What Growing Inequality?Mike Rappaport

While it is widely believed that inequality has grown in the last decade, this belief may be based on a mistaken measure of inequality.

Steven Levitt writes about an article written by his two colleagues, Christian Broda and John Romalis:

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 [this claim by my two colleagues].

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!

Comments

[Dan Simon]

Anyone who believes in a "progressive" income tax ought to *expect* income inequality to rise as wealth grows. I explain here:

http://icouldbewrong.blogspot.com/2003/05/debate-has-been-raging-among-oxblogs.html

[james wilson]

When the rich do not get richer, the poor get a lot poorer.
The means of the poor rise fastest when the rich get richer faster than anybody.
Generally, people desire the rich not get richer even more than they desire to gain wealth themselves, so bad arguments never fall out of fashion.

[Contributor X]

john nye (mercatus ctr. i think) makes the same pt. to take a super old example, being able to salt your food was once a marker of wealth. so was owning a car. now our poor have all these things... including cable tv and air conditioning.

i think what the left will never figure out is that status is a zero sum game, meaning that status markers will forever be dynamic. money being useful, of course, to the extent taht you can exchange them for status markers.