More about consumption inequality (25 January 2007)

At Marginal Revolution, Tyler Cowen has a few posts about his skepticism regarding the significance of income inequality. The first is a link to his NYT column that wants to exonerate politicians and businesses of most of the responsibility for the fact that income inequality is worsening (it's 75 percent demographics -- people who have lived longer have had a longer time to have their fortunes go separate ways, and as the populace becomes more educated it is more likely to show the income effects of different lifestyle choices). Inequality is pretty much inevitable if we want to respect the differences in individual motivation, a fact borne out in Cowen's opinion by the fact that measured inequality in happiness among different classes hasn't worsened. Some people are made happy by money, some are made happy by being "relaxed bohemians." Who isn't happy? Only the destitute, who are essentially exempted from consideration in the inequality comparisons Cowen pursues here because inequality is not worsening for them -- perhaps this is because their bare-subsistence situation can become no worse.

That's where his other post comes in, which is a tentative defense of making comparisons of what people consume rather than what they earn. Usually, free marketeers will point to a statistic that shows poor people buying a lot of some inessential good (big TVs, PlayStations, etc.) and declare income inequality insignificant, while implicitly suggesting the hypocrisy of these people with their luxury goods who pretend to be poor and cry for government handouts and lifestyle subsidies from hardworking taxpayers. Thus those people at the bottom, regardless of alleged inequality, are having their lives improved because their purchasing power is increasing with the falling prices of goods, and bare subsistence -- the minimum quality-of-life expectations in America -- now includes many things that were once considered luxuries. (We all have running water and refrigerators now, and the richest of our great-great-grandmothers didn't, this argument goes, so why are we complaining?) In the post linked above Cowen responds to the outrage at this libertarian argument expressed by John Quiggin and Henry Farrell at Crooked Timber. Quiggin's contention is that cherry picking certain consumer goods for this kind of argument ignores the relative prices of all the goods a household needs to survive and perhaps better itself, if it is so fortunate. The fall in TV prices doesn't really compensate for the explosion in health and college education costs, to use Quiggin's example. You could throw in the cost of credit, housing and transportation, too. So the purchasing power of the poor doesn't necessary increase when flat-screen TVs and cell-phone plans become cheaper, and it certainly doesn't imply an equality with middle-class suburbanites who share an appetite for these things. Cowen points out that "it can be argued that 'TVs are not enough,' but that is not reason to reject consumption data out of hand. It is a reason to look at more categories of consumption." This still won't capture the experience of class difference, though, or the impact of inequality -- subjective qualities that always escape quantification in economic statistics. It may be that as you move down the class ladder, such consumer goods go from being taken for granted and requiring no compromises to being crucial aspirational symbols requiring a great deal of sacrifice. The PlayStation3 may possibly hold a greater significance beyond its function for the poor than for the middle-class, but I'm guessing that doesn't really compensate for the class differences. The goods are necessary in fundamentally different ways, too, that cement class differences and limit mobility -- the way the urban poor wear brand-name clothes will not be mistaken for the way the upper classes wear the same brands, and in this distinction serves as a tangible marker that helps keep classes separated. This is true of most consumption goods; the manner in which these goods shared among the classes are consumed seems to define and illustrate class boundaries rather than erode them as the libertarian argument implies.