PAUL KRUGMAN: The rich spend differently from you and me

EDITOR'S NOTE: Paul Krugman is a New York Times columnist and also a distinguished professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography.

In a recent column I had a bit of fun with Donald Trump making an assertion that shows that he hasn’t flown commercial in a very long time — saying that America’s terrible airports make us look like “a third world nation:”

As it happens, a few days ago I flew into Newark Liberty International Airport’s new Terminal A, which drove home a point that’s obvious to anyone who has been flying commercial over the years: America’s airports have in fact become a lot spiffier. I’d certainly rather fly into Newark, New Jersey, than into the many European airports where you still have to take a bus from the plane to the terminal.

But this got me thinking. Why do U.S. airports have so many more amenities than they used to? (The flying experience can still be miserable because of security lines, but that’s another issue.) The obvious answer is that they’re catering to their clientele, but surely that was always true.

Well, one main reason probably is that while flying isn’t the elite-only experience it was in the “jet set” era, people who fly frequently and spend a lot of time in airports are a lot more affluent than average. And over the past 40 years, high-income Americans — we’re talking the top 10% or 20%, not the super-elite that doesn’t fly commercial at all — have seen much bigger income gains than the middle class. Here are estimates from the Congressional Budget Office (never mind the number for the bottom quintile, which is the source of considerable controversy but isn’t relevant for today’s discussion):

CONGRESSIONAL BUDGET OFFICE

So my guess is that airports are catering to this wealthier clientele. That is, the same clientele that is driving the proliferation of gourmet supermarkets and the gentrification of some urban neighborhoods and so on is causing airports to have better food and shops than they used to. I’m not making a value judgment here — hey, I’m in that class myself, so I benefit from the trend.

My point instead is that airports, like many other institutions, cater to a particular income class. And it follows that the affluent buy different things than those less fortunate — which means in turn that they care about different prices. There have been innumerable posts on social media complaining about the prices of airport meals or room service in fancy hotels, , like this one from the investor Kyle Bass:

But these aren’t prices that matter to most Americans. And because people spend their money differently, the convenient abstraction that we think of as “the level of consumer prices” gives way to the truth that different groups face at least somewhat different rates of inflation: different slopes for different folks.

My New York Times colleague Peter Coy wrote about this the other day, but I thought I’d pursue the matter a bit further and ask whether the multiplicity of inflation rates should affect our view of how Americans have been doing in recent years.

For the truth is that while it’s fun to mock well-off people complaining about the prices of fancy meals, there’s good reason to believe that recent inflation has actually been worse for people lower down on the income scale. Why? Mainly because of rising grocery prices.

I recently debunked widespread claims that official numbers on prices of food at home greatly understate grocery inflation. There’s every reason to believe that the Bureau of Labor Statistics gets the numbers more or less right.

But what those accurate BLS numbers say is that food prices have risen more than overall prices, reflecting a variety of factors, from climate change to the war in Ukraine:

And one of the best-established regularities in economics is Engel’s Law, which says that lower-income families spend a higher percentage of their income on food than higher-income families. So does this mean that U.S. economic developments over the past few years have hurt the middle and working classes more than the affluent? Not necessarily, because there’s something else going on.

As David Autor, Arindrajit Dube and Annie McGrew noted in a paper last year, there has been an “unexpected compression” of wage disparities during the Biden recovery, with wages growing much faster at the bottom than the top. Here’s Dube’s most recent chart of changes in real wages:

Note that while the y-axis says “percent change,” 0.1 actually means 10%.

The chart shows a striking process of equalization — the highest quintile’s real wages going down while everyone else gains, and the lowest quintile gaining the most. But real wages are calculated using the same consumer price index for everyone. As I’ve said, however, recent inflation has probably been higher for lower-income Americans who spend more on groceries. Does taking that into account undermine the conclusion?

Well, the Bureau of Labor Statistics has an experimental measure of inflation that varies across the income distribution. This measure isn’t updated every month; it goes up to only June 2023. But inflation has come way down, so it’s still a pretty good indicator of inflation disparities. Let’s take a look at the percent inflation faced by each of the five income quintiles from December 2019 to June 2023, according to the BLS measure:

• Bottom 20%: 19.5
• Next 20%: 19.3
• Middle 20%: 19.1
• Fourth 20%: 18.9
• Top 20%: 18.0

So yes, inflation has been higher for lower-income Americans. But the spread from bottom to top, 1.5 percentage points, is much smaller than the spread suggested in Dube’s wage data. In other words, taking differences in relevant inflation into account slightly softens the case for an “unexpected compression,” but doesn’t change the basic result.

So does it matter that the rich spend differently from you and me — or actually, that those of us in the top quintile spend differently from Americans in the middle? Yes, in some important ways. But it doesn’t change the story of a remarkably equalizing economic recovery.

This article originally appeared in The New York Times.

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