Carpe Diem

Consumption Equality 7X > Than Income Equality

Dallas Federal Reserve Bank VP/Chief Economist Michael Cox was featured in Drew Carey’s video “Living Large: America’s Middle Class” (see CD post here).

In today’s NY Times, Cox and co-author Richard Alm have an excellent article “You Are What You Spend,” which addresses some of the Dobbsian (Lou) myths of “Two Americas,” the “Disappearing Middle Class,” the “War Against the Middle Class,” etc.

According to Cox and Alm, the problem with these myths is that they focus on the wrong measure of financial well-being: Income statistics, which don’t accurately measure 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.”

For example, “The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? 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.”

Consider these statistics comparing the top fifth (richest 20%) and the bottom fifth (poorest 20%), measured by household income (see chart above, click to enlarge):

Household Income Ratio: 15 to 1
($149,963 top 20%, $9,974 bottom 20%)

Household Consumption Ratio: 3.84 to 1
($69,863 top 20%, $18,153 bottom 20%)

Persons Per Household: 1.82 to 1
(3.1 top 20%, 1.7 bottom 20%)

Consumption Per Person: 2.1 to 1
($22,536 top 20%, $10,678 bottom 20%)

Bottom Line: Even though households in the top fifth earn 15 times more income per household than the bottom fifth, those households in the top quintile consume only twice as much per person as the bottom fifth. Or, we could say that income inequality is 7 times greater than consumption inequality, or consumption equality is 7X greater than income equality.

Living standards are determined by consumption, not income, so the obsession about income inequality is a distraction from the fact that consumption, and therefore living standards, are distributed much more evenly than we think. After all, both low-income and high-income households own many of the same conveniences: color TVs, cell phones, microwave ovens, washers, dryers, VCR/DVD players, iPods, computers, etc.
Carpe Diem

Lotteries vs. Auctions for College Classes

From The Chronicle of Higher Education (subscription required):

For its humanities requirement, MIT asks students to rank the courses they’d most like to attend. If your No. 1 class is not in demand, then you’re in. But if that class is overenrolled, a computer program chooses randomly among all the students who ranked that class as their first choice.

Wharton auctions spots to its M.B.A. students, allowing them to bid for their classes. They don’t use real money; instead, students are each given 5,000 points when they enroll and 1,000 more for every credit they earn. An average course might sell for a few hundred points while the most sought-after ones can top 10,000.

Serban Suvagau bought a seat in a finance course this semester for 200 points. A couple of days later, he sold it for 900 points. Mr. Suvagau, a second-year student, wasn’t really trying to make a profit. He just changed his mind. But he’s made some shrewd moves in the past, and he began this semester with a solid 7,800 points.

Mr. Suvagau thinks an auction is more fair and efficient than, say, a lottery, but the process can still be annoying, especially if you get outbid. “Complaining about the auction is a big pastime,” he says.

It’s common knowledge among students which classes sell for a premium and which can be picked up for a song. Professors with more star power command higher prices. It also has to do with how many seats are available. If you restrict your class to 10 students, your price will most likely rise.

Carpe Diem

Nordic Welfare States Are Poorest in Europe

In Oslo, library collections are woefully outdated, and public swimming pools are in desperate need of maintenance. News reports describe serious shortages of police officers and school supplies. When my mother-in-law went to an emergency room recently, the hospital was out of cough medicine. Drug addicts crowd downtown Oslo streets, but applicants for methadone programs are put on a months-long waiting list.

Even the humblest of meals – a large pizza delivered from Oslo’s most popular pizza joint – will run from $34 to $48, including delivery fee and a 25% value added tax. In Norwegian pubs, anyone rich or insane enough to order a gin and tonic is charged about $15 for a few teaspoons of gin at the bottom of a glass of tonic.

Groceries aren’t cheap, either. Every weekend, armies of Norwegians drive to Sweden to stock up at supermarkets that are a bargain only by Norwegian standards. And this isn’t a great solution, either, since gasoline (in this oil-exporting nation) costs more than $6 a gallon.

A study by international accounting firm KPMG reported that when disposable income was adjusted for cost of living, Scandinavians were the poorest people in Western Europe.

Read more of the NY Times article “We’re Rich, You’re Not. End of Story,” (from April 17, 2005)

Carpe Diem

Global Migration: Destination USA and Europe

From WorldMapper, International Immigrant Destinations (country size on map represents relative immigration inflow)

Net Flow of Global Migration from the NY Times (click to enlarge).
Nearly 190 million people, about 3% of the world’s population, lived outside their country of birth in 2005. The NY Times presents a look at the flow of people around the world in this Global Migration presentation.

Carpe Diem

Emerging Markets to the Rescue? Recurring Theme

Emerging Markets Rev Up Toyota Sales–Toyota’s profit for the fourth quarter jumped 7.5% from the previous year as booming sales in China, Africa and South America offset declining US sales and a stronger yen, the Japanese car maker reported yesterday.

Overseas Snack Sales Help PepsiCo Meet Expectations–The snacks business registered double-digit growth in Russia, the Middle East, Turkey and India. The beverage business had double-digit increases in the Middle East, China, Brazil, Argentina, India and Russia. PepsiCo reported a quarterly profit on Thursday that met analysts’ expectations.

Carpe Diem

Why Mint the Penny When It Costs 1.675 Cents?

CBS 60 MINUTESShould the U.S. Mint continue to produce pennies and nickels whose metal content is worth more than their face value? Why mint the penny, when it costs $134 million to make $80 million worth of what most people consider nuisance coins (see chart above of rising copper prices)?

The situation irks Edmund Mony, the director of the U.S. Mint, who would like Congress to find a solution. “You can’t sustain losses on pennies and nickels and expect to be a viable organization that benefits the American people,” says Moy.

Is that really a bureaucrat talking!

Watch “60 Minutes” this Sunday night at 7 p.m. on CBS for the story.