With a recession on everyone’s mind, there’s been talk of enacting certain “protectionist measures” to soften its blow on the economy. Responding to this scuttlebutt, W. Michael Cox and Richard Alm, two Federal Reserve economists, wrote an op-ed in the NY Times to highlight the “perversity” of these suggestions and to defend almighty globalization. They begin by claiming that as a whole, Americans aren’t that economically unequal (oh really?) because the economic gap between the haves and have-nots in America has been based on the “wrong measurement of financial well-being” (i.e.. income), and should instead be based on measures of “consumption”. Already I was feeling uneasy about where their argument was going, but I decided to go ahead and take a trip down their economic rabbit hole. Join me won’t you? According to their data from a 2006 BLS report, the top fifth of American households earned $149,963 and the bottom fifth earned $9,974 in 2006, a gap of 15 to 1. But if we look at consumption expenditures, the top households spent $69,863 and the bottom fifth spent $18,153, narrowing that gap to 4 to 1 (note: according to the authors, expenditures were twice the amount of earnings because of access to “non-taxable income”). Although Cox and Alm argue that certain characteristics of this demographic (retired or in between jobs) are not indicative of their “long-term financial status,” I beg to differ. A closer look at the BLS data reveals that the highest level of education attained by 47% of the lowest economic quintile is a high school degree. Compare that to 83% of the top quintile holding college degrees. It is generally understood that education is a solid indicator of “long-term financial status.” In fact, the Census Bureau calculated that over the course of their lifetimes, high school graduates earn $1.2 million. College graduates earn almost twice that much. Cox and Alm note that ‘richer’ households are larger, averaging 3.1 people versus 1.7 people in the bottom fifth. Using that statistic, they conclude that the difference in per capita consumption between rich and poor narrows to approximately 2 to 1. However, they conveniently fail to mention that there are twice as many “earners” in the top fifth than in the bottom fifth. They defend their argument by saying that almost all American families now have refrigerators, stoves, color TVs, telephones, etc, thanks to globalization that has brought down the price of goods, and that this wasn’t always the case. And though they acknowledge that globalization “may” have also brought down the income of the average American – it’s balanced out by the fact they can all buy $40 DVD players. Based on their calculations, they conclude that the poor are actually “less poor” thanks to globalization… The chutzpah of these guys! Their arguments are filled with faulty assumptions, the inaccurate use of data, and ultimately, offensive conclusions. The suggestion that the level of consumption equals financial well-being is simply not true. Using savings, debt, and homeownership as indicators of financial well-being may be the status quo, but it is the most accurate means we have. It is foolish, if not offensive, to suggest that the bottom quintile is "less poor" when the authors know full well that the average American has net negative savings for the first time since the Great Depression, growing credit card debt, and that more than 2 million families are facing foreclosure of which a majority are low-income people of color. You cannot make an argument about globalization and financial well-being without considering who benefits and at what cost. We must be aware that globalization is not just about markets (as many would like to believe), but also about people, politics, power, inequity, and access. When indicators of financial well-being are reduced to levels of consumption, we are asked to view Americans merely as consumers, not as citizens – among whom, racial gaps exist. The very same data that Cox and Alm cited, shows that Blacks and Latinos make up 31% of the bottom fifth, and only 12% of the top. What does this say about the equality of financial well-being in the United States? Even if you believe that the poor are in fact “less poor,” you can’t ignore the fact that more people of color are poor. Financial well-being cannot be measured by our ability to buy cheap jeans, TVs, or microwaves. It must be defined by the ability of all, regardless of race, to have a surplus (i.e. savings), after fulfilling basic needs such as housing, food, health care and education. If we allow our financial well-being to be measured only by consumption, we relinquish our responsibility as citizens to hold institutions accountable for enacting policy that enables, promotes, and secures real financial well-being, and not the Gucci kind.
You’re Not What You Spend
By Victor Corral Feb 18, 2008