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Poor reasons for dismissing spending inequality evidence

Points 6 and 7 in our 21-point blog on inequality and poverty here asserted that consumer spending was generally a better indicator of living standards than current income.  On Motu research, it is also a better indicator of wellbeing.

On Victoria University professor John Creedy and Treasury’s Christopher Ball’s calculations, household spending inequality per adult equivalent in New Zealand in 2013 was no higher than in 1984. (See Figure 3 in their report.)

Inequality campaigner Max Rashbrooke is dismissive of such points.

First, he observes that lower income households may be running up debt by spending more than their disposable income. Yet the same households could not be doing that for decades and maintain their standard of living. The greater the proportion of income that is needed to service debt, the smaller the proportion available for maintaining living standards. Debt accumulation can’t be both enduring AND unsustainable. The chapter in our report on income mobility showed considerable upwards mobility for those starting in the lowest income deciles.

Even the case that borrowing can temporarily sustain consumer spending does not make disposable income a better measure of economic inequality. For a start the income measure also ignores the rising debt. More generally, disposable income can be expected to be a poorer indicator of sustainable living standards than spending for those whose incomes are temporarily high as well as those from whom it is temporarily low.  It should also be a poorer indicator for retirees who are running down retirement savings.

Regardless, Rashbrooke’s point does nothing to establish that differences in debt accumulation between 1984 and 2013 can explain Creedy and Ball’s findings.

Second, he argues that higher income households can spend less than their income because they can save.  Of course they can.  How else can they build up retirement savings? But again this was true in 1984 and in 2013 alike. Why dismiss consumer inequality measures on that account?

His third claim is that the OECD, IMF and World Bank don’t use the consumption measure “for these reasons” and “nor do any of the key international thinkers on inequality”.

Rashbrooke provides no evidence in support of the “for these reasons” claim. Given the weakness of his reasons, that is no surprise.

Limited availability of internationally comparable spending inequality statistics is a much more plausible reason for the greater prevalence of international income inequality statistics.

As for eminent thinkers, few would deny that Branko Milanovic qualifies for this description.  Here are some extracts from one of his World Bank research papers:

“But there is no agreement that “income” in global inequality studies should be income at all. Many people think that rather than income, one should look at consumption or expenditures as the true indicator of the standard of living.”

“What lends this debate an added importance in the case of global inequality is that in many countries household surveys ask income questions only, while in other countries they ask for both, or for expenditures only.”

“Although in the last few years, there has been a trend toward the use of consumption measures (not the least through the efforts of the World Bank and the influence it exerted on the choice of survey instruments in the former communist countries and Africa), we are still far from unanimity on this issue. In the study of global inequality based on the 1998 benchmark data, Milanovic (2005, p. 104) used 63 consumption instruments and 59 income instruments. This represents a significant increase in the number of consumption instruments compared with ten years before (80 income-based and 22 consumption-based distributions), but for some of the most important counties (like China) one still depends on income data alone. If a guess had to be ventured, it could be said that there is likely to be a tendency toward greater use of household per capita consumption as the welfare indicator.”

In short, household spending that is debt financed is not likely to be sustainable for many years, let alone for three decades. Rashbrooke provides no evidence that the OECD, IMF and World Bank are dismissive of consumer spending inequality measures where they are available, and no good reason why they would be dismissive. Of course they would also be open to looking at measures of income, debt and wealth inequality.

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