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Tuesday, September 05, 2006

Who's Getting Richer

There's been a flurry of activity lately on the topic of the income disparity between the rich and the poor. It was started by a New York Times article titled "Real Wages Fail to Match a Rise in Productivity" which basically argues that wages for most people have stagnated for many years, even decades. This article sparked heavy debate between socialist and free market economists and pundits. I tend to line up pretty closely with the free market crowd and their analysis is pretty comprehensive. Here are some excerpts:

In TCSDaily, David Henderson argues that wage statistics don't mean squat and that people are better off regardless of what the wage statistics tell us:
Take home ownership. In the first quarter of 1965, the first date I could find quickly, 62.9 percent of American households owned their homes. That was during Meyerson's golden era. In the second quarter of this year, the "dead middle-class era," it was 68.7 percent, an all-time high. Cars? What's relevant, as with homeownership, is the percent of the population that owns cars. And this has boomed. In 1970, presumably near the peak of Meyerson's golden era, there were 108.4 million vehicles registered in the United States; by 2003, this had soared to 231.4 million, an increase of 113.5 percent, while the population had risen by only 42.4 percent. And note that Meyerson doesn't even mention air travel, which, due to deregulation and technological improvement, has become so much cheaper that even poor Americans, let alone middle-class ones, can now afford to fly. How about college? In 1970, only 10.7 percent of the population 25 years old or more had a college degree; by 2004, this was up to an all-time high of 27.7 percent.
Nicholas Eberstadt argues in the Washington Post that income is meaningless - the measure to focus on is spending:
Among low-income households in the United States, the gap between reported income and reported spending has widened gradually since the 1960s and now has taken on chasm-like dimensions. In the early 1960s, the poorest quarter of U.S. households spent 12 percent more than their annual incomes. In 1973, spending by America's poorest fifth surpassed their income by almost 40 percent. And in 2004, spending by the poorest fifth of American families exceeded income by a whopping 95 percent; in effect, spending was nearly twice as much as income.
Don Boudreaux at Cafe Hayek poses a thought experiment:
But I ask: would you prefer to live in 1967 with today’s real median household income ($46,326) or live today with 1967’s real median household income ($35,379)? (These figures are expressed in 2005 dollars, by the way.)

He answers his own question:

Given these two options, I’d choose to live today with only 1967’s real median household income. The reason is that the economy today offers so very many more options than did the economy in 1967 – or even the economy of that halcyon year, 1973. Today I can buy cell-phone service; today I can buy cable television with hundreds of channels, including ones that specialize in sports, cooking, history, and science; today even the cheapest automobiles are safer and more reliable than were the finest cars for sale in 1967; today I can buy telephone answering machines (with caller-ID), microwave ovens, CDs, personal computers, Internet service, and MP3 players. Today I can watch movies in my own home – in color – whenever I want without having to wait for one of the three or four available television stations to telecast a movie for viewing on a black-and-white television...
And Don continues on and on and on with all things new and improved.

Other factors that mitigate the wage statistics include general measurement errors. For example, many economists think inflation is overstated by over one percent per year. If so, wages and compensation increases since 1960 are actually pretty impressive.

But the other side does have a couple of good points. First, the value of wages is subjective. It's my observation, that for some people, the value to them of everything while living under leadership of the Democrats is much higher than the value of everything while living under Republican leadership. Thus, considering Professor Boudreaux's thought experiment above, they would subjectively (and rationally) choose the today's median income in 1967, when the drugs were good and the love was flowin'. I suspect this description happens to at least partly describe many NY Times readers, so they really are worse off now - since there is no "objective" economic sense, only their subjective perceptions.

Also, even to me, all other things being equal (including GDP per capita, GDP growth, etc.), I would prefer a system that was more egalitarian. I personally wouldn't put that preference ahead of GDP per capita growth, and since I don't personally believe that we could have a more egalitarian system and maintain the current rate of growth, I'm willing to let the egalitarian preference slide. But to many people, they would simply rather be poorer (and even have the poor be poorer in the future) and have a more egalitarian system. Once again, the value of everything to them under such a system would be higher and it would make up for lower wealth and income.

Both of these last two concepts draw heavily from an emotional, intuitive point of view, but that's not to say they aren't valid. They're certainly, in my opinion, valid enough to act on (or vote on). Trying to show why they're rational is a little tougher. Economist Brad DeLong tries by positing:

I'm enough of a touchy-feely sociology-lover to believe that a good chunk of the utility the rich derive from their conspicuous consumption is transferred to them from the poor.

In other words, the rich can put on their diamonds and look down their noses at the poor while feeling superior and "a good chunk" of the value of being rich comes from that. This implies that it's hardly worthwhile being rich if you can't do that. I find this a little tough to believe. But let's assume that it's true. If one is a utilitarian (one who wants to maximize overall utility of the economy to society), it may turn into an argument to try and increase the disparity between rich and poor. After all, the rich now have additional utility for their wealth (the feeling of superiority), yet this extra utility doesn't cost the non-rich anything at all! In other words, not being rich, it doesn't cost me anything for the rich to feel superior to me - all the more power to them as far as I'm concerned. I'm not worse off because of it.

Yet I have a hunch status does have something to do with DeLong's statement. Let's say there were no rich and therefore status had nothing to do with wealth. Then people would derive status from other traits: beauty, strength, height, intelligence, and job, to name a few. Brad DeLong, though short on beauty, strength, and height (relative to girth), would still get a bigger share of status from his exclusive job as an economics professor at UC Berkeley and the supposed intelligence that got him that position.

So it's interesting that in the zero sum gain of status, many of those belaboring income inequality and trying to increase the taxes on the rich have the most to gain.


Oroborous said...

In other words, not being rich, it doesn't cost me anything for the rich to feel superior to me - all the more power to them as far as I'm concerned. I'm not worse off because of it.

Well said !

But it actually works the other way, too. Paris Hilton can buy and sell me out of her pocket change, but I feel superior to her in every way that it's possible for one human to feel superior to another.
And she couldn't care less.


Bret said...

I agree with that assessment regarding Ms. Hilton, though she probably is a bit less hard on the eyes than I am, so I don't feel superior to her in that one particular regard.

There are two other related situations. One is that the poor can envy the rich. I have trouble relating to the concept, since I can't ever remember feeling envy. No doubt I have (for example, as a child), but it's been too long so I can't remember the feeling. Nonetheless, it strikes me as childish. It's also interesting that there's sort of a commandment prohibiting it (Thou shall not covet thy neighbor's stuff - oxen, wife, etc.) - it's rather amazing to spend a whole commandment out of ten on the subject.

The other is, of course, the rich who are embarrassed to be rich. There are millions of millionaires in the United States, yet that might not be obvious because I think most of them eschew conspicuous consumption. Those I know certainly do. Don't get me wrong - they like to consume - but they'd generally rather keep their consumption hidden. They're sort of the closet rich.