Wednesday, February 27, 2008

What kind of inequality should we be concerned about?

There has been some discussion on the blogosphere on an NYT op-ed by Cox and Alm on consumption versus income inequality. Good points were made by Lane Kenworthy with some discussion by Andrew Gelman and Mark Thoma.

Consumption is constrained by income so if consumption inequality is lower than income inequality seems to imply that the constraint at the lower end is as binding as we would like to believe. If we were to transfer all of the top quntile income to the bottom quintile, the bottom quintile might consume only just as much as the top quintile leading to an equalization in consumption inequality. The article would like us to believe that this difference in consumption inequality is not all that much.

But what about the income less consumption i.e. savings? The rich are able to save more and hence would probably be able to consume more in the future than the poor when both are no longer working.

Perhaps the answer to the question in the post is that we should be concerned with neither income nor consumption but the present value of lifetime income and consumption (including bequests).

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