Do improvements in consumption equal improvements in economic well-being?

The image of poor individuals living large on government handouts is a powerful one that implicitly characterizes the poor as undeserving of assistance. The narrative of the Cadillac-driving “welfare queen” is perhaps the most well-known trope, but more recent articles on consumption trends have dismissed concerns about rising income inequality by focusing on what New York Times columnist Thomas B. Edsall terms “the hidden prosperity of the poor.”

The central thesis of this line of argument is perhaps best summarized by George Mason University economist Donald Boudreaux, whom Edsall quotes:

“[O]ur larger, more central, and most important point is that middle-class Americans are today far better off economically than they were 30 or 40 years ago, regardless of how their well-being today compares to that of rich Americans.”

This line of argumentation defines one of the primary characteristics of improved economic well-being as having access to better and more affordable goods and services than previous generations. As Kevin Hassett and Aparna Mathur write in the Wall Street Journal:

“[T]he access of low-income Americans—those earning less than $20,000 in real 2009 dollars—to devices that are part of the “good life” has increased [between 2001 and 2009]. The percentage of low-income households with a computer rose to 47.7% from 19.8% in 2001….

The percentage of low-income homes with air-conditioning equipment rose to 83.5% from 65.8%, with dishwashers to 30.8% from 17.6%, with a washing machine to 62.4% from 57.2%, and with a clothes dryer to 56.5% from 44.9%.”

The argument that the poor are somehow “doing okay” because they have access to air conditioners, time saving devices, and computers is a distraction from a larger discussion that is worth having, and ignores key issues underlying the consumption theory.

How do we conceptualize economic well-being?

The argument about consumption inequality versus income inequality points to a broader issue of how we conceptualize economic well-being. Should poverty be an absolute metric, defined as the ability to afford a set market basket of goods that is deemed minimally sufficient (i.e., the current U.S. federal poverty line)? (And, what is minimally sufficient? Should it be limited to what is necessary for basic human functioning, or should it be based on what it takes to be self-sufficient in a given society?) Or, should we use poverty metrics that are relative, such as the proportion of individuals earning less than 50% of median income?

Like any metric, both have strengths and weaknesses. Absolute metrics give us a measure of deprivation, while relative metrics provide a better picture of the potential for inequality to exert negative effects on overall societal well-being. As such, the choice of metric leads to different conversations about the consequences of poverty and how best to target public policies.

Are improvements in consumption equal to increased economic well-being?

While it may be true that low- and moderate-income households have access to certain goods and services previously out of their reach, the consumption thesis focuses on an absolute standard and ignores that consumption patterns are typically relative to changes in living standards. The definition of the “good life” is not static. Many of these items owned by low-income households, such as refrigerators for food storage and microwaves for cooking, are no longer considered luxuries, and other items, such as access to computers and corresponding computer skills, are often key to successful labor market entry.

Ultimately, while it is important that low- and moderate-income households have access to goods and services that improve their lives, that does not by definition translate into economic well-being. The proponents of the benefits of increased buying power for the poor fail to mention the source of this consumption financing. If consumption is maintained (or increased) primarily by reliance on borrowing (debt), this is a serious problem that has the potential to dramatically undermine both the short-term and long-term economic well-being of these households.

Compared to non-poor households, poor individuals and households spend a larger proportion of income on basic necessities and are less likely to own assets, such as a car or a house, and are less likely to have savings. In addition, low-income workers are significantly less likely than their higher earning counterparts to have access to workplace fringe benefits, such as health insurance and retirement accounts. Consequently, lower-income households often have no or limited capacity to weather financial emergencies.

If we consider economic well-being to entail being able to both afford day-to-day necessities and build savings for the future, then consumption alone fails to provide a full picture of economic well-being.