Kevin Hassett from AEI has published a new study that looks at consumption inequality over time rather than income inequality. Consumption is, of course, a better measure of economic welfare than income because individuals are able to smooth consumption over their lifetimes. Most (responsible) people spend less than they earn while working and much more than they earn during retirement. Income measured would tend to overstate, then understate their economic welfare. A person who earns a lot one year and little the next (quite common -- see June 7, 2012 entry) is not really rich one year and poor in successive years. Another reason is that income measures do not take taxes or transfer payments into account. A person who is paying a high level of taxes is not nearly as well off as income might indicate, and a person receiving assistance payments (unemployment, social security, food stamps) is not nearly as bad off.
What Hassett found was that consumption inequality has not increased nearly as much as income in the last 30 years, and has actually fallen in the latest economic contraction (income inequality also always widens during expansions and contracts during recessions).
Year Ratio of Top Quintile to Bottom Quintile
1984 3.8
1994 3.7
2004 4.7
2010 4.4
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