NCPA - National Center for Policy Analysis


February 18, 2008

With 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, say W. Michael Cox, senior vice president and chief economist and Richard Alm, senior economics writer, both with the Federal Reserve Bank of Dallas.

Looking at household consumption (a far more direct measure of American families' economic status), one finds  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, say Cox and Alm:

  • The top fifth of American households earned an average of $149,963 a year in 2006.
  • 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? 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, say Cox and Alm.

Source: W. Michael Cox and Richard Alm, "You Are What You Spend," New York Times, February 10, 2008.

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