What About Spending Inequality?

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While Democrats and liberal think tanks have been raising the volume over the issue of growing income inequality, less has been said about spending inequality. Now, you're probably well aware that your investment banker brother-in-law spends more than you do–darn those fat year-end bonuses!–but that makes sense since he earns more than you do. But what's interesting is knowing whether or not his spending is growing relative to your spending. As it happens, the Labor Department has recently released its 2005 Consumer Expenditure Survey. Delving into the numbers, I compared consumer spending in 2001 vs. 2005, looking at spending by various quintiles. In 2001, per-person spending in the top 20 percent was $24,879 vs. $16,817 in the second quintile, $14,264 in the third quintile, and $12,041 in the fourth quintile. (Think of the second, third, and fourth groups as the broad middle class.) Next, I compared the 2001 numbers with the 2005 numbers.

The good news is that spending–adjusted for inflation–increased in all those groups, even though hourly earnings for production and nonmanagement workers were flat. (You can thank China for helping keep our interest rates low and supporting the housing market–and home equity loans.) But spending increased much faster for the top group, growing 4.8 percent vs. 2.8 percent for the second quintile, 1.1 percent for the third quintile, and just about half a percent for the fourth. As a result, the top group now spends 1.66 times more than the second quintile, for instance, vs. 1.47 in 2001. So not only is income inequality growing but spending inequality is, too.

But keep in mind that the economy is cyclical, and short-term data can create a misleading snapshot. After an economic slowdown–like the one in 2001–it may take a while for middle-class income gains to recover. After the 1990–1991 recession, median family income, according to the Census Bureau, fell from a high of $50,332 in 1989 to $47,578 in 1993. Income didn't surpass its old high until 1996. We might be seeing a similar phenomenon now. Median family income peaked again in 2000 at $55,647. In 2004, the last year for which data are available, income was $54,061, marking four straight years of decline.

But we might have turned a corner in 2006. Average hourly earnings are up 2.8 percent, adjusted for inflation, during the past year. A tight labor market should help keep those gains coming. Last week's solid job report is a good sign of that, as is today's Labor Department report showing that the layoff rate fell to 1.2 percent from 1.3 percent and the quit rate rose to 1.9 percent from 1.8 percent. As economist Robert Brusca of Fact and Opinion Economics explained in a research commentary: "Economists like this indicator because people do not quit a job unless they think they can do better (unless, of course, they really, really, really hate the boss). An increased quit rate is a sign of a more healthy economy."

As always, any questions can be E-mailed to me at jpethokoukis@usnews.com.