CONSCIENTIOUS VERSUS CONSPICUOUS CONSUMPTION

Consumption is the sole end and purpose of all production. ~ Adam Smith 

Any American knows personal spending on goods and services is the lifeblood of our economy. The statistic that economists universally trot out to emphasize personal consumption expenditures’ pre-eminence is that it represents 70% of our nation’s GDP. In the first quarter of 2020, this statistic was 69.5% of real GDP; close enough for a lot of jazz, and spending. In dollar terms, that’s $13.2 trillion or $39,800 on a per capita basis. In April, consumption declined a whopping 13.4%, in large part due to Sheltering-in-Place and related orders that have curbed consumers’ and business’ behavior to restrict the spread of the coronavirus. This is why the recession was well underway in April.

Progressives and others have argued these government restrictions have unduly hurt lower-income people and have increased inequality. Income and wealth inequality has gradually grown for a quite a while. The pandemic has added to this trend. Income inequality has been strengthened by consumption inequality, because it’s not conscientious enough according to a recent commentary in the New York Times.

Although income inequality has risen, no economist or policy-maker can authoritatively say what level of inequality is best. Should it be 18% lower? No one knows, other than it’s too high now. And because inequality is now acknowledged to appear in so many different guises, there’s no broadly-agreed upon policy remedy. Thinking just about unequal income or wealth distribution is passé. Only a decade or so ago, economists thought instituting more progressive income taxes (in the economic sense) and higher estate/inheritance taxes could effect a reduction in inequality.

No longer. Inequality has simply become too complex and multi-faceted. Its complexity exasperates the policy dilemma of resolving it. I counted 25 different types of inequality that have been mentioned in the media during the past few years. Beyond traditional income and wealth inequality, everything from geography (urban v rural) and criminal justice to education, library fines and the pandemic are wrapped in inequality flags.

A key ingredient in any inequality assessment is its measurement, particularly of how rich, wealthy people are defined. The 2011 Occupy Movement popularized the “we are the 99%” slogan, and correspondingly defined “the 1%” as The Rich. The Nobel-laureate economist Joseph Stiglitz wrote an influential article in the May 2011 issue of Vanity Fair that talked about the harmful effects of the 1%ers’ disproportionately large ownership of society’s wealth and resources. For the past decade the top 1% of income earners has become an unofficial standard for defining the richest Americans, sometimes supplemented by using a thinner slice,  the top 0.1%, for the really, really richest people.

The recent NYT commentary about inequality characterized the rich in a much broader fashion, not the top 1%, but the top 25% (quartile) of the income distribution. The story concentrates on inequality in consumption rather than income per se. A household’s consumption is positively and strongly related to their income (in econo-speak, it’s their disposable, after-tax income). Economic studies have shown for decades that higher-income households directly spend more on consumption than lower-income ones, but proportionately less, relative to their income.

If you’ve taken Econ 101 you might ever-so-vaguely remember that once upon a time, economists fervently debated how to explain household consumption patterns. Now we debate other, usually more exotic economic behaviors. We use the term “average propensity to consume” (APC) to measure what percent of your income you spend on consumption versus savings (non-consumption). If you spend $800 of your $1000 monthly disposable income on consumption, your APC is 80%. Research by the San Francisco Federal Reserve indicates that the APC of households with the lowest 10% income is 36% greater than that with those with highest 10% income; the APC of the lowest 10% is 25% greater than that those with the highest 25% income.

The NYT analysis castigates rich, wealthy people for not spending enough of their income to keep low-wage workers fiscally healthy. The authors criticize their broadly-defined quartile of the richest people for not consuming conscientiously enough.

Thorstein Veblen, who created the term “conspicuous consumption” in his radical 1899 book The Theory of the Leisure Class, would be delighted. The Rich’s consumption patterns, especially the conspicuous ones, have been disparaged (and covertly envied) for over a century. Nevertheless, the NYT study authors’ criticism doesn’t seem to care as much about whether The Rich spend conspicuously – say buying a Porsche 911 GT1. They care whether The Rich’s consumption is conscientiously appropriate in benefiting low-wage workers.

The differences in adjusted gross income (AGI) needed to be in the top 25% versus the top 1% are stark. The top 25% needs at least an AGI of $77,372; the top 1% needs $437,404, 5.5x more AGI. For perspective, the 2019 US median household income was $63,030, just 22% less than the top 25%ers’ minimum $77,372 AGI.

