or to be true; accept without verification or proof - synonyms: assume, presume
niche: nicho (easier to explain in Portuguese)
retirees: One who has retired from active working life – (aposentados)
bearing this in mind: expression: “Tendo isto em mente” - (easier to explain in Portuguese)
narrowing: To make smaller or narrower: constrict, constringe
edge in: Work into a limited space or time; move gradually or hesitantly; insert
stoves: a kitchen appliance used for cooking food – (fogão)
take for granted: take to be the case or to be true; accept without verification or proof - synonyms: assume, presume
niche: nicho (easier to explain in Portuguese)
wealthy families: rich families
ownership: The fact of possessing or the legal right to possess something: dominion, possession, proprietorship, title
purchasing: buying
jazzed up: phrasal verb: to make more interesting; enliven
toll: A fixed amount of money charged for a privilege or service: charge, exaction, fee
Thus: (used to introduce a logical conclusion) from that fact or reason or as a result - synonyms: therefore, hence, thence
Enact: To make into law
ownership: The fact of possessing or the legal right to possess something: dominion, possession, proprietorship, title
purchasing: buying
jazzed up: phrasal verb: to make more interesting; enliven
toll: A fixed amount of money charged for a privilege or service: charge, exaction, fee
Thus: (used to introduce a logical conclusion) from that fact or reason or as a result - synonyms: therefore, hence, thence
Enact: To make into law
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