Wal-Mart and Income Inequality

First, I have not doubt that income inequality--  in whatever way the folks who care about such things measure it -- has increased.  The analysis that has been making the rounds of liberal blogs show the rich "capturing a higher share" of total output.  The very terminology here reveals their faulty core assumption, treating wealth as a zero-sum that must be grabbed and fought for and can only be gained to someone else's disadvantage.  They always write about incomes as if GDP is a sort of natural fountain in the desert, and the piggy rich crowd in too close to get more than their fair share of water from the fountain.

This is silly.  Wealth is created from the minds of human beings, and there are human minds that create far more wealth than others, and are able to keep some of that wealth for themselves as a reward.  I say "some" because even the richest people tend to keep only a small percentage of the wealth they create.  Sum up the benefits we all get from our iPods and iPhones and iPads, and the total number dwarfs what Apple shareholders have made from these devices.

Anyway, the actual point of this post was to revisit the notion that there are different inflation rates for the rich and poor (via Carpe Diem) that may be skewing income inequality numbers

Using scanner data on household consumption of non-durable goods between 1994 and 2005, we document that the relative prices of low-quality products that are consumed disproportionately by low-income households were falling over this period. This implies that non-durable inflation for the 10th percentile of the income distribution has only been 4.3 percent between 1994 and 2005 (0.4 percent per annum), while the non-durable inflation for the 90th percentile has been 11.9 percent (1.0 percent annually), and 13.4 percent (1.2 percent annually) for the richest 5 percent of households in the sample (see chart above)."...

"A large literature has focused on the rising inequality observed in official statistics, but have mostly abstracted from the fact that these official measures are based on a single price index for a representative consumer. This assumption is not crucial in a world with a stationary relative price distribution or where an identical basket of goods is consumed by different income groups. However, using household data on non-durable consumption, we document that the relative prices of low-quality products that are consumed disproportionately by low-income consumers have been falling over this period.

This fact implies that measured against the prices of products that poorer consumers actually buy, their "real" incomes have been rising steadily. As a consequence, we find that around half of the increase in conventional inequality measures during 1994"“2005 is the result of using the same price index for non-durable goods across different income groups. Moreover, given that the increase in price dispersion does not seem to be specific to our sample or time period, the overstatement in the increases in inequality from official measures can be even more significant, changing our view of how progress has been distributed in recent decades substantially."

The price of a night at the Four Seasons has gone up more than the price of a shirt at Wal-Mart.

  • Stan

    Almost makes you feel bad for the rich. Actually, I do on many issues.

  • joshv

    And even though they are "low quality" the products at Walmart aren't necessarily inferior. Walmart jeans will last just as long as designer jeans. There are of course counter examples (never buy furniture at Walmart) but much of the quality Walmart customers aren't paying for, is not missed.

  • delurking

    So wouldn't that be what you would expect if income inequality is rising? As the top 10% get relatively richer compared to the poorest 10%, there is relatively more demand for the products/services that top 10% want, compared to the products/services that the bottom 10% want. Hence, prices for those things go up more. So, you really can't make a point without getting into a quantitative discussion of how "the folks who care about such things measure it".

  • Noumenon

    They always write about incomes as if GDP is a sort of natural fountain in the desert

    I think it's fair to think of it that way, since there are so many other countries with equal or better GDP growth, per capita at least. GDP growth isn't something you need one particular CEO-friendly policy to have.

    As for the zero-sum thing, I just don't think the way you're reading the implications of the language matches the way liberals actually think. Ask Drum, Yglesias, etc "Do you think the income inequality comes as a direct taking from the poor of income they would otherwise have?" and I think they'd say no. The simple intellectual concept of increasing your income via an increasing pie rather than zero sum stealing is something even dictators understand.

  • http://raggedindividualist.blogspot.com Craig

    "The simple intellectual concept of increasing your income via an increasing pie rather than zero sum stealing is something even dictators understand."

    I still don't think Obama does, though.

  • DensityDuck

    It's not really about "income inequality", just like it was never really about "global warming". It's about some people being richer than me, and this is not acceptable.

    It's the same impulse that leads people to jump over in the left lane and drive at exactly sixty-five miles an hour. NO NO YOU CANNOT GET MORE YOU CANNOT BE BETTER NO BETTER THAN ME NO MORE THAN ME NOOOOO!!!

    Some people never get beyond that shaved-monkey stage of social development.

  • http://www.maplesyrupsource.com Robert Montcalm

    >>Wealth is created from the minds of human beings

    I think statements like this make your otherwise pretty good writing a little cliché. I have no problem with this as I like Ayn Rand too.
    Thanks, great blog. I've been reading for years.

  • http://pwmf423 Donna

    Should we thank China for the rising "real" income of the poorer consumers?

  • stan

    Some really good stuff, even in the comments. I'm not the Stan of the first comment btw.

    delurking -- specifically, you have status goods which are sought precisely because they are expensive. In order to continue to signify status, they must remain "pricey" or the demand dries up. See the lessons of Izod learned and implemented by Polo.

