Economists track discretionary, and disposable, income as a proxy for the growth in the financial health of average citizens in an economy. In a well-functioning economy, where productivity is increasing and real wealth is being generated, the total level of discretionary income should rise. There are two important reasons why economists like to see increasing discretionary income: it shows a decreasing cost of living and it means there is more money left over for marketers and businesses that are sensitive to discretionary spending.
Economic Definition of Discretionary Income
Some expenses are tied to basic life essentials, such as shelter, clothing, food and transportation. In a modern society, these reveal themselves through mortgage payments, rents, items at the grocery store, and cars and gasoline. The amount of income dedicated to these expenses is called nondiscretionary.
The total amount of income left over after paying for nondiscretionary essentials is called discretionary income. This income has been tracked by the U.S. Census Bureau for decades, and economists often cite changes in discretionary spending to project future demand and economic health.
Impact of Taxes
Many economists focus on the impact of taxes on discretionary income. One of the major arguments proposed during the 1960s under President Kennedy, and the 1980s under President Reagan, was that lowering taxes leaves more money in the pockets of consumers and increases discretionary spending. This, in turn, spurs economic growth.
The Bureau of Economic Analysis and Savings
The Bureau of Economic Analysis, or BEA, tracks discretionary income and disposable income as measures of American standards of living. The BEA highlights the importance of discretionary income when it comes to paying for "such items as college educations, autos, vacations, and entertainment or for saving."
The last part, savings, is particularly crucial. Economic development is only made possible through savings, which need to be built up to invest, develop capital equipment or make loans. Without discretionary income, no economic growth is possible.