Monday , December 16 2019
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Another reason why income is misleading

Summary:
I often argue that income is a very misleading measure of economic well being. In many cases, I am pushing back against claims made by progressives regarding economic inequality. But I don’t have any ax to grind on the inequality issue, and today I’ll use the same argument in support of a “progressive” argument. Bloomberg recently presented this graph, showing the average amount of consumption by people in each income decile: I do not know if this graph is accurate—it seems implausibly flat to me.  However, for the sake of argument let’s assume it is accurate.  Even in that case it would present a highly misleading picture of consumption inequality, for exactly the same reason that income inequality is a misleading concept.  Here’s Bloomberg: One kind of inequality

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I often argue that income is a very misleading measure of economic well being. In many cases, I am pushing back against claims made by progressives regarding economic inequality. But I don’t have any ax to grind on the inequality issue, and today I’ll use the same argument in support of a “progressive” argument.

Bloomberg recently presented this graph, showing the average amount of consumption by people in each income decile:

Another reason why income is misleadingI do not know if this graph is accurate—it seems implausibly flat to me.  However, for the sake of argument let’s assume it is accurate.  Even in that case it would present a highly misleading picture of consumption inequality, for exactly the same reason that income inequality is a misleading concept.  Here’s Bloomberg:

One kind of inequality that’s invisible in the spending chart is inequality within each income decile. The numbers shown are averages, and within each decile are households spending more and less. This form of inequality doesn’t separate high from low earners or people with more wealth from those with less. Instead, it distinguishes high-spending households in all income deciles from low-spending households in all income deciles.

In the lowest-income decile, for example, are students with little or no income, who nevertheless spend a lot supported by parents, student loans and prior years’ savings. This pulls up the spending average, disguising the troubles of a minimum-wage, part-time, no-benefits worker trying to support a family.

If you are a progressive then you are probably skeptical of this graph, and rightfully so.  It’s good to be skeptical, but also important to understand why the graph is misleading. It is misleading because income is not a good measure of economic well being.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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