THE AFFLUENT POOR:

The Wealth Inequality Mirage (Diana Furchtgott-Roth, 10/07/10, Real Clear Markets)

A more meaningful measure of inequality comes from an examination of spending. On Wednesday the Labor Department presented 2009 data on consumer spending, based on income quintiles, or fifths. This analysis shows that economic inequality has not increased, contrary to what the levelers contend.

Differences in per-person spending from the lowest income fifth to the highest are not dramatically different from 20 years ago. These measures of spending show less inequality than do measures of income. [...]

The Labor Department data, which are published every year, track spending by income group. Spending is vital because it determines our current standard of living and our confidence in the future. It shows how much purchasing power Americans have. The usual pretax measures of income, on which most inequality studies are based, don't show how much purchasing power some Americans have because they omit other benefits, and so don't provide an accurate measure of purchasing power inequality.

Further, income quintiles have different demographic characteristics, so comparisons of quintiles can be misleading. In 2009, households in the lowest fifth had an average of 1.7 people, and in half these households there were no earners. The highest fifth, however, had 3.1 persons per household, with 2.0 earners.

Household size at the bottom has been shrinking faster than at the top, adding to a false perception of inequality. Over the past 20 years, the size of households in the bottom quintile has declined by 5.6% and the middle quintile by 3.8%, whereas the size of the top-quintile household has been unchanged. This is due not only to the increased longevity of today's seniors, but also to the higher numbers of divorced couples and single-parent households.

Calculating spending on a per-person basis (these are my calculations, from the official data) produces comparable measures. The average annual spending for a household in the lowest quintile was $21,611, or $12,712 per person. In contrast, the average spending for a household in the top quintile was $94,244, or $30,401 per person.

On a per person basis, the new Labor Department numbers show that in 2009 households in the top fifth of the income distribution spent 2.4 times the amount spent by the bottom quintile. That, Professor Reich might note, was about the same as 20 years ago. The top quintile spent 1.8 times what the middle quintile spent per person. And that ratio has not been increasing.

On a per person basis, those in the bottom group spent 2.8% less in real terms in 2009 than in 2008 due to the recession. In contrast, those in the top quintile spent 0.6% more, and those in the middle quintile spent 0.7% more.

But compared with 1989, the big winners are the lowest-income group, which spent 9.1% more per person in constant dollars. In contrast, the highest group spent 2.6% more, and the middle group increased its spending by 1.1%.

Income and spending do not tell the whole story about how well Americans are doing. A higher percentage of low-income Americans own their homes free of mortgage debt than do upper-income Americans. Twenty-six percent of households in the lowest income group and 31% in the next-to-lowest group owned their homes debt- free in 2009, compared to 27% in the middle quintile and 18% in the top quintile. There are more seniors in the lower two quintiles, and many have paid off their homes.