Inequality is growing in the United States. The data say so. Knowledgeable experts like Ben Bernanke say so. Ask just about any economist and they will agree. (They may or may not think growing inequality is a problem, but they will acknowledge that there has been a sharp increase in inequality.)
Photo: Jim, Wal-Mart Supercenter in Suwanee, Georgia.According to two of my University of Chicago colleagues, Christian Broda and John Romalis, everyone is wrong.
Inequality has not grown over the last decade — at least not very much. What we think is a rise in inequality is merely an artifact of how we measure things.
As improbable as it may seem, I believe them.
Their argument could hardly be simpler. How rich you are depends on two things: how much money you have, and how much the stuff you want to buy costs. If your income doubles, but the prices of the things you consume also double, then you are no better off.
When people talk about inequality, they tend to focus exclusively on the income part of the equation. According to all our measures, the gap in income between the rich and the poor has been growing. What Broda and Romalis quite convincingly demonstrate, however, is that the prices of goods that poor people tend to consume have fallen sharply relative to the prices of goods that rich people consume. Consequently, when you measure the true buying power of the rich and the poor, inequality grew only one-third as fast as economists previously thought it did — or maybe didn’t grow at all.
Why did the prices of the things poor people buy fall relative to the stuff rich people buy? Lefties aren’t going to like the answers one bit: globalization and Wal-Mart!
China is able to produce clothes, electronics, and trinkets incredibly cheaply. Poor people spend more of their income on these sorts of things and less on fancy cars, expensive wine, etc. According to Broda and Romalis, China alone accounts for about half of their result.
So if the sorts of people who break store windows in Davos care about the poor, they might need to rethink some of their ideas about globalization’s impacts.
MIT economist Jerry Hausman (who taught me econometrics in my first year of graduate school) and co-author Ephraim Leibtag have analyzed the impact of the entrance of a Wal-Mart superstore on local food prices.
Not only are Wal-Mart’s prices lower, but its entry also induces competitors to lower prices. The impact is much larger on the poor than the rich, both because the poor are more likely to shop at Wal-Mart and because they spend more of their income on food.
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At what point does Wal-Mart stop having the incentive to keep their prices low. If they become a towns only grocer they have complete price control and can at some future point raise prices artificially high.
I fail to see how cheaper products for the poor can disguise an actual income difference. Argueing that the price of gruel has decreased does not mean that the rich cannot now afford more caviar…
Still, if we compare the purchasing power on the same bundles of goods, I suppose inequalities are increasing… more and more?
Is it true that the import of the paper is that inequality of incomes has not occurred? On the basis of Prof. Levitt’s summary, it merely suggests that the purchasing power of the poor has not been eroded as much as the nominal differences in income show.
I find this argument problematic for two reasons. First, it’s a bit of a strawman argument because many economists, (Paul Krugman is a great example) who point this out frame the issue not with the general term “inequality” as Levitt implies they do, but rather with “income inequality.”
Second, I’m not sure about this claim that “how rich you are depends on … how much the stuff you want to buy costs.” Simply because the ceiling on the highest end luxury goods has gone up does not mean that the rich who may want to buy them are less wealthy. This is because wealthy consumers often want the most expensive goods that they can afford. So if they could obtain the quality of a once higher priced good at a lower price, they still would often choose a more expensive option.
Here’s an example from an industry that I’m very familiar with – high end road racing bicycles. In 2002, the most expensive road bike you could purchase from a company like Trek was in the $4000 neighborhood. Now the top of the line bike is nearly $8000. But for $3200, you can get a bike that is much better than the $4000 2002 model. So have the prices gone up or down? I’d argue that, for the most part, prices have gone down. If this example holds for other luxury goods, it would seem to invalidate Levitt’s argument.
I believe that there’s a point missing. In principle, of course, you’re right in saying that the real income matters. What is missing though, is the fact that people who reside at the lower end of the income distribution would probably like to change their consumption patterns but aren’t capable of doing so.
I have been concerned about a different effect coming into play, namely quality. Are poor people better off if while the price of clothing declines, the quality also declines and declines to such a point that they end up spending more of their money in the long run than they saved in the initial purchase?
In another example the cost of processed, mass produced food is now extremely low but it makes up for the additional cost in additional health problems caused by said food?
I am beginning to fear that quality is becoming synonymous with luxury. While the rich can afford quality goods that will last a long time and retain resale value, the poor are doing little better than “renting” goods, which quickly wear out and require replacement, or buying good that exact a high external cost on their health or time. In either case the long term advantage will be to the wealthy who can continue to invest in their future, while the poor will continue to have all of their income drained away.
Somebody needs to do a study on the effect of diminished quality of the new globalized goods and see if there really are positive benefits or if we as a nation have found another way to extract a short term savings at a high long term cost.
I’m just glad that only rich people have to buy high-priced luxuries like milk and gasoline.