The Centre for Policy Studies claims (pdf) - to the glee of the Daily Heil - that disposable incomes for the average household have fallen since 2002. I've got three gripes with this.
1. The average and the median are very different. The CPS claims that the average household pays £7800 a year more in taxes than in 1997. But this is largely because a few super-rich have seen their incomes - and therefore their taxes - soar. For the more typical household - those in the fifth decile - direct taxes (which include council tax rose) by an average of £1441 between 1997-98 and 2005-06. Indirect taxes rose a further £753. And these increases are largely due to a 40% rise in pre-tax income. (table 6 of this pdf and table 21 of this pdf.)
2. There's a curious treatment of housing costs. The CPS's claim that the average household has got poorer since 2002 rests upon the belief that mortgage costs have more than doubled. Now, ordinary mortgage rates have certainly not doubled since then. So how have payments done so? It's because house prices have soared, raising the average mortgage debt. But this is only an outgoing for that small fraction of people who bought recently. Someone who bought before 2002 has seen a much smaller rise in mortgage costs.
Regarding rises in house prices as a pure cost - as the CPS does - is about as daft as regarding them as a pure benefit.
3. It treats the public like fools. The CPS fails to ask the obvious question: why, if average people have gotten poorer since 2002, have retail sales boomed since then? Instead, it claims that "excessive debt" and lower disposable incomes mean "British households are more vulnerable to, and less prepared for, any downturn."
No doubt, this is true of some households - but anything is true of some people. What it fails to consider is the possibility that households took on extra debt for a good reason - that they reasonably anticipate rising incomes, just as Milton Friedman's permanent income hypothesis says.
And herein lies a puzzle. The CPS describes itself thus:
The CPS was founded...to champion economic liberalism in Britain and has since played a global role in the dissemination of free market economics. Its policy proposals are based on a set of core principles, including individual choice and responsibility.
In presuming that people were wrong to spend and borrow, how are economic liberalism and individual choice being championed?
Very good post.
A couple of quick potential issues:
Continued retail spending and increased personal debt could, under the permanent income logic, make quite a lot of sense with stalled real incomes of the kind the CPS describe. People could be assuming that real incomes will start to rise again and trying to smooth consumption growth.
While "what about consumption" questions undermine the case for stalling disposable incomes they also undermine the case that inequality is rising. Just something to think about. I know there has been interesting research on this in the US.
Posted by: Matthew Sinclair | February 04, 2008 at 01:12 PM
Ta muchly for link in side bar!
Posted by: Mark Wadsworth | February 04, 2008 at 02:55 PM
Thanks, chaps.
Matthew - I suspect your first point might be right. The interesting question is why? Are people anticipating lower taxes, or just sustained stable growth, or technical progress and productivity growth, or what?
I'm not sure if aggregate consumer spending can tell us much about equality. But it's certainly true that inequality in consumption is less than income inequality (and inequality in subjective well-being FWIW is lower still).
Posted by: chris | February 04, 2008 at 03:14 PM
"In presuming that people were wrong to spend and borrow, how are economic liberalism and individual choice being championed?"
Because this isn't liberalism at all, but rather toryism in disguise - something that has become depressingly familiar.
Posted by: Peter Risdon | February 04, 2008 at 03:45 PM
They switch between the median and mean rather too much for my liking - their initial analysis (tables 1 and 2) is based on medians but you are right the tax bit (table 3) is based on means.
I'm not sure you are right on the mortgage bit, as the survey is only interested (in tables 1 and 2) with homeowners and apparently then the average mortgage is £125k, which works out on their figures.
I did wonder where the money in mortgage payments shows up as a credit, though.
Posted by: Matthew | February 04, 2008 at 04:50 PM
Actually the average mortgage for a homeowner is £125k, I'm not sure what the median would be. Again they're switching around.
Posted by: Matthew | February 04, 2008 at 04:53 PM
People should stop using means full stop. I'm f...ing well not interested in the very rich.
Posted by: reason | February 05, 2008 at 11:51 AM