Politics & Policy

Of Growth and Gaps

The growth of consumption by the middle class is more significant than the relation of this growth to that of the rich.

The New York Times took us to task Tuesday in an editorial titled “Consumption Gap.” The editorial insinuated that an article we wrote in October 2006 for National Review has been refuted. That insinuation is false.

#ad#Over the past few years, most of the mainstream media have consistently characterized the current U.S. economy as rewarding the rich at the expense of everyone else. This characterization rose to a fever pitch a few months back, when the latest Census numbers suggested that the median citizen has actually seen his income shrink this decade. An avalanche of claims emerged that the man in the middle is worse off than he was in 2000.

This evidence has always struck us as counterintuitive because the National Income and Product Accounts data tell a story of robust growth in income and consumption. If the middle guy is worse off today than he was in 2000, then the people at the top must have been eating a whole bunch of hamburgers.

Moreover, the surveys that purport to show that incomes are shrinking are less reliable than the NIPA data, which are based on actual spending and tax-return data. If you ask someone how much he will make this year, his answer will be less accurate than what it says on his tax return. If you ask him how much he spent, his answer will be less accurate than a comprehensive compilation of his receipts.

These observations moved us to construct an alternative measure of how the middle is doing, based on the NIPA data. The first results of that effort were published in National Review in October 2006. We found that the best available estimate of consumption by those in the middle suggested that their consumption had been increasing at a very healthy rate this decade. Since consumption is perhaps the best measure of a person’s welfare, this evidence undermined significantly the notion that we now live in a “rich-take-all” society.

The key point of our essay was simply that consumption was growing, which presented a much different picture of the economy from the populist portrayal based on the Census data. We noted in passing, however, that the data even suggested that consumption by those with middle incomes actually grew faster than consumption by those at the top.

After our paper was released, new source data for 2005 were released. For the most part, the new source data confirmed our earlier calculations. We previously had estimated that consumption growth for the middle was 2.0 while it was 1.9 for the top. The new data suggested that these numbers changed to 1.8 and 2.1. Our main point, that consumption has been growing in the middle, not shrinking, is still true.

The ordering of the top and the middle, though, has been reversed. This and other points were raised in a recent article about our piece by economists Jared Bernstein and Jason Furman. In a collegial private exchange with them, we worked together to iron out the facts about the latest numbers, and our differences in opinion about methodology. Their paper reflects a broad agreement between us about how to crank their numbers, and it documents, as did our article, that consumption is growing, not shrinking, for the middle class.

Despite the rhetoric, a logical individual should identify their piece, for the most part, as a useful replication of our work. In its editorial, the Times chose a different path. It led with the statement that “Conservative economists often argue that wage stagnation and income inequality are not as big a threat to Americans’ standard of living as they’ve been made out to be. In their view, how much one buys — rather than how much one makes — is a better measure of economic well-being.”

That is clear enough, and a solid characterization of our argument. The editorial goes on, however, to focus on the reversal of the ranking of the consumption growth of the middle and the rich, and then seems to imply that this reversal undoes our whole argument as summarized in the lead. That is poppycock. If consumption is growing, then those who say that welfare in the middle is stagnating have some explaining to do. The question of stagnation, the main focus of our article, does not depend on how well the rich are doing.

We should add that one should not get too excited about the relationship between the growth numbers for the top and the middle, which is why we relegated this consideration to an aside. Statistically speaking, 2.0 and 1.9 are not significantly different from one another. Nor are 1.8 and 2.1. That should not surprise even the reader who knows little about statistics. If adding just one year of data can change a result, then neither the previous nor the revised result is robust enough to draw firm conclusions from.

That lack of significance does not deter the Times, however, from arguing boldly that “the gathering evidence shows that growing income inequality has fostered consumption inequality as well. It’s time for policy makers to acknowledge that such inequality is an economic and social ill — and to start finding cures.”

We beg to differ. The best measure of how someone is doing is how they are doing, not how they are doing relative to someone else. Consumption by the middle may have grown slightly less quickly than consumption by the rich, given the latest data, but grow it did.

One wonders if the same would have been true if policymakers had accepted the spin that our economy has changed, and had crafted “cures” for a malady of questionable seriousness.

– Kevin Hassett is director of economic-policy studies at the American Enterprise Institute . Aparna Mathur is a research fellow at the AEI.

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