Economics focus: The new (improved) Gilded Age
JOSE BAILEN
interesting than usual (in my opinion):
http://www.economist.com/finance/economicsfocus/displaystory.cfm?story_id=10328935
Economics focus
The new (improved) Gilded Age
Dec 19th 2007
From The Economist print edition
The very rich are not that different from you and me; or less
different, perhaps, than they used to be
IN 1904 Willie Vanderbilt hit a thrilling 92.3 mph (147.7 kph) in his
new German motorcar, smashing the land-speed record. His older
brother's sprawling North Carolina manse, Biltmore, could accommodate
up to 500 pounds of meat in its electrical refrigerators. In miserable
contrast, the below-average Gilded Age American had to make do with a
pair of shoes and a melting block of ice. If he could somehow save
enough for an icebox, a day's wage would not have bought a pound of
meat to put in it. Paul Krugman, of Princeton University, has recently
argued* that contemporary America's widening income gap is ushering in
a new age of invidious inequalities. But a peek at the numbers behind
the numbers suggests that Mr Krugman has been misled: far from a new
Gilded Age, America is experiencing a period of unprecedented material
equality.
This is not to deny that income inequality is rising: it is. But
measures of income inequality are misleading because an individual's
income is, at best, a rough proxy for his or her real economic
wellbeing. Because we can save, draw down savings, or run up debt, our
income may tell us little about how we're faring. Consumption surveys,
which track what people actually spend, sketch a more lifelike
portrait of the material quality of life. According to one 2006
study**, by Dirk Krueger of the University of Pennsylvania and
Fabrizio Perri of New York University, consumption inequality has
barely budged for several decades, despite a sharp upswing in income
inequality.
But consumption numbers, too, conceal as much as they illuminate. They
can record only that we have spent, but not the value—the pleasure or
health—gained in the spending. A stable trend in nominal consumption
inequality can mask a narrowing of real or "utility-adjusted"
consumption inequality. Indeed, according to happiness researchers,
inequality in self-reported "life satisfaction" has been shrinking in
wealthy market democracies, America included, suggesting that the
quality of lives across the income scale are becoming more similar,
not less.
You can see this levelling at work in markets for transport and
appliances. You no longer need be a Vanderbilt to own a refrigerator
or a car. Refrigerators are now all but universal in America, even
though refrigerator inequality continues to grow. The Sub-Zero PRO 48,
which the manufacturer calls "a monument to food preservation", costs
about $11,000, compared with a paltry $350 for the IKEA Energisk B18
W. The lived difference, however, is rather smaller than that between
having fresh meat and milk and having none. Similarly, more than 70%
of Americans under the official poverty line own at least one car. And
the distance between driving a used Hyundai Elantra and a new Jaguar
XJ is well nigh undetectable compared with the difference between
motoring and hiking through the muck. The vast spread of prices often
distracts from a narrowing range of experience.
Save money. Live better
This compression is not a thing of the past. To take one recent
example, Jerry Hausman of the Massachusetts Institute of Technology
and Ephraim Leibtag of the United States Department of Agriculture,
show† that Wal-Mart's move into the grocery business has lowered food
prices. Because the poorest spend the largest part of their budget on
food, lower prices have benefited them most. The official statistics
do not capture these gains.
As a rule, when the prices of food, clothing and basic modern
conveniences drop relative to the price of luxury goods, real
consumption inequality drops. But the point is not that in America the
relatively poor suffer no painful indignities, which would be absurd.
It is that, over time, the everyday experience of consumption among
the less fortunate has become in many ways more similar to that of
their wealthier compatriots. A widescreen plasma television is lovely,
but you do not need one to laugh at "Shrek".
This compression is the predictable consequence of innovations in
production and distribution that have improved the quality of goods at
the lower range of prices faster than at the top. New technologies and
knock-off fashions now spread down the price scale too fast to
distinguish the rich from the aspiring for long.
This increasing equality in real consumption mirrors a dramatic
narrowing of other inequalities between rich and poor, such as the
inequalities in height, life expectancy and leisure. William Robert
Fogel, a Nobel prize-winning economic historian, argues†† that nominal
measures of economic well-being often miss such huge changes in the
conditions of life. "In every measure that we have bearing on the
standard of living...the gains of the lower classes have been far
greater than those experienced by the population as a whole," Mr Fogel
observes.
Some worrying inequalities, such as the access to a good education,
may indeed be widening, arresting economic mobility for the least
fortunate and exacerbating income-inequality trends. Yet even if you
care about those aspects of income inequality, the idea can send
misleading signals about the underlying trends in real consumption and
the real quality of life. Contrary to Mr Krugman's implications,
today's Gilded Age income gaps do not imply Gilded Age lifestyle gaps.
