More on Inequality and Prices

Will Wilkinson defends the notion of separate price indexes for the poor and the rich. I don’t have a problem with that per se. The point I tried to make in my previous post concerns its relevance for our assessment of how much inequality has increased.

In his original post on this, Wilkinson writes “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.” I disagree. We should care about inequality of income not simply because it contributes to inequality of well-being, but also because it contributes to inequality of capability.

Even if consumption inequality has increased only a little, the rise in income inequality has produced a noteworthy increase in inequality of capability. The rich aren’t forced to purchase goods and services whose prices have increased more rapidly; they could switch to the same consumption bundle as the poor if they wished.

In my view the Broda and Romalis analysis is important for our understanding of (absolute) poverty, rather than inequality. They find that the prices of goods poor Americans tend to purchase have risen less rapidly than the overall inflation rate. I can’t assess whether they’ve accurately analyzed the data and how much measurement error the data contain. But if the finding is correct, it suggests that the trend in living standards for America’s poor was more favorable (or less unfavorable) between 1994 and 2005 than income data imply.

17 thoughts on “More on Inequality and Prices

  1. Can I accurately translate this statement:

    We should care about inequality of income not simply because it contributes to inequality of well-being, but also because it contributes to inequality of capability.

    to mean this?

    “even when inequality of income does not contribute to inequality of well-being, it always contributes to inequality of capability.”

    or is it more like this?

    “inequality of income always contributes both to inequality of well-being and to inequality of capability.”

    or like this?

    “‘well-being’, when properly defined, encompasses what I am doing as well as what I can do. So to decrease what I can do reduces my well-being even if it does not change what I am doing.”

    Thanks :)

  2. Pingback: walmart and economic inequality « orgtheory.net

  3. Pingback: Will Wilkinson / The Fly Bottle » Blog Archive » Inequality of Capability?

  4. So you are saying that a shrink in my consumption possibility frontier reduces my utility even if it does not change my purchased basket of goods?

    I disagree. I think the goodness of the purchased basket of goods, minus the badness of the money I paid, equals my utility (putting aside everything non-economic :) )

  5. I want to see Mike’s model: the one where the frontier moves, but the tangent remains the same.

    Unless he’s arguing that he borrowed (more) heavily to maintain the same standard (basket), in which case the answer presents itself.

  6. Am I missing something, or do the words ‘medical’ and ‘health’ not appear in Broda’s paper?

    Seems a rather glaring omission to me.

  7. Ken: I specifically mean inflation in a good I don’t buy.

    Such inflation will shrink my CPF, but I had decided I want zero of that good already, so my basket of goods does not change.

    My question is whether Lane feels this is a reduction in my well-being. And is that what’s driving Lane’s objection to the study?

  8. The other issue here is that while it can be argued that consumption may be a better measure of current living standards than income, the difference between disposable income and consumption is available for savings. People concerned about inequality also point to widening dispersion of wealth.

  9. Thank you for the reply on relative versus absolute poverty – I will be interested to see further discussion of that.

    On this one, I think you’re spot on. It is remarkable how often poverty and inequality become confused. It is in my view absurd to imply that the rich and the poor’s consumption bundles are primarily different because of their preferences. There is an inherent asymmetry here – the rich may *choose* caviar over baked beans, but the poor do not have that choice available to them.

    Incidentally – though he wasn’t asking me – I would vote for the third of Mike’s ‘translations’. Whether we buy the capabilities approach wholesale or not, I think it would be odd to argue that decreasing my range of possible consumption bundles does not affect my well-being.

  10. Mike:

    If one wants to define well-being as actual consumption, as Will Wilkinson does in his post, then either of your first two options might be right. A broader definition of well-being would include capability, as in your third option.

    Lane

  11. The greater the trade, the closer in shape becomes the wealth distributions among trading partners. Another affect, is the flattening and spreading of the wealth distribution, more workers fill in more slots.

    What matters is how smooth the wealth distribution becomes as trade increases, and whether it is more symmetrical than before.

  12. «If one wants to define well-being as actual consumption, as Will Wilkinson does in his post,»

    In that case then any money that is not spent on actual consumption does not contribute in any way to the well being, and any money not spent in consumption by high earners can be taxed way, as it contributed nothing to the well being of the high earner.

  13. «There is an inherent asymmetry here – the rich may *choose* caviar over baked beans, but the poor do not have that choice available to them.»

    Well, you don’t understand the “free market” sophistry here: sure the poor have that choice. It is is free market after all: nobody is holding a gun to their head saying “you buy caviar instead of beans, I pull the trigger”. As Mike says:

    “Such inflation will shrink my CPF, but I had decided I want zero of that good already,”

    poor people simply *decide* what they don’t want (e.g. health care, college education, holidays in Aspen).

    Nobody is coercing those poor people to decide one way or another — every choice they make must be of advantage to them over those they have not made, because there is no coercion.

  14. «They find that the prices of goods poor Americans tend to purchase have risen less rapidly than the overall inflation rate.»

    Sure, but that may simply mean that’s why the poor tend to purchase those goods. Consider beans vs. steak: the poor may perhaps buy more beans than steak precisely because bean prices may be growing less rapidly than those of steak. This does not mean that their well being is decreasing more slowly — because beans are not a perfect substitute for steak.

    For example, there has been phenomenal inflation in the cost of health care and college education, two services that are consumed much more by the rich than the poor. Does this mean that the relative well being of the poor has increased because only the rich can afford to consume services whose price has been rising fast?

  15. The issue I have with this is the fact that, even if living standards are increasing for the average poor person, any poor person who atypically chooses to buy goods generally associated with the rich is going to be much worse off. That’s probably not so terrible if that good is caviar, but quite a bit more worrisome if that good is a medical procedure. So living standards for the poor are increasing, but the goods that rich people buy more often may be getting further out of reach.

    (Though having mentioned medical care as an example of a high-inflation “rich people” good, I should mention that most research shows that medical prices are increasing because of new, expensive procedures, while prices for any given procedure have generally fallen.)

    Still, on the whole, this is very positive news.

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