Jonathan Fisher's presentation at the 2014 American Economic Association Annual Conference. The presentation explores why income inequality diverged from consumption inequality during the Great Recession, finding that those with the biggest decrease in consumption were the highest income individuals, while those at the bottom of the income distribution had falls in consumption that were smaller and closer to the drop in income. Our results suggest three main factors associated with the observed patterns. First, property values dropped by a larger percentage for high income households, a negative housing wealth effect led these households to cut back consumption. Second, consumer confidence fell by a larger percentage for higher income households. Finally, the transfer and tax policies boosted the income of the lower income quintiles, preserving their consumption so that it did not fall by as much as it would have otherwise.

1. Exploring the Divergence of
Consumption and Income Inequality
During the Great Recession
Jonathan Fisher
David Johnson
Timothy Smeeding
Any opinions and conclusions expressed herein are those of the authors and do not
necessarily represent the views of the U.S. Census Bureau. The research in this paper
does not use any confidential Census Bureau information.

2. The Consumer Expenditure (CE) Surveys
• 1984-2011 Interview Surveys
• All four-quarter consumer units disaggregated to the
individual using an equivalence scale.
• Weights adjusted to account for attrition across the
four quarters.
• Adjusted to 2010$ using CPI-U-RS.
• We impute income for missing observations and
estimate taxes for everyone (Fisher, Johnson, and
Smeeding, 2013; econofish.wordpress.com)

3. Defining Income and Consumption
• Disposable Personal Income (DPI): income from
employment, investment, government transfers, and
inter-household transfers of money plus tax credits
and food stamps, less income taxes and property
taxes.
• Consumption: Outlays for non-durables, plus
imputed rent, service flow from vehicles, and the
dollar value of free or subsidized housing.

4. Inequality using Gini Coefficient (2006=100)
110
105
100
95
90
Disposable Income
85
Consumption
80
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010

5. The difference between consumption
and income is seen in the NIPA/PCE data too
12,000
1.00
11,000
Disposable Personal Income
0.98
Billions of Dollars
10,000
0.96
9,000
Personal Consumption Expenditures
8,000
0.94
7,000
0.92
6,000
Average Propensity to Consume
0.90
5,000
4,000
0.88
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

6. Staircases going in opposite directions:
Percent Change by Respective Quintile, 2006-2011
0.0%
Q1
Q2
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
-12.0%
-14.0%
-16.0%
-18.0%
-20.0%
Disposable Income
Consumption
Consumption by Income Quintile
Q3
Q4
Q5

7. Staircases going in opposite directions:
Percent Change by Respective Quintile, 2006-2011
0.0%
Q1
Q2
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
-12.0%
-14.0%
-16.0%
-18.0%
Disposable Income
Consumption
Consumption by Income Quintile
-20.0%
Q3
Q4
Q5

8. Staircases going in opposite directions:
Percent Change by Respective Quintile, 2006-2011
0.0%
Q1
Q2
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
-12.0%
-14.0%
-16.0%
Disposable Income
Consumption
-18.0%
-20.0%
Consumption by Income Quintile
Q3
Q4
Q5

9. What are the major forces
of the Great Recession?
•
•
•
•
•
High and persistent unemployment
Large and persistent housing market crash
Large but short-term financial market crash
Loss in consumer confidence
Policy response that increased transfers and tax
credits aimed at lower half of distribution

10. Percent Change in Employment Income
by Income Quintile, 2006-2011
0%
Q1
Q2
Q3
Q4
-5%
-10%
-15%
-20%
-25%
-30%
High and persistent unemployment
Q5

11. Percent Change in Consumption
by Income Quintile:
Homeowners versus Renters (2006-2011)
0%
Q1
Q2
Q3
-5%
-10%
-15%
Homeowners
-20%
Renters
-25%
Large and persistent housing market crash
Q4
Q5

12. Percent Change in Property Value
by Income Quintile, 2006-2011
0%
Q1
Q2
Q3
Q4
-5%
-10%
-15%
-20%
-25%
-30%
Large and persistent housing market crash
Q5

13. Percent Change in Consumption by Income Quintile:
Securities Owners vs Non-Owners, 2006-2011
15%
Securities owners
10%
Non-owners
5%
0%
Q1
Q2
Q3
Q4
-5%
-10%
-15%
-20%
-25%
Large but short-term financial market crash
Q5

14. Percent Change in Consumer Confidence
by Income Quintile, 2006-2011
(Survey of Consumers)
0%
Q1
Q2
Q3
-5%
-10%
-15%
-20%
-25%
-30%
Loss in consumer confidence
Q4
Q5

15. Back-of-the envelope counterfactuals
1) How would consumption inequality have changed if the
change in consumption equaled the change in income by
quintile?
2) How would income and consumption inequality have
changed if there were no transfer and tax policy
response?
3) Housing wealth effect -- how would consumption
inequality have changed if the change in consumption
equaled the change in property value by income quintile,
using a standard housing wealth elasticity (0.06)?

16. Staircases going in opposite directions:
Percent Change by Respective Quintile, 2006-2011
0.0%
Q1
Q2
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
-12.0%
-14.0%
-16.0%
Disposable Income
Consumption
-18.0%
-20.0%
Consumption by Income Quintile
Q3
Q4
Q5

17. Counterfactual change in consumption inequality assuming
change in consumption is equal to the change in income by
income quintile
106
104
102
100
98
96
Consumption
94
Counterfactual #1
92
Income
90
2006
2007
2008
2009
Counterfactual #1
2010
2011

18. Back-of-the envelope counterfactuals
1) How would consumption inequality have changed if the
change in consumption equaled the change in income by
quintile?
2) How would income and consumption inequality have
changed if there were no transfer and tax policy
response?
3) Housing wealth effect -- how would consumption
inequality have changed if the change in consumption
equaled the change in property value by income quintile,
using a standard housing wealth elasticity (0.06)?

19. Mean Government Transfer Income
by Disposable Income Quintile ($)
$2,500
$2,000
$1,500
$1,000
$500
$0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Policy response

20. Counterfactual change in C&Y inequality assuming no
increase in transfer benefits or tax credits
106
104
102
100
98
96
Income
Inc Counterfactual #2
Cons Counterfactual #2
Consumption
94
92
90
2006
2007
2008
2009
Counterfactual #2
2010
2011

21. Back-of-the envelope counterfactuals
1) How would consumption inequality have changed if the
change in consumption equaled the change in income by
quintile?
2) How would income and consumption inequality have
changed if there were no transfer and tax policy
response?
3) Housing wealth effect -- how would consumption
inequality have changed if the change in consumption
equaled the change in property value by income quintile,
using a standard housing wealth elasticity (0.06)?

22. Counterfactual change in consumption inequality assuming
standard housing wealth effects by income quintile
106
104
102
100
98
96
Consumption
Cons Counterfactual #3
DPI
94
92
90
2006
2007
2008
2009
Counterfactual #3
2010
2011

23. Why might have income and consumption inequality
diverged during the Great Recession?
• It was generated by a drop in consumption at the top
of the income distribution.
– Loss in housing wealth was higher for high income
households.
– Drop in consumer confidence was higher for high
income households.

24. Tax and transfer changes were effective
• Tax and transfer policies during the Great Recession:
– helped lower income inequality;
– helped preserve consumption in the bottom half of
the distribution.
• How will the removal of these more generous
benefits affect inequality going forward?
– Cut in SNAP
– Removal of UI benefit extension
– Return of full payroll tax