Bayh and the top fiftieth

Tupelo, Mississippi.: Shot May 30, 2010

Evan Bayh, the recently retired Indiana Senator, has taken a thumping this week from the likes of the WaPo’s Ezra Klein and Salon’s Alex Pareene for his life after Congress: not as a professor or philanthropist, as he'd predicted, but as a lobbyist and Fox News cast member.

The latter is a depressingly suitable job for a man who has proven, at least on one occasion, to grease up the truth a bit before rolling it out on cable. Far as I know, nobody called out Bayh for a fact he mangled during an appearance on MSNBC last year, but it’s never too late to start.

On Sept. 13, Bayh went on MSNBC to argue against the expiration of the Bush tax cuts, saying that we need to focus on growth. As evidence for this view, he stated that the top 2 percent of earners, who would stand to pay more if the tax rates revert, "account for 30 percent of consumption." (1:15 mark on)

I sputtered when I saw it, yet the hosts said nothing. The big tell in this isn’t the lunatic ratio of earning to share of the economy, exactly; it’s that Bayh conflates income with consumption. The top 2 percent might earn 30 percent of the nation's income but the Bureau of Labor Statistics shows that people who earn that much tend to spend far less of their annual income than poorer people do (on the order of half).

I called Bayh's office in the fall to ask whether he had a source for his could provide a source. A press officer there took my digits, but I never heard back from him. I suspect it’s because there is no accurate source for those numbers. If anyone does knows otherwise, HMU.

Here's why I think he's off, and substantially. A Wall Street Journal story last summer quoted another Democrat arguing for extending the tax cuts:

"I think given the fragility of the recovery, the timing is wrong for any kind of tax increase of this nature," Rep. Gerry Connolly (D., Va.) said. "I know that puts me out of step with many in my own caucus, but it's important for members to remember the top 5% [of earners] generates 30% of consumer spending."

That the top 5 percent (not 2) generates 30 percent of consumer spending seems more in line with reality (see fig. 2 in this 2006 paper). But I don't believe people in those brackets don't actually consume anywhere near their income levels relative to lower earners. Compare the lines "income after taxes" and, a bit further down, "average annual expenditures" on these two .pdf charts from 2008: normal-people income vs. made-good-choices-and-caught-some-breaks income.

It's evident, looking at those figures, that people in the lower brackets are spending nearly everything they take in. Intuitively, too, that makes sense: A family making $30,000 and a family making $300,000 pay the same amount for a gallon of gas, for a 12-pack of Bud, for a hot shower, for a movie ticket, for a large Domino's pizza. Accordingly, people making more than $150k a year are only spending about half of what they have left after taxes. (This is, of course, why they are rich. They spend less than they earn.) Bayh’s argument is specious on several levels. Tops is the implication that high earners are proportionately high consumers, when in fact the rich manage to sack away well more than the rest of us.

Bayh's line was brief, and perhaps innocuous, but the fact that he's conflating consumption (in the name of economic activity) and income does not seem, to me, accidental: He's rounding greatly in his favor, to the point that he virtually writes the counterargument to his point. A 2 percent that can afford to chug one-third of the economy would seem to be in fine position to also chip in for these these enormous loans the U.S. is taking out to help run this semi-functional modern economy of ours.