On the contrary, those intrepid souls who make vast fortunes turning
out ever higher-quality goods at ever lower prices widen the income
gap while reducing the differences that matter most.
*"The Conscience of a Liberal" by Paul Krugman. W.W. Norton, 2007.
**"Does Income Inequality Lead to Consumption Inequality? Evidence and
Theory" by Dirk Krueger and Fabrizio Perri. Review of Economic
Studies, 2006.
†"Consumer Benefits from Increased Competition in Shopping Outlets:
Measuring the Effect of Wal-Mart" by Jerry Hausman and Ephraim
Leibtag. Journal of Applied Econometrics, forthcoming.
††"The Escape from Hunger and Premature Death, 1700-2100" by Robert
William Fogel. Cambridge University Press, 2004.
raylopez99
what the CEO makes and what the lowest paid temp employee in a
corporation make.
If shareholders are profiting from the stock slowly rising, is it fair
to give golden parachutes and bonuses for ordinary performance to the
officers of a corporation, while lowly employees get smaller and
smaller wages?
In theory it shouldn't matter...after all, the employee is getting
paid (maybe minimum wage, but better than nothing) while shareholders
are also profiting (slowly).
But in practice it might breed resentment that undercuts corporate
efficiency.
In behavioral finance, the analogy is with that game where people
agreed to split a prize but only one person made the decision as to
how much the prize would be shared, with the other could either accept
or reject the decision of the first. Rationally and mathematically,
according to game theory, even a 99% to 1% split (with the side making
the decision keeping 99% of the prize, the weaker, non-decision making
side getting 1%) should have been accepted by the other side (after
all, 1% is better than 0%), but it was found that the side making an
inequitable split (i.e., less than 50-50%, such as 99%-1%) would often
have their proposal rejected by the weaker side (so nobody got the
prize).
RL
JOSE BAILEN
his/her the marginal productivity of his/her work (i.e., how much
production increases due to your work). Widening income inequality is
due to a larger contribution of physical or human capital -relative to
raw labor- to total production. Nothing wrong about this, in fact,
rising inequality provides people more incentives to save/invest and
to get educated themselves.
What the article says is that although income inequality has
increased, consumption inequality remains about the same. The
implication is that high-income people has increased their savings
rates relative to low-income people. Also, what is even more
interesting is the reflection that living standards have actually
become more equal, not less equal, as Krugman and other liberals
claim. Accross countries, there is an interesting study by
Sala-i-Martin that also shows that global inequality has decreased
once we take into account the different sizes of countries (for
instance, China and India have been growing faster than the world's
average, and together they account for almost 40 percent of the
world's population of 6.6 billion ):
http://www.columbia.edu/~xs23/papers/GlobalIncomeInequality.htm
Bernarda Zamora
later and I hope to follow your discussion further.
HAPPY HOLIDAYS!! berna
2007/12/20, JOSE BAILEN <jose....@gmail.com>:
raylopez99
On Dec 20, 3:35 pm, "JOSE BAILEN" <jose.bai...@gmail.com> wrote:
> For economists, in a competitive equilibrium, a worker's salary equals
> his/her the marginal productivity of his/her work (i.e., how much
> production increases due to your work). Widening income inequality is
> due to a larger contribution of physical or human capital -relative to
> raw labor- to total production. Nothing wrong about this, in fact,
> rising inequality provides people more incentives to save/invest and
> to get educated themselves.
>
know. I recall reading that a guy went to school to learn
engineering, in a hot field (I forget which) and when he graduated
technology had progressed to the point where he was not in demand
anymore. Now I admit it sounded extreme, and maybe the guy had some
defects, but still...
> What the article says is that although income inequality has
> increased, consumption inequality remains about the same. The
> implication is that high-income people has increased their savings
> rates relative to low-income people.
what I've seen in this debate) are kind of small, but noticeable.
Kind of like the debate about global warming, the debate is over a
mere 1 degree change in temperature in the last 25-50 years (which of
course might increase a lot more, that's the concern, but 1 degree
right now is almost trivial).
> Also, what is even more
> interesting is the reflection that living standards have actually
> become more equal, not less equal, as Krugman and other liberals
> claim. Accross countries, there is an interesting study by
> Sala-i-Martin that also shows that global inequality has decreased
> once we take into account the different sizes of countries (for
> instance, China and India have been growing faster than the world's
> average, and together they account for almost 40 percent of the
> world's population of 6.6 billion ):http://www.columbia.edu/~xs23/papers/GlobalIncomeInequality.htm
>
relative, not absolute. You cannot compare people becoming less poor
in one country with the poor in another country because "poorness" is
not tradable across borders. That is, the fact that now a poor family
in Xian, China is less poor means nothing to the poor in the USA since
the poor in the USA are comparing themselves to the rich in the USA,
not the poor in China. Neverthless, I do agree that human utility (as
Bentham I think defined the term in the early 19th century) is
increasing, as more and more poor in India and China get richer. But
this does not address the income inequality issue within a country.
