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There are 9 articles discussed 'behind the wall'. One of them is an article all by itself discussing a Manhattan Institute paper featured by John Mauldin this week in Thoughts from the Frontline.
Diana Furchtgott-Roth (F-R) argues that personal expenditures are a better measure of income disparity than trying to measure income directly. F-R correctly points out that there are distortions in the income numbers over the time span because of changes in the tax law that have encouraged movement of income from corporate returns to individual income returns and that has occurred predominately at higher income levels.
But there are distortions in the personal consumption expenditure numbers as well and F-R has not included them. One huge distortion that should be apparent comes from the level of personal debt which has exploded more than 4-fold over the 25 years studied. Adjusted for inflation (CPI) the increase is more than 1.6X.
The debt above includes mortgage debt, which was about $7.9 trillion for households at the beginning of 2012. See graph below from the New York Fed. Econintersect does not have an estimate for what portion of mortgage debt ended up adding to personal consumption expenditure (PCE), but some part certainly did. In what follows we will not consider any mortgage debt interaction with personal consumption.
The per captita household debt 01 January 2012 was more than $43,000, up from an inflation adjusted $26,500 in 1987. If we averaged the increase uniformly over the 25 years (obviously not a good estimate because the last 5 years have seen a decline) the increase in debt each year would have been near 4%, adjusted for inflation. But that includes mortgage debt and we must exclude some unknown portion of mortgage debt from our consideration of PCE. To repeat, in what we do here we are excluding all of it.
From the Fred data base we obtain a value for real disposable personal income at the beginning of 1987 of $5.7 trillion (2009 chained dollars), or adjusted to 2012 dollars, $6.3 trillion. From a 1987 New York Fed report (page 37) the ratio of consumer debt to disposable income was almost exactly 0.20 from 1966 through 1985; we will use that ratio for 1987.
This produces a 1987 consumer debt (mortgages excluded) of $1.3 trillion in 2012 dollars.
We have made the preceding calculations because we want to compare to the same analysis for personal expenditures. The data from the table above produces an average increase per year (calculated) of 0.4% (top quintile) and 0.5% (bottom). These amount to increases that would average in the range of $60-$70 a year for the bottom quintile and around $120-$130 for the top.
Now personal debt (sans mortgages) has grown from about $1.3 trillion to $3.4 trillion over the 25 years, which is from approximately $5,500 per capita in 1985 to about $11,000 in 2012, adjusted for inflation. That amounts to an average increase per year near 3% or about $240 ($160 in the first year increasing to $330 in the last*).
So the F-R paper has done a determination of income inequality by ignoring the elephant in the room: growth of debt. Household credit (without mortgages) increased between $200 and $500 most years from 1985 through 2012, an average around $240 a year.*
Increase in debt had a much greater impact on consumption than increase in income. The ratio is somewhere between 2x and 6x depending on how debt was acquired over the income quintiles and what year is examined.
* Of course there were five years where households were deleveraging (2008-2012) so the analysis will be considerably more complicated than just looking at 25-year averages.
Econintersect has not discovered a source of allocation of personal debt across the five income quintiles. Obviously that is needed to segregate effects of debt from income on consumption.
Readers: Please comment on this discussion before I talk with John Mauldin about it. If you see any errors I would like to know about them sooner rather than later. :-)
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