Explaining Southern California's economy

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

Consumption U.S.


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. 


Inequality in America: The 'Great Divergence' explained

Sometimes, it's just so simple. What is the Occupy Movement protesting? That income and wealth gains have gone disproportionately to the top 1 percent. And how did this come about? Well, according to this recent paper from the San Francisco Fed, you can blame the "Great Divergence," which took place after the Great Convergence of the war years. And what caused the divergence? A failure of education:

Economists Lawrence Katz and Claudia Goldin argue that the educational system has failed to produce an adequate supply of skilled labor to keep up with the pace of technological change over the past 30 years. In contrast, remember that the Great Compression that took place in the early 1940s was essentially a reversal of this situation, where skilled labor was plentiful at a time when unskilled labor was in demand, flattening wages across the labor market. Today, employers are competing to hire highly skilled workers from a limited pool, creating a wage premium for those with better training and education; the result is the widening income gap across education groups. In addition, consider the impact of educational attainment on employability; in September 2011, the unemployment rate for those without a high school degree was 13 percent, but for those with a bachelor’s degree, the unemployment rate was 4.2 percent.


Tweet of the Day: Income inequality in New York...and Los Angeles!

Today's Tweet of the Day comes from @TheEconomist and refers to this post, which analyzes a metric of inequality known as the Gini coefficient as it relates to income distribution in the U.S.

That sounds technical, the but the upshot is that if you are close to zero on your Gini, you're very equal, whereas the closer you get to 1, the more unequal you are.

The most unequal place in the U.S., in terms of  income, is the New York area, at 0.501 (tied with Santa Fe, NM, but representing a much larger population, obviously). That's why Occupy Wall Street picked Lower Manhattan as its first protest site. Although you could also say that they picked it because...well, that's where, you know, Wall Street is.

I know, I know, you're shocked. But wait! LA is also pretty unequal — and not too far behind New York, at 0.483. The point is that the worst places in the U.S. for inequality are also the best places to make a lot of money. The question is, Are the populations in the these regions becoming hoplessly divided into haves and have-nots? And is there really anything that we can or want to do about it?