February 12, 2008

You Are What You Spend

Letter to the New York Times

A friend wrote the following letter.

To the editor:

W. Michael Cox and Richard Alm (“You Are What You Spend”, Feb. 10, 2008) do an admirable job of proving the very point they wish to skewer. Those of means, by the authors' very own measures, spend far less of their worth on what have come to be seen as life’s necessities. Moreover, using consumption as a surrogate for wealth is flawed logic; many of our society’s problems, whether related to health, economy, national security or environment, stem from our insatiable appetite. Equating consumption to wealth while ignoring savings and security is simply absurd.

I'm not sure what ticked off my friend, but it might have been this bizzare line:

Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.

By their own measures, the rich are getting richer and the poor are getting poorer:

It’s true that the share of national income going to the richest 20 percent of households rose from 43.6 percent in 1975 to 49.6 percent in 2006, the most recent year for which the Bureau of Labor Statistics has complete data. Meanwhile, families in the lowest fifth saw their piece of the pie fall from 4.3 percent to 3.3 percent.

Cox and Alm go from bizzare to absurd. First they inform us that

The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year.

and ask "How could this be?" Most of us immediately think, "Debt" as in credit cards, and "No Money Down" sales. But NOoooo. Cox and Alm inform us these poor people are splurging via

sales of property, like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts.

Most poor people don't have cars. They don't have bank accounts. They live paycheck to paycheck, getting ripped of by check cashers and payday loan sharks.

Then based on the foundation of that logic, we are given the not so brilliant conclusion of Cox and Alm:

if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1.

The logic is sick. Besides, anyone who is familiar with comparisons of rich and poor know that "income" is not the correct measure to use. The more proper measure is "wealth." Rich individuals often don't have, or need, "incomes." They live off the returns on investments, capital gains, which Cox and Alm point out is not counted as "income" and which is taxed at a lower rate than income (can you say, "the system is rigged by the wealthy?"). Furthermore, the rich accumulate wealth over time. The poor are lucky to have a job and live paycheck to paycheck, no accumulated wealth.

Cox and Alm should be ashamed of themselves, but I doubt they have any clue what shame is. There is a time honored solution for this. It's called the guillotine; some heads are going to roll unless people like Cox and Alm wake up and do something to narrow the wealth gap.

For those who are serious about the subject of wealth inequality, I direct you to Edward N. Wolff, economics proffessor at New York University. According to Wolff

The bottom 20 percent basically have zero wealth. They either have no assets, or their debt equals or exceeds their assets. The bottom 20 percent has typically accumulated no savings.[2]


The top 1 percent of families hold half of all non-home wealth. The richest 10 percent of families own about 85 percent of all outstanding stocks. They own about 85 percent of all financial securities, 90 percent of all business assets. These financial assets and business equity are even more concentrated than total wealth.

Mike, Dick: It's not about "income" or "consumption." It's about "wealth."

Let Cox and Alm, of the Dallas Federal Reserve, know how you feel by contacting the Community Affairs office:

Let Cox and Alm know that you think they need remedial education in "economics" by contacting the Dallas Federal Reserve Director, Economic Education and Special Projects Sherry Kiser:

Let the New York Times know your views too:

The Fellowship of the Pen lives.


1. New York Times, Opinions, You are What you Spend, W. MICHAEL COX and RICHARD ALM
Published: February 10, 2008.

W. Michael Cox is the senior vice president and chief economist and Richard Alm is the senior economics writer at the Federal Reserve Bank of Dallas. With "chief" economists like Cox, it's no wonder the US is facing a financial sector melt down.

2. The Multinational Monitor, The Wealth Divide: The Growing Gap in the United States Between the Rich and the Rest, Interview with Edward N. Wolff, May 2003 - VOLUME 24 - NUMBER 5.


Rick said...

Amen! We've been teaching the difference between wealth and income to our kids since they could understand the difference.

If you can develop yourself a positive cash flow, you can develop wealth. But as you say, that requires saving and investment, not consumption.

GDAEman said...

Like the old saying goes, "It takes money to make money."

I'm finishing up a video. Will share it with you soon.

Thanks for dropping by.