Kenworthy on Consumption and the Value of Savings

I’m immensely grateful to professors Kenworthy, Nye, and Anderson for such thoughtful, challenging replies to my initial contribution. I could spend days responding in detail to each essay — and I probably will! I’d intended to write a relatively short omnibus post touching on one or two points in each of the reaction essays, but in the interest of getting the informal blog discussion under way, I’m going go ahead and post my response to each essay separately as soon as I finish it.

First up: Lane Kenworthy!

I have argued that consumption is a better proxy for material welfare than income and that the consumption gap has widened much less than the income gap, if it has widened at all. So, I conclude, inequality in material welfare has not increased much. Kenworthy argues that I’m overlooking the value of accumulated wealth. Money in the bank, he says, widens our horizon of opportunity and these opportunities are valuable to us even if we do not take advantage of them. I agree entirely. But I still believe that, among standard economic measures, consumption is the best indicator of  individual’s or household’s real standard of living.

So what accounts for our disagreement? I’m not certain, but there seem to be two questions at issue. I think the fundamental question is: What are we trying to measure? The second question is: What’s the effect of savings on whatever it is we’re trying to measure?

I’ve been speaking variously, and probably somewhat carelessly, about “material welfare,” “real standard of living,” and “economic well-being.” Whether or not these terms mean precisely the same thing, I think people are generally talking about something along these lines when they’re talking about distinctively economic inequality. Whatever economic well-being is, it’s narrower and less comprehensive than overall well-being. Overall well-being might include such things as happiness, health, a sense of purpose, the development and exercise of certain human capacities, and more. I take it that specifically economic well-being has something to do with that part of overall well-being directly affected by the economic resources at our disposal, or at the disposal of our household. What we consider a sensible measure of economic well-being, then, is likely to turn on what we count as an economic resource and the weight we put on the various effects of these resources on our well-being.

So, for example, money in the bank, or in a mutual fund, is indisputably an economic resource. And I’m inclined to agree with Kenworthy that the peace of mind and sense of open opportunity that affords should be included in an accounting of economic well-being. But suppose I’ve invested a great deal in gaining skills greatly in demand in the labor market. Is my “human capital” an economic resource? Suppose I’ve got a stellar credit rating and so I could get access to a big line of credit with which I could do all sorts of things. My sense is that both human capital and reputational capital should count in much same savings does. I am, as a matter of fact, still in debt from graduate school. I certainly don’t worry about it, since I’m confident that I’ll come out way ahead in the end. But my “coming out ahead” is largely a matter of future consumption — a matter of what I expect to do with the money I’ll make. And it seems to me that the expectation of future consumption is a large part of the value of savings, or of the value of access to credit. So, while current consumption may be a bit misleading as a measure of an individual’s or household’s current economic well-being, aggregate measures that encompass people at all points of the life-cycle seem to me pretty likely to capture much of the value of savings, access to credit, and so on.

That said, I think nominal consumption remains a pretty rough measure of economic well-being. For example, the quality of public goods in a place certainly contributes to the standard of living of the people who live there. The quality of public goods and services here Iowa City is excellent — much better than in Washington, D.C. Public schools in Iowa are remarkably good. (Iowa consistently has one of the highest high-school graduation rates and one of the highest average standardized test scores in the United States, which is really remarkable when you think about it.) Basic cost-of-living issues aside, it seems pretty clear that both income and consumption measures badly underestimate the level of real consumption enjoyed most Iowans — especially low-income Iowans. Meanwhile, low-income Washingtonians likely have it rather worse than consumption surveys would indicate. It might be interesting to talk a bit how social scientists could correct for this sort of thing in their estimates of economic inequality.

Also from this issue

Lead Essay

  • In his lead essay, Will Wilkinson observes what he believes is a poor chain of reasoning: Income inequality is rising; it is also a measure of injustice. To fix this injustice, we should redistribute incomes. Wilkinson attacks this reasoning on several fronts: Income inequality is less important than consumption inequality, and consumption inequality is probably lessening. But if income inequality is a problem, it is so only as a symptom of a different problem: substandard schools, perhaps, or our high incarceration rate, or CEOs who conspire to overpay one another. Rather than redistributing income, we should identify the underlying problem and fix it directly. This may well lessen income inequality, and it will also fix an undoubtedly serious problem somewhere else in our society.

Response Essays

  • Lane Kenworthy argues that income inequality is indeed important, and that we should not be misled by the relatively reassuring data on consumption. Unconsumed income also adds to the quality of life enjoyed by the rich, even if that increase is still hard to measure. A more egalitarian society need not entail a radical social leveling, but it should entail better public services for the poor and the middle class.

  • John Nye adds several considerations to the mix: First, positional goods may make us feel more unequal — there are only so many “top ten” schools for our kids, only so many “best” views or neighborhoods. Yet, with rising incomes, more of us feel that we should be able to afford them, even as they slip further from our grasp. As we become more equal, we feel less equal. Second, one other effect of relative equality has been to erode the security formerly enjoyed at the very top of the economic pyramid. This security itself was a form of compensation, and executive salaries may be rising in recent years in part because executive security has fallen. And third, much of human inequality is not directly measurable in money at all. Differences in appearance, intelligence, ability, and the like are all real and may translate into economic inequality as well. Consideration of these elements is curiously absent from many discussions on inequality.

  • Elizabeth Anderson agrees with Wilkinson that the root causes of inequality are more troubling than inequality taken alone. But economic inequality is still a problem for two reasons: First, economic inequality of the sort we have today is not making the poor better off in absolute terms, but rather it is making them worse off. And second, economic inequality translates directly into inequality of political power, which in turn reinforces economic inequality. This is an unacceptable state of affairs.