[ExI] the formerly rich and their larvae...

[Damien Broderick]

At 12:55 AM 2/10/2008 -0500, Rafal Smigrodzki  wrote:

>. What I said was something along the lines "The rising
>tide lifts all boats"....right? I didn't say that the fraction of
>wealth controlled by workers is higher, I only said that the total
>wealth grows, and is enjoyed by an ever larger fraction of the
>population. That this is true, even in the bastardized,
>over-regulated, stunted kind of capitalism we have in America, is
>self-evident.

A piece on this in today's NYT:


You Are What You Spend

    * <http://www.nytimes.com/2008/02/10/opinion/10cox.html>
By W. MICHAEL COX and RICHARD ALM
Published: February 10, 2008

WITH markets swinging widely, the Federal Reserve 
slashing interest rates and the word “recession” 
on everybody’s lips, renewed attention is being 
given to the gap between the haves and have-nots 
in America. Most of this debate, however, is 
focused on the wrong measurement of financial well-being.

It’s true that the share of national income going 
to the richest 20 percent of households rose from 
43.6 percent in 1975 to 49.6 percent in 2006, the 
most recent year for which the Bureau of Labor 
Statistics has complete data. Meanwhile, families 
in the lowest fifth saw their piece of the pie 
fall from 4.3 percent to 3.3 percent.

Income statistics, however, don’t tell the whole 
story of Americans’ living standards. Looking at 
a far more direct measure of American families’ 
economic status ­ household consumption ­ 
indicates that the gap between rich and poor is 
far less than most assume, and that the abstract, 
income-based way in which we measure the 
so-called poverty rate no longer applies to our society.

The top fifth of American households earned an 
average of $149,963 a year in 2006. As shown in 
the first accompanying chart, they spent $69,863 
on food, clothing, shelter, utilities, 
transportation, health care and other categories 
of consumption. The rest of their income went largely to taxes and savings.

The bottom fifth earned just $9,974, but spent 
nearly twice that ­ an average of $18,153 a year. 
How is that possible? A look at the far 
right-hand column of the consumption chart, 
labeled “financial flows,” shows why: those 
lower-income families have access to various 
sources of spending money that doesn’t fall under 
taxable income. These sources include portions of 
sales of property like homes and cars and 
securities that are not subject to capital gains 
taxes, insurance policies redeemed, or the 
drawing down of bank accounts. 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.

So, bearing this in mind, if we compare the 
incomes of the top and bottom fifths, we see a 
ratio of 15 to 1. If we turn to consumption, the 
gap declines to around 4 to 1. A similar 
narrowing takes place throughout all levels of 
income distribution. The middle 20 percent of 
families had incomes more than four times the 
bottom fifth. Yet their edge in consumption fell to about 2 to 1.

Let’s take the adjustments one step further. 
Richer households are larger ­ an average of 3.1 
people in the top fifth, compared with 2.5 people 
in the middle fifth and 1.7 in the bottom fifth. 
If we look at consumption per person, the 
difference between the richest and poorest 
households falls to just 2.1 to 1. The average 
person in the middle fifth consumes just 29 
percent more than someone living in a bottom-fifth household.

To understand why consumption is a better 
guideline of economic prosperity than income, it 
helps to consider how our lives have changed. 
Nearly all American families now have 
refrigerators, stoves, color TVs, telephones and 
radios. Air-conditioners, cars, VCRs or DVD 
players, microwave ovens, washing machines, 
clothes dryers and cellphones have reached more than 80 percent of households.

As the second chart, on the spread of 
consumption, shows, this wasn’t always so. The 
conveniences we take for granted today usually 
began as niche products only a few wealthy 
families could afford. In time, ownership spread 
through the levels of income distribution as 
rising wages and falling prices made them 
affordable in the currency that matters most ­ 
the amount of time one had to put in at work to 
gain the necessary purchasing power.

At the average wage, a VCR fell from 365 hours in 
1972 to a mere two hours today. A cellphone 
dropped from 456 hours in 1984 to four hours. A 
personal computer, jazzed up with thousands of 
times the computing power of the 1984 I.B.M., 
declined from 435 hours to 25 hours. Even cars 
are taking a smaller toll on our bank accounts: 
in the past decade, the work-time price of a 
mid-size Ford sedan declined by 6 percent.

There are several reasons that the costs of goods 
have dropped so drastically, but perhaps the 
biggest is increased international trade. Imports 
lower prices directly. Cheaper inputs cut 
domestic companies’ costs. International 
competition forces producers everywhere to become 
more efficient and hold down prices. Nations do 
what they do best and trade for the rest.

Thus there is a certain perversity to suggestions 
that the proper reaction to a potential recession 
is to enact protectionist measures. While foreign 
competition may have eroded some American 
workers’ incomes, looking at consumption broadens 
our perspective. Simply put, the poor are less 
poor. Globalization extends and deepens a 
capitalist system that has for generations been 
lifting American living standards ­ for 
high-income households, of course, but for low-income ones as well.

W. Michael Cox is the senior vice president and 
chief economist and Richard Alm is the senior 
economics writer at the Federal Reserve Bank of Dallas.