Inequality In Well-Being

by: House Of Debt

As we mentioned in our post yesterday, economists care much more about inequality in well-being rather than inequality in income or wealth. Data on well-being are more difficult to gather, but we discussed some evidence that inequality in consumption also increased from 1980 to 2010. Consumption directly affects the utility of an individual in most economic models. Income does not.

Here is some more evidence, with a particular focus on the last few years:

Aaron Cobet of the Bureau of Labor Statistics used information from the Consumer Expenditure Survey to plot the following chart, which measures the change in annual expenditures for the richest and poorest Americans between 2008 and 2012.

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As it shows, spending increased the most from 2008 to 2012 for the richest households in the United States. So stronger income growth for rich Americans from 2008 to 2012 has translated into stronger spending growth as well. A working paper by Barry Cynamon and Steve Fazzari shows similar results.

The chart above is consistent with this fantastic New York Times article written by Nelson Schwartz earlier this year. He reports that high-end hotels and casinos that target rich customers are doing much better than mid-scale hotels. Retailers aimed at the middle class, such as Sears (NASDAQ:SHLD) and J.C. Penney (NYSE:JCP), are suffering while high end retailers such as Nordstrom (NYSE:JWN) are doing great.

These are small data points and as researchers we prefer larger samples. But when the data are scarce, articles such as these can give us some hint of what is going on. We love this part:

"The post-recession reality is that the customer base for businesses that appeal to the middle class is shrinking as the top tier pulls even further away. If there is any doubt, the speed at which companies are adapting to the new consumer landscape serves as very convincing evidence. Within top consulting firms and among Wall Street analysts, the shift is being described with a frankness more often associated with left-wing academics than business experts. 'Those consumers who have capital like real estate and stocks and are in the top 20 percent are feeling pretty good,' said John G. Maxwell, head of the global retail and consumer practice at PricewaterhouseCoopers."

Another strategy in measuring well-being is to look beyond spending and toward measures of health. Life expectancy data are available, and they seem to tell a similar story. Annie Lowrey at the New York Times wrote a nice article detailing the growing gap in life expectancy between the rich and poor. She focuses on two countries in the mid-Atlantic, and she finds that the poor county has seen a decline in life expectancy for women of two years whereas the rich county has witnessed a rise of five years in life expectancy for women.

The Congressional Budget Office examined life expectancy in a 2008 report that uses a larger data set. As they write:

"Accompanying the recent increases [in life expectancy], however, is a growing disparity in life expectancy between individuals with high and low income and between those with more and less education. The difference in life expectancy across socioeconomic groups is significantly larger now than in 1980 or 1990."

Here is the key chart which shows the overall increase in life expectancy, and the difference in the rise between the rich and the poor:

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As they write:

"In 1980, the difference in life expectancy at age 65 between the highest and lowest socioeconomic groups was 0.3 years. By 2000, the difference had grown to 1.6 years. That increase in the gap equals more than 80 percent of the increase in overall average life expectancy at age 65 over that period."

Another way of saying this: the rise in life expectancy from 1980 to 2010 for people already 65 is driven almost entirely by the rich.

There has been a lot of attention on income and wealth inequality, and for good reason. But inequality in outcomes such as consumption and health are far more important. We've gathered some evidence here, but more is needed. The evidence so far suggests that inequality in well-being has tracked inequality in wealth and income closely.