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July 27, 2008
Inequality in America, Part MCCLXII
I draw your attention to a potentially important (from a policy standpoint) and certainly interesting (from an intellectual standpoint) new paper looking, essentially, at inequality in America. The Economist neatly summarizes it here.
In essence, it makes the following ideas:
1. (Obvious) That in gaging income or purchasing power over time, one must focus on real, not nominal, income or purchasing power.
Suppose, for instance, that there was only good in the word, cans of soda, and each was worth $1 in 1990. Therefore, a person with a real-time dollar income of $100 in 1990 would have a "real income" of 100 cans of soda. If their real-time dollar income had only risen to $110 by 2008, you might be tempted to argue that they had not done that well across two eras of economic expansion: after all, they could only buy 10 more cans of soda in 2008 than 1990. Suppose, however, that the price of soda had actually fallen to 75 cents a can by 2008. Their real income in 2008 would then be roughly 147 cans of soda, a nearly 50 percent gain from 1990 (not too shabby). On the other hand, if their real time income had risen to $200 by 2008 but the price of a can of soda had doubled, they would be no better off in real terms, despite the fact that they seemed so in nominal terms.
2. (Slightly Less Obvious) Different socioeconomic strata in our society consume different goods and hence face different price environments.
Continuing the above example, let's suppose that the poor drink soda, which was $1 per can in 1990. If the average poor household had a real-time dollar income of $100 in 1990, that implies a real income of 100 cans of soda. Let's suppose that the rich drink wine, which comes at a far dearer $10 per bottle. If the average rich household had a real-time dollar income of $1000 in 1990, that would imply a real income of 100 bottles of wine. Now suppose you were told that by 2008 the income of poor households had fallen to $50 but that of rich households had risen to $2000. In nominal terms, it would look like the income difference had gone from 10-to-1 to 20-to-1. Suppose I told you, however, that thanks to evil Chinese influence the price of soda had fallen to 50 cents per can, while a different sort of evil in places like France had led to wine prices doubling. Real incomes would then be...unchanged.
These two ideas are sort of at the core of this paper. In essence, it argues that the relative nominal income gains of the rich have been offset to a degree by rising prices for the kinds of things they tend to but, while the comparatively stagnant nominal dollar income of poorer families now goes further thanks to falling prices for the kinds of things they tend to buy. (The paper is more complicated than that, focusing for instance on changing variety as well). The point is, between these forces (and things like the expanding variety of products for the poor), much of the supposed growing income inequality in the United States in recent years vanishes.
Put slightly differently, once you account for the fact that higher-income families faced an effectively higher rate of inflation in the past two decades or so, most of their supposed relative (to lower income families) income gains evaporate.
Discuss among yourselves.
Posted by dag at July 27, 2008 6:44 PM