The Gap Between America’s “Rich” and “Poor” - "You Are What You Spend"

Fact: The richest 20% of Americans earn 15 times the income of the bottom 20%.

Fact: The richest 20% of Americans only consume 4 times as much as the poorest 20%.

From the New York Times. (Click on Image to enlarge)

The Federal Reserve Economist who writes this piece for the NYT opinion piece claims that there is more to "inequality" than just income numbers. While before tax income of the top 20% is around $150,000, the poorest 20% earn only around $10,000. Clearly these numbers indicate an enormous income gap in America.

Concerning consumption, the poor consume an average of $18,000 on everything from food to housing to entertainment to transportation. The richest 20%, on the other hand, consume an average of only $70,000, less than half their before-tax income. The consumption gap is less than 4 to 1, compared to lower income households, not 15 to 1, as is the income disparity. When compared to the middle 20% of income earners, the consumption gap between them and the lowest 20% is only 2 to 1.

Should our standard of living be based on our income, or on our consumption? If it’s income, then there’s certainly a huge gap in standard of living between the rich and poor. But if we believe it’s consumption, then the gap is narrowed dramatically. The author claims the latter:

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 cellphones have reached more than 80 percent of households.

It turns out that in the last 50 years, while income inequality has increased, Americans in all income levels are all much richer that 50 years ago, on average. The combination of rising wages for the lowest classes and falling prices for many household products has lead to a dramatic narrowing in the “consumption gap” in America:

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 cellphone 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.

And to whom do we owe our thanks for the lower prices of all these great products? Globalization and trade, which increases wealth, and… yep you guessed it, China!

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.

Click on the graph above and have a look; you’ll be surprised at the revelations behind the numbers. It sure is a compelling argument; the gap between the richest and poorest Americans may not be as bad as the income numbers show!