There’s an often-quoted statistic that the ratio between the average incomes of the richest and poorest quintiles of Americans is 15 to 1. Earlier this year I stumbled over some research (“You Are What You Spend”) indicating that there is less to that difference than meets the eye. According to the authors, the difference in actual annual spending (as opposed to annual income) falls to 4:1, apparently because lots of people have sources of spendable cash that don’t show up as annual income (asset sales, securities not subject to capital gains taxes, insurance policy redemptions, and so forth).
But it gets better. If you adjust for size of household, the consumption ratio between richest and poorest quintiles drops to 2.1:1. They note that the average person in the middle income quintile consumes just 29% more than the average person in the lowest quintile. American spending patterns look dramatically more egalitarian than the raw numbers on income distribution would suggest. What the heck is going on here?
On these numbers, it doesn’t sound like being rich actually buys you a lot. OK, you get to save a lot of money for the future, while poor people live paycheck to paycheck and spend a significant fraction of their income on debt service. That’s significant. There are other ways to quarrel with this analysis, too; averaging over quintiles arguably underweights inequality at the extreme top and bottom ends of the distribution.
Still, that 2.1:1 figure is pretty startling. That gives us a factor of 6 difference between income spread and consumption spread over at least 80% of the income distribution, which suggests that something is operating that drastically equalizes Americans’ consumption power. And some other papers that I found by googling for “consumption inequality” actually back this up with different lines of evidence. The second and third I read noted that while U.S. wage inequality has increased significantly since 1970, consumption inequality has not. Both attribute this to the buffering effect of consumer credit on wage volatility.
I think the authors of “You Are What You Spend” are on to something more basic, though. There simply isn’t much stuff left that is so expensive that rich people can buy it but poor people can’t. This is true even for classic rich-person luxury goods. Proles buy wedding diamonds in strip malls. Caviar is no big deal; I know a woman who has carried it as backpack rations becuse the food-value-to-weight ratio was so good, which might sound like a rich-kid story until I tell you she’s a calligrapher who makes a somewhat precarious living doing piecework. And I know a non-wealthy programmer who recently bought himself an airplane.
More prosaically, look at what “poor” people have. Refrigerators. Cars. Televisions. Cell phones. Computers. I wrote about this in 2003 in an essay Mobilizing the Poor and Other Delusions. In that essay I was arguing that the goods consumption of all Americans above homeless drug addicts on the SES scale is so high as to make “poverty” a term that cannot meaningfully be applied in the U.S. Not if you’ve lived, as I have, in places where they have the real thing.
The data on consumption spreads demonstrate something else: not just that “poverty” is a silly word to use in the U.S., but that the degree of “inequality” we have here barely moves the needle off the peg on the historical misery meter.
The authors of “You Are What You Spend” explain this mainly by noticing that consumer goods have plummeted in price while rocketing in quality. Basically, everything is cheap now. Even with the recent spike in the price of oil, for example, Americans spend less on gasoline in constant dollars than they did in 1971. Food, clothing, housing, and other basics also cost drastically less than they did as recently as my teenage years, continuing a 150-year trend. Rates of home ownership are at an all-time high, and can be expected to continue increasing despite the current mortgage flap.
Heck, in 1928 food was so expensive that “a chicken in every pot” was a presidential campaign slogan. That’s right: chicken was a luxury good. If you find that bizarre and hard to believe, wake up. You just learned something about how wealthy you are.
The authors of “You Are What You Spend” get the first-order consequences right; the cheaper consumer goods get, the more the consumption gap between rich and poor will tend to vanish even if income inequality is flat or rising. Having lots of pictures of dead presidents matters less when you only need a relative few of them to live comfortably.
A more interesting question is: why is this happening, and can it be expected to continue?
At this point the authors of “You Are What You Spend” handwave vaguely in the direction of free markets. They’re not wrong — of course the reason we can buy cheap food and clothes and electronics is because of market-driven innovation, price competition rewarding efficiency of production, economies of scale, yadda yadda yadda.
But I think there’s a more fundamental and often missed cause, one that leads to strong predictions once you notice it. It’s what Bucky Fuller called “ephemeralization”, the substitution of design information for material and energy costs. Consider, for example, the difference between a computer in 1950 — a multi-ton behemoth — and a laptop today. The laptop uses design information to substitute ounces of silicon and plastic for thousands of pounds of steel, glass, and rare earths. This substitution has a ripple effect through all the transport, energy, and opportunity costs associated with producing and using computers.
This suggests that we can expect the consumption gap between rich and poor to continue closing — regardless of what income inequality does — as long as we can continue finding cleverer ways to arrange atoms. Or optimize supply chains. Or write risk-spreading financial instruments. Or, to anticipate one objection, find cheaper ways to make synthetic fuel from genetically tailored algae (algae genomes are design information, too).
The vanishing consumption gap has political consequences as well, but I’ll save those for another post.