The same is true over generations--you cannot say that there's no real
poor today because the poorest person in the USA today lives better
than King Louis the XIV did in France (which might be true--maybe--I
guess he didn't have cable TV but that's no great loss).
Another analogy: in the Balkans the average income is 50% of the USA--
the average person here would qualify for welfare in the USA, yet
within the country the average people do not consider themselves poor
(and they're not, since there are some _really poor_ people within the
country by comparison).
RL
JOSE BAILEN
> > For economists, in a competitive equilibrium, a worker's salary equals
> > his/her the marginal productivity of his/her work (i.e., how much
> > production increases due to your work). Widening income inequality is
> > due to a larger contribution of physical or human capital -relative to
> > raw labor- to total production. Nothing wrong about this, in fact,
> > rising inequality provides people more incentives to save/invest and
> > to get educated themselves.
> >
>
> sounds good...in theory. In practice are people so flexible? I don't
> know. I recall reading that a guy went to school to learn
> engineering, in a hot field (I forget which) and when he graduated
> technology had progressed to the point where he was not in demand
> anymore. Now I admit it sounded extreme, and maybe the guy had some
> defects, but still...
I don't think that every person can (and should) get a college degree,
so people are effectively not that flexible. But, in any case,
incentives matter. If the salary for a high-IQ person -who may get a
PhD or a MBA- is the same as the salary of a janitor, most high-IQ
people would rather choose to be a janitor because they don't have to
spend 8-10 years getting additional education (and paying for it). The
opportunity cost of this time matters a lot. This is why inequality is
good: it provides the right incentives to people to get their right
education levels, boosting the productivity of the economy as a whole.
> > What the article says is that although income inequality has
> > increased, consumption inequality remains about the same. The
> > implication is that high-income people has increased their savings
> > rates relative to low-income people.
>
> Perhaps, but it's probably very small, since inequality shifts (from
> what I've seen in this debate) are kind of small, but noticeable.
> Kind of like the debate about global warming, the debate is over a
> mere 1 degree change in temperature in the last 25-50 years (which of
> course might increase a lot more, that's the concern, but 1 degree
> right now is almost trivial).
It depends. In the US -and to a lesser extent, the UK- the shift in
income inequality since the 1980s has been quite large and noticeable,
at least in the income distribution statistics. In most European
countries, there is no hard evidence of a significant change in income
inequality in the last few decades.
> > Also, what is even more
> > interesting is the reflection that living standards have actually
> > become more equal, not less equal, as Krugman and other liberals
> > claim. Accross countries, there is an interesting study by
> > Sala-i-Martin that also shows that global inequality has decreased
> > once we take into account the different sizes of countries (for
> > instance, China and India have been growing faster than the world's
> > average, and together they account for almost 40 percent of the
> > world's population of 6.6 billion ):http://www.columbia.edu/~xs23/papers/GlobalIncomeInequality.htm
> >
>
> This is correct but false. Economists tell us that wealth is
> relative, not absolute. You cannot compare people becoming less poor
> in one country with the poor in another country because "poorness" is
> not tradable across borders. That is, the fact that now a poor family
> in Xian, China is less poor means nothing to the poor in the USA since
> the poor in the USA are comparing themselves to the rich in the USA,
> not the poor in China. Neverthless, I do agree that human utility (as
> Bentham I think defined the term in the early 19th century) is
> increasing, as more and more poor in India and China get richer. But
> this does not address the income inequality issue within a country.
> The same is true over generations--you cannot say that there's no real
> poor today because the poorest person in the USA today lives better
> than King Louis the XIV did in France (which might be true--maybe--I
> guess he didn't have cable TV but that's no great loss).
>
The issue here is that, when we look at the disparity in basic
indicators such as life expectancy or child mortality rate, the
disparity is much less pronounced than when we look at per capita
income, even if adjusted in purchasing power parity terms. With the
correct PPP estimates, China's per capita income is just $4,000, or 10
times lower than the US's $40,000 (see
http://www.economist.com/world/asia/displaystory.cfm?story_id=10329268
). Yet when looking at indicators such as life expectancy -China's
72.88 years versus the US's 78 yrs- or infant mortality rates, or the
consumption of a basic good like food -in terms of calories per
person-, the disparity is not 10 to 1 in favor of the US but much
less. The income disparity is probably reflected in the number of
households with access to cable TV, but as you mentioned, this is not
such a great welfare loss for most people. Given a universal set of
basic goods -food, health care, education- the disparities between the
living standards of developing and developed countries is much lower
than the one reflected in income levels.