International Herald Tribune Editorial - Consumption gap

International Herald Tribune Editorial - Consumption gap
Copyright by The International Herald Tribune
Published: December 12, 2006


Conservative economists often argue that wage stagnation and income inequality are not as big a threat to Americans' standard of living as they've been made out to be. In their view, how much one buys — rather than how much one makes — is a better measure of economic well-being.

In a recent article in The National Review, researchers at the American Enterprise Institute asserted just that, saying that when you look at how much the middle class is consuming, they're "even doing better than the upper crust."

Why make a fuss over other grim economic statistics if everyone manages to keep buying things?

Here's why. The assertion — that the middle class has out-consumed the "upper crust" during the Bush years — is false, the result of rosy assumptions that turned out to be wrong.

Researchers at two other think tanks, the Center on Budget and Policy Priorities and the Economic Policy Institute, reworked the figures, including newly available spending data for 2005. There is no dispute among the various researchers over the new findings. Over all, consumption is growing. But the growth is unbalanced, consistent with the wide disparity in wages and income that has characterized the Bush years.

Consumer spending by low-income households is way down since 2001. Over the same period, spending by high-income Americans has been robust, supported, in part, by generous tax cuts. In 2005, the top 20 percent of households made 39 percent of all consumer expenditures, the highest share since the government started keeping track in 1984.

The information on middle-income households is mixed, with some data showing a decline in their spending during the Bush era and some showing an increase. But there is no question that spending by the middle class has been weaker in the current economic expansion than in previous recoveries.

It would be nice if by some magic Americans could spend their way out of today's economic woes. But the gathering evidence shows that growing income inequality has fostered consumption inequality as well. It's time for policy makers to acknowledge that such inequality is an economic and social ill — and to start finding cures.