The changing face of inequality

Paul Krugman offers a spirited defence of his book against a review by the Economist. Then again when have you noticed anything from Paul Krugman that isn’t spirited? The exchange is well worth checking out, indeed a bit of a ‘must’ for anyone thinking about inequality.

For once I disagree more with Krugman than I agree with him. I agree with him about the tone of the Economist piece which is smug and self assured, yet undoubtedly written by someone who knows far less about the subject than Krugman. But the issues it raises are of great import and interest and they do highlight ways in which inequality isn’t as bad as it looks – or at least matters less than it did.

[A] peek at the numbers behind the numbers suggests that Mr Krugman has been misled: far from a new Gilded Age, America is experiencing a period of unprecedented material equality.

This is not to deny that income inequality is rising: it is. [The article then goes on to look at consumption inequality as opposed to income inequality – I score Krugman mostly a winner on points here]

But consumption numbers, too, conceal as much as they illuminate. You no longer need be a Vanderbilt to own a refrigerator or a car. Refrigerators are now all but universal in America, even though refrigerator inequality continues to grow. The Sub-Zero PRO 48, which the manufacturer calls a monument to food preservation, costs about $11,000, compared with a paltry $350 for the IKEA Energisk B18 W. The lived difference, however, is rather smaller than that between having fresh meat and milk and having none. Similarly, more than 70% of Americans under the official poverty line own at least one car. And the distance between driving a used Hyundai Elantra and a new Jaguar XJ is well nigh undetectable compared with the difference between motoring and hiking through the muck. The vast spread of prices often distracts from a narrowing range of experience.

Then, in my book, the critique of Krugman’s starts becoming Pollianaish.

This compression is not a thing of the past. To take one recent example, Jerry Hausman of the Massachusetts Institute of Technology and Ephraim Leibtag of the United States Department of Agriculture, show that Wal-Mart’s move into the grocery business has lowered food prices. Because the poorest spend the largest part of their budget on food, lower prices have benefited them most. The official statistics do not capture these gains.

That’s true enough, but food prices are rising fast with rocketing Chinese and Indian consumption and with the Americans and others subsidising the bejesus out of ethanol it looks like it will go on rising.

The review then makes another good point

This increasing equality in real consumption mirrors a dramatic narrowing of other inequalities between rich and poor, such as the inequalities in height, life expectancy and leisure. William Robert Fogel, a Nobel prize-winning economic historian, argues that nominal measures of economic well-being often miss such huge changes in the conditions of life. In every measure that we have bearing on the standard of living…the gains of the lower classes have been far greater than those experienced by the population as a whole, Mr Fogel observes.

Before concluding with appalling complacency that there are a bunch of things that have become more unequal. Are they less important? Here at Troppo, we report – you decide!

Some worrying inequalities, such as the access to a good education, may indeed be widening, arresting economic mobility for the least fortunate and exacerbating income-inequality trends. Yet even if you care about those aspects of income inequality, the idea can send misleading signals about the underlying trends in real consumption and the real quality of life. Contrary to Mr Krugman’s implications, today’s Gilded Age income gaps do not imply Gilded Age lifestyle gaps. On the contrary, those intrepid souls who make vast fortunes turning out ever higher-quality goods at ever lower prices widen the income gap while reducing the differences that matter most.

As Krugman says:

Seventy percent of the poor have cars! They must be doing fine! Except that they often cant afford medical care, sometimes cant afford enough food, and usually cant find a way to get their children a decent education.

All pretty interesting stuff for helping to get your mind around a great issue of our age.

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Bill Cushing
Bill Cushing
13 years ago

A Noo York bus driver once pointed out to me a considerable gathering of clapped-out Cadillacs and the like parked along one particular section of the Grand Concourse in the South Bronx. ‘That’s the Welfare office’, he observed.

Patrick
Patrick
13 years ago

When you call part of the review Pollyannish, presumably because

food prices are rising fast

– what do you mean by this? That the reviewer was right, but might not be some time in the future?

The Economist has responded, incidentally.

Krugman lists as the fourth flaw in the review the following:

Finally, theres the failure to appreciate just how rich todays rich are.

Call me silly, but doesn’t that statement refute the implied premise??? Ie if even relatively sophisticated and well-off Economist journalists don’t ‘appreciate just how rich todays rich are‘ then doesn’t that suggest that the inequality complained of is not relevant to social inequality. After all I take Krugman’s foundational premise to be that relative inequality matters because of the effect it has on people, or something in that vein.

