Shattering the Conventional Wisdom on Growing Inequality

Freakonomics: Shattering the Conventional Wisdom on Growing Inequality

...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! ...

Related: Saint Wal-Mart? well, let's look at the record

Comments

[J. K. Gayle]

Michael,
Freakonomics does indeed help reinterpret some of the conventional wisdom. But "shattering" is just some Steven D. Levitt hyperbole. It may just be plain hype, of his book, which is now three years old, and after three million copies sold, might just be experiencing a first-time slump in sales.

That kind of puts a different spin on economic inequities.

So in 2007, when the book was making Levitt richer than ever, do we remember the inequities for women authors? Would you mind too much if we look again at how really bad, unequal, women compared to men had it in 2007?

[matthew]

Applying two different sets of prices for purchasing power within the same society seems to me to demonstrate that inequality is extreme. Saying that poor people's purchasing power has increased because they are constrained to buy cheap goods, but that rich people's purchasing power has decreased because they have the luxury of buying anything they want (including expensive things) is a weak argument for decreasing inequality at best. At worst, it is nonsensical.

If rich people were somehow constrained from shopping at Wal-Mart, and could ONLY buy more expensive goods, they might have a point. However, the rich have gained substantial purchasing power, even if they choose not to exercise it by staying away from cheaper goods. This argument, at least as Levitt retells it, would not pass muster against an eighth grader with some critical thinking skills.

For example, if rich people, because their income has increased in the last decade, all bought more private jets, we might expect the prices of these jets to increase. No one in their right mind would argue that the increasing cost of a private jet negates the increases in income for the rich and that society is actually more equal or as equal as it was previously.

One thing you might be able to say is that the consumption choices people make have not changed much. This is a completely different, and much more cautious argument than the one the authors make, however.