Consumption as a Measure of Wealth

It's amazing how far removed economists are from the day-to-day living of those they treat as objects. In a New York Times editorial, W. Michael Cox and Richard Alm claim that we are measuring wealth all wrong. Rather than measure income by an abstract idea like income, we should instead look to the concretes of consumption. Yes, that's right, your wealth is determined by your consumption. Cox and Alm claim that, if you look at it, many low income people are drawing from bank accounts, from insurance policies, etc., which are not classified as taxable income; and therefore, they live much better than the data suggest. They claim the the prices of goods have fallen, and so we now see more homes with goods like VCRs and cellular telephones. The difference, they claim, is merely that the wealth have a larger capital flow and put more money into savings. In fact, they say, the gap between wealthy and poor on the new consumption-wealth concept is only a 4:1 difference between the poorest 5th and the wealthiest 5th, not the 15:1 we get when we use taxable income.

The authors conveniently talk about an unclear "some" families who are mired in poverty and a "many" of the bottom 5th who are retirees and don't draw a large percentage of taxable income. I just love the fact that they ground their entire argument in statistics they admit they do not know! They say quite clearly, "While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status." It must be very unexact for them to not even say "approximately 10%+/-2%." They can only say "many", "some", and our hopeful or pessimistic wishes are to see the glass half empty or half full. I do not have data, but I am skeptical that the vast majority of retirees are drawing off their local bank savings accounts and Roth IRAs (Roth IRA's were only established 10 years ago), or that they great "many" are all drawing thousands a year from insurance policies. Furthermore, Cox and Alm say nothing of the inordinate amount of credit (student loans or credit cards -- also not taxable income, at least insofar as I am aware of) that causes the type of discrepancies between income and spending they show for the bottom fifth or that is now leading to the demise of many people through the housing deflation.

Their argument about retirees is suspicious, because we would have to assume that the "many" retiree households that account for the $10,000 in non-taxable income also account for the $10,000 a year average in taxable income (their annual dividends from their IRA bond funds?). If this is the case, are we to assume that the poorest fifth of the country is living well? According to their own graph, the "bottom fifth" of consumption households do not have a clothes dryer, internet, dishwasher or computer at home. And if we look at the bottom 10%, you can eliminate the microwave, VCR, air conditioning, television, clothes washer, and cell phone. And, what does it say if I have utilities that I pay on credit cards that I can never pay in full and fall deeper and deeper into debt until the Repo man comes for my car and the Bank for my home? I'm wealthy because I have a cell phone, even if it means I'll have nothing in 5 years?

So let's take another step back…why does consumption alone even count as wealth? I think it is a difficult enough case to make to say that income could count for wealth (if wealth is to account for some form of human flourishing), unless we are to make the trivial identity that income and assets are wealth, but to make the step to say that your income is a poor assessment of wealth and that we should rather merely look at consumption while ignoring debit and bad credit? I am no economist (and that fact will be obvious to those of you who are), but this all sounds very thin and slippery to me, and I think it only attempts to hide the real problem: more and more people are falling into the shackles of a wage-slavery whose master is debt.

How this ever made it into The Times is beyond me (not that I think The Times is the vanguard or truth and reason, but I did think it to have more integrity than this -- my mistake, obviously). I know this is an op-ed piece, but if these people claim to be a senior writer and another a chief economist for the Fed, shouldn't they be using citations, or are we just to talk you on their authority and The Times and never have the resources to double check your reasoning? An op-ed piece from the Fed should read like an academic argument, not like some propaganda hack making ungrounded conjecture. Of course, this is all in true keeping with every testimony I've seen by Bernanke, who speaks in mythical conjecture and what a friend of mine calls "strategic ambiguity" (like the "many"). It's a lot of hand-waving. I've been poor. I had to draw food stamps, visit the food bank, and stop driving because I couldn't afford gas (and almost couldn't afford the bus). Let me tell you: I certainly didn't feel wealthy. Sure, I had a computer (I built myself from parts and on which I ran Linux, so costs were very low), a cell phone (my only phone), and a washer and dryer (I shared a rented house with 5 others). But I didn't know if I was going to have enough groceries. Sure, I could sell the washer and dryer, maybe sell the computer, but that would hold me off for all of about 3 weeks. Then what? Then I'm back in the same situation, but without all my "wealth." I think if Cox and Alm ever tasted poverty and knew how much more complex it is than their neat equations that use people as mathematical objects, they would find their argument as implausible as I do.

I would love comments from people who have strong backgrounds in economic and social theory to help me out by developing any of these thoughts or pointing out weaknesses in them (I know not a lot of people read this [yet], so I admit I am largely talking to myself).