Worse, Krugman writes that just after lambasting the Economist for their third ‘error’:

the downplaying of poverty.

. But isn’t his just-stated concern about the possibility that the superrich today live in their own ‘financial country’ completely downplaying real poverty and inequality in just the manner the Economist picks up?

Ie, isn’t it much more relevant whether A and B can fly, than whether A must do so in cattle class and B has a private plane?

Finally, the Economist’s conclusion is pretty spirited too:

Mr Krugman rightly points to health care and education as areas of especially worrying inequalities. But surely he recognises that it is precisely in education and health care where the market mechanisms that generally lead to lower prices and higher quality have been allowed to operate least freely.

Patrick
Patrick
13 years ago

In that vein I would say that Krugman’s spiritedness comes across as verging on the boorish. And he attracts the least enlightening commenters of any econblogger I have ever read, which presumably reflects the degree to which he is no longer an economist but simply another very partisan columnist. The moral of the story, I guess, is that political writing ruins good economists.

Not to mention that I am pretty sure that one has to take a pretty selective sample of times to find that inequality in education has got worse, and that is definitely an area where a) the Economist’s point is very sound and b) Krugman is on very weak ground.

But whilst your point about the US health system appears to me to hold, broadly (excluding perhaps the role of the FDA), I think Krugman loses heavily on the substance of the argument, and particularly (what comes across as) his ignorance of what poverty could mean.

From personal experience, even a really crappy car is a substantial improvement on none!!

Patrick
Patrick
13 years ago

I don’t think that there was any such extraordinary turn. Consider the Clinton, let alone Nixon or Kennedy, administrations.

And I think he is pretty partisan as a columnist. If he has only scorn for Republican economic policies and generally supports Democratic ones, as opposed to a mild preference, well, that’s either partisanship or economic ignorance. I am pretty sure about ruling out the latter.

What would Krugman have made of a Republican party that gained the majority largely by campaigning against the war and then a) did not make any change to American policy in regards to torture, b) voted en masse to approve unconditional and substantially increased further funding and c) declined to actually pass even the mildest bill of censure?

I don’t argue as to the merits of any of those actions – but I am sure that if Republicans were Democrats (or vice versa I guess) we would still be hearing about such behaviour. I don’t doubt that if Sandy Berger had been a Republican, Krugman would have written about nothing else for a month or two.

I don’t mind criticism of the current administration, especially on economics. But the fact that the Democrats don’t presently have the presidency is not a reason to support them nor to exempt them from criticism, as Krugman appears to do.

But I accept that maybe I overeact – after all I have a general preference for Republicans and their policies. I suspect that you err the other way – your post, despite your last comment, really ends as an exoneration of Krugman, almost an endorsement. Hence my jibe about stirring, which I don’t really think adds much, especially in Krugman’s style.

Anyway, amities, vive la difference, etc, and we should leave Krugman at that.

Further on interesting things, Tyler Cowen discusses a recent perspective on inequality here.

And the same blogger reports on Daniel Kahneman’s latest work on comparative happiness here, although that may interest James Farrell and Paul Fritjers than you.

The comments to both are, as usual on marginalrevolution, also worth reading.

John Greenfield
John Greenfield
13 years ago

Surely it is high time that Messrs Hitchens and Krugman had a Bitchslap-Off for the right to be knighted ‘The Liberal Leftist More Holier Than Thou?’

John Greenfield
John Greenfield
13 years ago

Krugman is the very worst of the most excerable moral narcissist bourgeois Luvvies.

Can’t stand him.

Patrick
Patrick
13 years ago

It seems to me that Republicans are more likely than Democrats to support

free-er trade,
education reform,
tort law reform,
anti (as opposed to positive) discrimination policies,
earmarks and budgetary reform (although I accept that this might be more faith than reasonable belief),
lighter capital markets regulation,
sensible (ie Australian-style :) ) social security reform,
tax relief, and
low-cost environmental solutions.

But I am not particularly strongly pro-republican. Whilst I don’t think Obama would make a great president yet, I would be about as much optimistic about eg Hillary-Obama or even Hillary-Richardson or (perhaps least so) Hillary-Edwards than I would be about McCain-Romney or Thompson-Romney or Guiliani-Romney or Romney-Thompson, etc.

Glad to see you enjoyed the links! Fwiw, Andrew Leigh also read Frank Rich’s book recently. He basically liked it.

Bring Back CL's blog
Bring Back CL's blog
13 years ago

John G try sitting!

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