Inequality isn't so bad after all

[bad_robbie]

. . . at least according to "The Economist".

I've been going through dog-eared magazine articles that I'd meant to start discussions about a while ago.

The July 26 edition of "The Economist" magazine carried an article that says US income inequality is not as bad as it appears. They don't argue that the numbers on wages are incorrect, rather that it's surprisingly expensive to be rich, while one can be poor or middle class much more frugally.

Economics focus

Cheap and cheerful

Jul 24th 2008
From The Economist print edition

The long-term rise in American inequality may have been smaller than it appeared

POPULISTS and professors rarely see eye to eye. But on at least one fact of economic life, they agree: wage inequality has increased in America since the mid-1980s. Many studies outline the same broad shifts. Workers at the bottom of the wage scale have seen their incomes fall relative to those at the top. Within the top decile, the super-rich have left the merely well-off far behind.

Indeed increases in national income this decade have been so skewed towards the rich that, allowing for headline inflation, the spending power of a large chunk of the population has apparently stagnated or even declined. Yet this finding is at odds with the impression of spreading prosperity. Increasing numbers of Americans watch DVDs, rely on dishwashers, enjoy air-conditioning and display other signs of increased material wealth. Are the poor really falling so far behind?

. . .

For most of the past three decades, the price of non-durable goods has been falling relative to the price of the services—investment advice, personal care, domestic help and so on—that the rich spend more of their money on. If these differences between the inflation rates faced by the rich and the poor are taken into account, the rise in inequality is reduced and may even vanish.

. . .

conomists found that the share of non-durable spending for the very poorest households was 12 percentage points higher than for the richest households. Because the price of services rose by more than the price of goods during this period, the inflation rate for the rich was far higher than that for the poor. Rich households also buy dearer versions of the same goods than poor consumers. For each product category—a 16-ounce carton of milk, say—well-off households paid an average of 25% more than poor households. This is not because the rich are gullible shoppers but rather, say the authors, because they tend to buy goods of better quality (such as organic milk), the prices of which are higher and tend to rise more quickly.

The authors matched their figures on non-durable spending with equally detailed import data, and discovered that increased trade with China (see right-hand chart) helped lower prices and widen variety. “The poor tend to shop in the aisles of the supermarket where the presence of Chinese goods has increased most,” says Mr Broda. These are also the aisles where prices have fallen fastest. The authors reckon that low-cost imports from China alone offset more than a quarter of the measured rise in income inequality since 1994.

. . .

So your job may have moved to India or China, but at least you can buy cheap junk. In fact, the poor really are the lucky ones, in that they spend a larger portion their income on cheap consumable necessities. The rich bear the real inflation burden, since the price of good help just keeps going up. As my wife said: "Well, that's 'The Economist' for you".

The complete article (including a link to the cited research) is online at: http://www.economist.com/finance/displaystory.cfm?story_id=11791427

[PM Martin]

1. I assure you that things are quite good here in Canada.

We don't buy the junk that you buy, but we have jobs, healthcare, a balanced budget and trade account.
We also don't waste money on excessive packaging.

[Warpy]

2. How nicely chirpy that article is

Meanwhile, people who went into debt for all those toys are now finding they bring only pennies on the dollar at the desperation yard sale they hold every month so they can hang onto their houses and cars.

Start looking at net worth, and you realize just how deep and wide that divide really is.

[Art_from_Ark]

3. Yes, we poor folks are all "Lucky Duckies"