Rationale

One argument that is often made for consumption (or expenditures) as the resource definition rather than income is that consumption is a better estimate of families' long-term or "permanent" income. Thus, Friedman's (1957) permanent income hypothesis suggests that current income is comprised of a permanent component and a transitory component. Families with low levels of current income are disproportionately comprised of families with temporary income reductions. If consumption is based on permanent income and not on transitory income, families with negative "income shocks" will have consumption levels that are high relative to their income levels because they expect their long-term income to be higher, on average, than their current income. Consequently, they ''dissave" in order to smooth consumption and thereby material well-being: for example, they may liquidate their savings accounts or borrow on their credit cards. Such families may be income-poor but able to maintain a constant standard of living through dissaving. The reverse will be true of high-income families, who will have consumption levels that are low relative to their income levels and positive savings.

Modigliani and Brumberg's (1954) closely related life-cycle model of behavior assumes that current consumption is equal to average lifetime resources. Thus, younger families, by borrowing, and older families, by spending down assets, tend to exhibit high consumption-to-income ratios, while middle-aged families with the highest earnings potential tend to exhibit relatively low consumption-to-income ratios. Again, it is supposed that families smooth consumption and well-being on the basis of wealth and on expected earnings by saving and dissaving at various points during their life cycles.

We note that it is not necessary to accept all of these arguments in order to support a consumption definition of resources. Thus, one need not accept the life-cycle model or the view that what is wanted is a measure of long-term or permanent income. One could simply believe it is preferable to estimate a family's actual consumption rather than the consumption that it could potentially achieve from its available income.

Another point that is often made in support of using consumption or expenditures rather than income as the resource definition is that income is poorly measured. Those making this argument can cite the known under-reporting of asset income (and other sources) in the March CPS, the likelihood that income earned "off the books" or illegally is not reported at all, and the fact that self-employed people who report business losses are often able to take sufficient cash out of their business to sustain their own standard of living.

Implications

Consumption and income definitions of resources have somewhat different implications for who is counted as poor. A consumption resource definition



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