Capitalism to Egalitarians: You're Welcome!

I’ve posted on this paper once already, but it really, really, really deserves more attention. And people pay attention to Steven Levitt, so listen to him:

According to two of my University of Chicago colleagues, Christian Broda and John Romalis, everyone is wrong.

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!

With the recent rise in food and energy prices, I wouldn’t be surprised if inflation is now rising more quickly for the poor. But it’s just huge if everyone has been so wrong about rising inequality over the last decade. If you think economic inequality matters, that’s because you think relative economic well-being matters.  If you think economic well-being matters, then what you care about is consumption, not income. So what you’re worried about, my egalitarian friend, is consumption inequality. If the trend in consumption inequality is flat, will you please make a note of it? Indeed, will you please communicate to your friends that, despite the outsized income gains of the wealthiest, America has become scarcely more unequal because capitalism has done so much of specific benefit to the poor?  Of course you will.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center