Having more money vs. buying cheaper goods (20 May 2008)

Prompted by James Surowiecki's most recent New Yorker column, the econoblogosphere has been discussing this paper about purchasing power and income inequality. Says Surowiecki, "In a recent paper on the effect of trade with China, the University of Chicago economists Christian Broda and John Romalis estimate that poor Americans devote around forty per cent more of their spending to 'non-durable goods' than rich Americans do. That means that lower-income Americans get a much bigger benefit from the lower prices that trade with China has brought." Broda and Romalis's University of Chicago colleague Steven Leavitt (of Freakonomics fame) chimes in, highlighting the counterintuitive idea that "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." Which in turn delights Cato Institute scholar Will Wilkinson, who's anxious to rebut critics of rising income inequality: "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?" That's all in line with the libertarian ideology that holds that we can't jeopardize the outsize rewards reaped from capitalism's "creative destruction" with any sort of regulation lest we hamper society's "dynamism." (That's also why unreconstructed Randians like Alan Greenspan don't want to do anything to forestall bubbles.)

Somewhat bizarrely, Leavitt argues (perhaps following the paper's argument, though the abstract draws few interpretive conclusions) that because the lower-income bracket's basket of goods has seen less inflation than the basket of goods typical for wealthier people, that inequality between the two groups has been mitigated. Felix Salmon questions the numbers here, but there seems to be a strange methodological assumption as well. Poor people haven't chosen to buy the cheapening goods before the fact; they by them because they have to, because they are already cheap and not because they prefer them. So they may experience less inflation, but their stagnant incomes mean they don't have the ability to price themselves into a different (and possibly more satisfying, more status conferring) level of consumption. I don't know about you, but wouldn't you want the rich person's basket anyway, assuming you could afford it? Would you prefer clothes from SoHo boutiques or from Factory 2 U? Leavitt's logic seems to be that you can enrich yourself de facto by buying cheap things, a la the Ernest and Julio Gallo commercial where the sybarite fat cat drinking cheap wine purrs, "How do you think I got so rich?" I don't feel particularly rich when I go to the 99-cent store to buy recycling bags and am surrounded by mind-boggling amount of cheap crap available -- instead I feel thankful that I don't have to do my ordinary shopping there. It reminds me why it's so comforting to be in luxury-retail zones, where clutter and sensory assault is minimized and precious retail space is wasted conspicuously. Less, in certain contexts, is much more. I'd suppose I would rather be in a position to enjoy fewer luxuries and revel in the experience they provide than be in a position where I couldn't even dream about buying such experiences at all.

As economist Lane Kenworthy argues

Consumption is worth paying attention to. But income is important in its own right because it confers capabilities to make choices. What matters, in this view, is what you are able to buy rather than what you want to buy. If a rich person with expensive tastes gets an extra $100,000, she can continue buying high-end clothes and gadgets. Or she can choose to purchase low-end Chinese-made products and save the difference. Suggesting that if she opts for the former there has been no rise in inequality is not very compelling.