The American Enterprise Institute's really awful new study on income inequality

A new paper from AEI's Kevin Hassett and Aparna Mathur says what you've heard about exploding income inequality in the United States is wrong: It's not really happening, they say, because consumption trends have remained relatively stable—the rich are consuming more, yes, but so are the not as rich.  It's a variation of the old "even poor people have color TVs now!" argument.

This is completely misleading.

Here is how you know it's misleading. Nowhere in the paper do Hassett and Mathur use the word "debt." And nowhere in the paper do the duo use the word "credit."Nor "bankruptcy."

Instead, the two suggest that debt is something kids do and adults pay their way out of: "Individuals are generally assumed to be able to smooth consumption by borrowing in the low-income years and saving in the high-income years."


Only that's not really true, at least not anymore. 


Here's what personal household debt has done during the last 60 years:

Debt is the blue line. It's always been going up, but the pace accelerated after 1980, and then started going nearly straight up during the first decade of the 21st century. That led to....

A big rise in bankruptcies. That big drop in 2006? That wasn't an improvement in American's well-being: That was the result of a new law meant to make it tougher to file for bankruptcy—and make sure that credit card companies could keep collecting fees from tapped-out customers.

And just for kicks, here's what happened to the personal savings rates:

Americans stopped saving.

And incidentally, this wasn't a widespread phenomenon. By 2007--just before the crash--this is what debt and income levels looked like for the various quintiles of American society:

In both charts, you'll note that the debt exceeds income for every income group...except for the top quintile.

Now, you can argue that Americans shouldn't have dug themselves such a deep hole, and that's a great argument to have. What you can't do is argue that everything is fine and dandy because consumption trends were consistent among the various income groups. The devastation of savings and the rise of big borrowing masked the growing inequality and permitted the consumption to continue—and when it became unsustainable, the economy went boom.

It's such an obvious objection, you have to wonder if AEI's economists were even trying. The report shouldn't be taken seriously.