Who believes $77,372 is a rich household’s income? No one. It’s true the tippy top of the top 25%ers are indeed very rich, but this quartile of income distribution is very broadly defined, by definition and the lower half includes folks who usually aren’t considered very rich. For this reason, using the overly-broad top 25% to characterize The Rich is flawed. There’s way too many not-rich folks in this segment, at least 20% too many, more likely 24% too many.

Why do the authors use this expansive, quartile-based definition of rich – and not something more suitable, like the top 1%? No rationale is provided. Back to consumption.

Early in their commentary the reader is introduced to both the victims and the villains, “The recession has crushed this kind of work [Low-wage labor done by The Workers, who are servers and staff in Manhattan restaurants around Lincoln Center.], in particular: service jobs that depend directly on the spending — and the whims — of the well-off.” The authors directly blame the well-off, aka The Rich, for this economic crushing due to their lack of consumption spending.

Curiously, the authors do not mention several other factors that have magnified small business workers’ woes during the covid crisis. First, there’s no mention that all restaurants throughout New York and elsewhere have been closed for sit-in dining for months due to the coronavirus. Nationally, one in five small businesses have closed down. Second, that some truly rich folks (the top 1%ers, not the 25% richest) have departed NYC for other locations, and thus aren’t consuming anything in the Big Apple. Interestingly, thousands of young, probably un-rich people (but some maybe in the lower reaches of the top 25%) are also leaving NYC because of the pandemic and its associated costs. Third, that richer people are more likely to consume goods and services via online services, including (shudder) Amazon. Thus the top 25%ers’ expenditures at small businesses during covid-19 may have shifted online and outside of some “small businesses.” Businesses have been rapidly adopting online sales, that now represent 11.8% of total US retail sales, in order to stay in business. Only 11.8%? The online proportion seems much larger given the media’s focus/hype about online sales.

The authors state that the top 25% of income-earners have disproportionately not returned to their full pre-covid “rich consumption” patterns at small businesses, and that’s causing severe the problems for The Workers. However, no income group’s consumption has fully recovered to pre-covid levels. The “top-middle 25%ers’” spending at small businesses has also fallen but that reduction merits no apparent alarm. It’s hard to imagine that The Workers care much at all where their income comes from. Whether it’s dollars from rich, middle-class or other customers isn’t likely a concern. The Workers only care they are being paid with legal tender, not who hands it to them.

According to the story, by April Fools Day people at every income level drastically and quickly dropped their consumption expenditures at small businesses between 35% to over 40%; the top 25%ers had the most decrease. After mid-April when the first stimulus checks started arriving, small business revenue (SBRev) started to gradually rise in fits and starts. By June 1, the top-middle 25%ers had increased their portion of SBRev to where it was only 16% below that of March; SBRev attributed to top 25%ers was 26% down from March.

The authors’ vegan beef about The Rich is a relative one, not absolute. Their criticism focuses on this 10% difference (26% v 16%) in the top 25%ers’ SBRev recovery gap compared to the top-middle 25%ers’. The story faults these rich folks, who earn as little as $77,372, for not spending more of their income to help The Workers. The authors argue that conscientious consumption – whereby consumers spend their money to benefit low-wage workers – will reduce inequitable consumption. The authors believe The Rich haven’t gotten this message. Thus, consumption by The Rich, who haven’t lost their jobs like The Workers, have devastated low-wage workers, who “count on high-income people spending money.”

The authors’ believe The Rich should make consumption decisions on the degree to which their dollars will help low-wage workers. It sounds worthy, but oh my. Following their novel precept of conscientious consumption, before I decide where to purchase mouthwash, I should conscientiously learn how many low-wage workers are employed at CVS, Amazon, Target, Walgreens and, of course, the locally-owned mouthwash stores, and hopefully also get some understanding about how my mouthwash purchase will specifically benefit these workers at each business. I expect the number of consumers who would use this rationale for conscientiousness would, at most, be the proportion of folks who are now publicly wearing masks in South Carolina, Oklahoma or Montana – all states suffering from significant increases in coronavirus cases.

My bet is that low-wage workers in small businesses, like all workers in all businesses, are counting on everyone ramping up spending their money on goods and services, not just those who are rich. Castigating nearly 35 million households for not sufficiently consuming to conscientiously help low-income laborers is a fool’s errand.

Instead, how about biting a large, legislative bullet and, after November, significantly raising the federal minimum wage from the appalling $7.25/hr that was set 21 years ago, so at least 21 states’ minimum wages would be increased.

Getting out of this horrible recession will take the rich, as well as  you, me and everyone else raising their consumption for whatever we want. The more the merrier.