Explaining Southern California's economy

Why we should worry less about income inequality and focus on consumption

Consumption U.S.

AEI

Per-capita real consumption for both the bottom and top income quintiles has been trending up. AEI economist argue that this is more important than income inequality.

I had another great conversation with Aparna Mathur of the American Enterprise Institute last week (we last talked about a worrying "labor mismatch" in the U.S.). AEI is generally regarded as a conservative think tank, but regardless of your politics, it's been putting out some interesting research lately, and Mathur is an excellent explainer when it comes to labor and tax issues.

With Kevin Hassett, also of AEI, she's authored a new paper, titled "A New Measure of Consumption Inequality." Here's a sample:

Economists have widely acknowledged that consumption is a better measure of economic welfare than income. In general, individuals are better able to smooth consumption rather than income over their lifetimes, making consumption a more informative indicator in the study of inequality. Unlike income, consumption remains relatively steady throughout life since individuals borrow during years with low income and save in high-income years. Using consumption as the relevant measure of inequality, most studies conclude that, contrary to popular belief,inequality has remained fairly steady over the past thirty years. Our study retains the focus on consumption inequality and arrives at a similar conclusion. 

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Do the math: Find out if you're in the '1 percent'

Occupy LA

Eric Richardson / blogdowntown

Those participating in Occupy Los Angeles march toward City Hall.

Ah, the Wall Street Journal. It serves capitalism, but it's also a newspaper, so it wants to jump on trends. Add some nifty, number-crunching online technology to that and you get this calculator, which will swiftly tell you just where you fall in the U.S. income distribution

Give it a try! But don't get hung up on income! Remember that much of the top 1%'s wealth comes from capital gains, not wage income. So you might be looking pretty good as a household if you bring in $200,000 per year and rank in the 94th percentile. But remember that you're then taxed at the 28 percent IRS rate, while a true 1%er — which I define as a member of the U.S. financial elite, making money from money rather than from labor — is seeing their capital gains taxed at 15 percent.

There are plenty of people in the U.S. who think they're rich, but they aren't. And even if they're in the 1% as set by earnings ($506,000 annually), the gulf between you and a 1%er who makes the same off less heavily taxed investment and divident income is vast.

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A brave new world for getting and spending

New York City Prepares For Direct Hit By Hurricane Irene

Mario Tama/Getty Images

Declining incomes plus frugal shoppers equals a whole new ball game for retailers.

Are we starting to see some kind of paradigm shift in the way people earn and spend? I'm far from sure, but in the last week and a half, I've seen a few signs that's something's afoot. Median household income has evidently declined since the end of the recession, while consumers have reduced their spending — and may not increase it any time soon.

Reuters Felix Salmon offers a quick summary of a some U.S. labor data data now being processed by Sentier Research. You can easily see what the really troubling thing is: "In dollar terms, median household income is now $49,909, down $3,609 — or 6.7% — in the two years since the recession ended. It was as high as $55,309 in December 2007, when the recession began."

This is why the "recovery" feels like anything but. Meanwhile, the Wall Street Journal took a look at the new frontier of frugality:

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