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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A fine example of data analysis not giving the entire picture. If the point is that price is the only indicator of inequality, the data proves this point. However, being able to buy lower quality products at Wal-Mart does not put the folks at the lower end of the income spectrum on an equal footing. At the risk of being accused of being a “leftie” (oh the horror!), I will only mention in passing the shoddy worker treatment at Wal-Mart and the pathetic environmental and product safety standards that globalization forces on the American consumer, and just point out that the inequality is not just price based, but also quality based. There are a number of low price supermarkets in my town, always situated in poor minority areas, and the folks in these areas can certainly buy the food that is there, but the quality is so bad, that it can hardly be compared to the higher end supermarkets in other sections of town. If that’s equality, I would hate to see inequality…
I have less income than my father did at my age, roughly 30 years ago (that’s NOT adjusted for inflation). While he is convinced that I am worse off than he was, I know that I can afford more products than he could when he was my age. I have satellite, broadband, cellphones, a landline, 2 vehicles, a house, and 4 kids.
I would argue that my purchasing power is higher than my father’s was at my age, though my (NON-adjusted) income is lower.
The question is whether China’s ability to produce goods at low cost is sustainable, and whether Wal-Mart (and others) will continue selling these goods at low cost. Given rising commodity prices, I seriously doubt this will be the case.
Mike B, if you think quality has generally gone down on, well, anything, you are wrong. Sorry, but it’s as simple as that. A 2008 car is much much better than a 1988 car. And yes, the same goes for any other goods you can think of.
For clothes, it may be that the cheapest clothes are worse than the cheapest clothes available two decades ago. But that is just because such clothing was not available. Imagine the quality of a shirt that cost two hours’ worth of salary 20 years ago and today. Was it really better then? Nope.
Same goes for food. The cheapest food may be of poor quality (and was previously unavailable), but the meat you can buy for x hours worth of salary is higher than before.
Yes, it’s possible that the recent food price increases will make this untrue in the future. But today it is true.
We’re all (in the western world) unbelievably much richer today than we were 30 years ago. Am I really the only one who recognizes that? It makes me happy every day, and it’s sad that it doesn’t make most other people happy as well.
You also don’t take into account the many externalities of increasingly lengthy supply chains, the destruction of local culture and identity by big box stores, or the very high substitutability of high end luxury goods and very low substitutability of necessities. Pretty glib of you to say that since rich people cant buy as many fancy cars of bottles of expensive wine they really aren’t that much better off.
Another question that I have to ask; how do major expenses (everything not consumable) figure into this equation? You know: homes, medical care, social services, and provision of basic commodities (heating oil, gasoline, natural gas, electricity).
So if the poor eat cheap cake and the rich eat expensive cake, everybody’s equal?
I would suggest that this hints at an even deeper division. We not only see a divergence of income, but a divergence in goods. Sure, the bottom end goods are cheaper, but the top end goods are now more out of reach than ever. We are rapidly approaching two split marketplaces, a Venn diagram where the circles of the rich and the poor don’t intersect anymore.
Swap the basket of goods between the two groups and the rich are now richer than before, and the poorer, poorer than before.
I do not see how it can be a good thing that the luxury goods are more unreachable than before and the cheap goods are even more trivial to the rich can be a better prognosis. It suggests a level of stratification between classes that is deeper than previously realized.
Will be get to a point where at the airport you either see people with the $70 Walmart suitcase or people with the $3,000 Louis Viutton bag with no one in between? Or will the the two never even intermingle as the rich forgo the meatpacking ways of commercial airlines in favor of chartered flights?
I do not see how stability in a country can exist when the world becomes more divided between those that can’t afford a vacation, and those that choose to stay in the newly created world of 5 star villas costing 10′s of thousands a night. I think the raise in price of luxury goods and the cheapening of tube socks is more of a symptom of the widening divide than a source of relief about the situation.
There have always been, and will be, parts of every major city where the poor do not even venture because the stores sell nothing that they can ever even dream of purchasing. It does not bring me happiness to think these areas are getting even more out of reach and growing in size, delegating the rest of people to the increasingly shrinking alternatives where soon, Walmart may be (if it isn’t already for some), the only thing they can afford.
As an economist, you should know the role “choice” plays in utility and consumption. What we are saying here, is increasingly, Walmart is becoming the only choice available.