New School Politics

Measuring Economic Inequality

Ryan | 18 02 2008

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The economic blogs have been buzzing about the recent column in the NYT by Dallas Reserve Bank economists Michael Cox and Richard Alm regarding economic inequality. They’re article argues that consumption is a better unit of measure for economic inequality, because it is a more accurate measure of living standards. As the tittle says, “you are what you spend.”

My reaction is that when we compare the economic conditions of people within an economy we should be looking at consumption figures, because they most accurately reflect a person’s quality of life at any given point. Given the marginal propensity to consume, it should not come as a surprise that inequality is less stark under this type of measurement (see first image below), and that savings/investment makes up the difference.

More importantly, however, is that consumption comes closer to taking into account innovative technologies which enhance standard of life across the board. These innovations are not reflected in monetary representations of income, or even consumption, which ultimately represent each individual’s “slice of the pie.” Improvement in technology does not only make everyone’s life better but it also makes living standards more equal as the changes are mass-produced and rapidly become social norm. Even Paul Krugman agrees with this point:

Yes, over the centuries economic progress has reduced some gross disparities — modern Americans are relatively unlikely to simply starve to death (though it can happen), so in that sense the gap between rich and poor has narrowed. But the question isn’t whether society is, in some sense, more equal than it was in 1900. It’s whether it is radically more unequal than it was in 1970.

Krugman, of course, holds that inequality has grown since that time. I would assume that is true, if one is to go by income distribution, or even consumption distribution since 1970. But once again, distribution is not always the best way to go about making these assessments. Keep in mind all of the advancements since 1970, and their speedy dissemination among consumers (bottom graph below). Goods like the microwave, VCR, cellphone, home computer, and internet all hit the market since that point in time, reaching between 60% and 95% of the population by the present. For instance, the microwave has made cooking food far more efficient for those who otherwise could not spare the labor and time, while internet access makes any type of information imaginable far more accessible, especially on the net, for those whose resources are otherwise more limited.

Ultimately, to answer Krugman’s question about equality since 1970, we need to weight the effects of technological advancements against the climbing inequality in monetary distribution. Such a task is difficult to exact, however, to to which Tyler Cowen proposes an alternative conclusion:

We do not know how inequality of welfare in America is faring over say the last thirty years. This is a point of overriding importance. Just in case you missed it, let me repeat: when it comes to the kind of intra-nation inequality that we should really care about (if we are going to worry about intra-nation inequality at all), we “do not know.” As in “know” and “not” put together.

Until and unless I know more, I am inclined to side with Cowen. Consequently, I think we are better off concentrating economic policy on how to raise productivity, rather than how to equal economic ends, because what we do know is that, as a former teacher of mine often cited, “a high tide does indeed raise all boats.”