    Noumenon -- my impression is that they are convinced that rich people use their influence over politicians to buy favorable govt treatment which unfairly tilts the playing field to favor the rich over the poor. But Warren is correct, everything they say and do demonstrates that they see the pie as being fixed in size. Look at how the CBO uses static scoring on bills in Congress. The refusal of the Dems to adopt dynamic scoring is all about the explicit assumption of a fixed pie.

    Density Duck -- bingo!

  • alanstorm

    A thought experiment:

    2 people, one making $50,000/year, one making $100,000/year, e.g. one makes twice as much as the other.

    Both get 100% raises (whoever these people are, I want to work where they do!). Thus, one is now making $100,000/year, the other is making $200,000/year. One still makes twice as much as the other.

    A rational person will look at this and note that each is now twice as well off as before.

    A socialist/liberal/democrat (they're pretty much interchangeable at this stage) will whine that the income disparity was doubled, i.e. from $50K to $100K. This is demonstrably true, but utterly meaningless.

  • David

    Isn't income inequality a function of a larger pool of talent? Consider the case of a book author. In 1950, a talented author writes an amazing best seller that one in every ten people pick up and read. The profit from this is quite large. A not-so-talented (or simply more niche author) writes a book that has low appeal. He has less profit.

    Sixty years later, another low talent or niche book is written and sells to roughly the same sized audience for roughly the same profit. At the same time, another best seller is written that also appeals to one of every ten readers. Because the population of readers has grown substantially, so do his profits. Did the best seller steal from the other author? No. There are simply more readers to appeal to, which is exactly what he did.

    Isn’t this the same case in the business world? If a given task today is no more challenging than it was 50 years ago, who would it necessarily pay more? If running a company, that has an even larger market, a larger competitive exposure, and larger employment base is more complex than it was 50 years ago, wouldn’t it make sense that the job would pay more? From this, wouldn’t we naturally expect that the income divide would rise simply from the difference in the scale of responsibilities? The longer that scale, the bigger the income disparity, right?

    For another no-brainer example, look at athletes. The top athlete from a pool of 300 million that draws 299.999 million fans is going to get paid more than the top athlete from a pool of 100 million that draws 99.999 million fans, right? Top authors, athletes, and movie stars have all seen their incomes relative to others in their trade rise as the population has grown. Why wouldn’t we expect to see the same thing in business as the size of the firms and their markets has grown? And why, when we see exactly what we should expect, do some assume that it means that someone must be getting short changed?

    Oh wait… my bad… I was trying to apply real life logic to political economics… I could never make it in politics.

  • Notateabagger

    Typical teabagger. I have mine and screw everyone else. And a climate denier. All you astroturf monkeys are destroying America.

  • Jim Collins

    I'm afraid that my comment to Notateabagger would get me banned from this website. Just goes to show how ignorant some people are.

  • A Friend

    David, great post.

  • ADiff

    Severe concentration of wealth can threaten a democratic system in many ways. Beyond that it's hard to see any intrinsic problem with it. Beyond attention to the potential threats inherent in such concentration ... which aren't exclusively or even predominantly from 'the rich' by any means ... it's generally true that 'a rising tide lifts all boats'. The fact it lifts some more than others should generally be understood an issue of envy and probably little, if anything, more.

    A representative democracy might well need, in the interest of stability, especially those of the modestly wealthy, to try to rectify such concentration ... but only with moderation and great caution that it neither betray its own virtues nor kill that proverbial goose.

  • caseyboy

    Jim, I think Notateabagger is being facetious. No one could be that naive.

  • spiro

    Notateabagger,

    compare the intellectual content of you post with David's, right above it.
    I think it illustrates the difference in the thought process we put into our votes, vs. how you do it. As for the destruction of America, you voted your folks into both houses and the presidency....how's that working out for ya?

  • chris

    I have long believed that "income inequality" is a red herring. I think most readers have the wayward brother, uncle, child, friend, etc who, despite a priveleged U.S. upbringing, has chosen to live a life of subsistence.

    So, if that type of person has always existed, the low end of the income range stays fixed (or increases at the glacial rate of public welfare). Therefore the only way to stop income inequality from increasing is to cap the upper end of income, or more accurately to stop income increases among the upper half, which is counterproductive by definition.

    Whenever somebody brings up income inequality, I find it helpful to redirect their thinking toward income/class mobility.

  • jke

    walmart has good lead prices but many everyday items are rip offs.reading glasses at 20 bucks vs 1 dollar at dollar stores.pharmacy specials vs prescription name items not made in generic.
    ike

  • http://www.dlasys.net dhlii

    This argument is atleast as old as Adam Smith and as ludicrous as it was then.
    The first fallacy - which is touched on without being fully appreciated, is that Wealth and money are distinct. Oprah and Gates possess far more wealth than most of us, but in the end you can only spend so much on gulf streams, mansions, etc. The vast majority of the riches of the "wealthy" are in the form of money - investments. These are not wealth, but they are the means to build wealth and the overwhelming majority of that wealth is in others.
    Wealth is what we consume - whatever we desire and are willing to trade our money for, Vacations, ice cream, time with our kids, Blue Jeans, cell phones, flat screens.
    In Smith's time the real wealth of a nation was (and had to be) concentrated at the bottom of the pyramid. The pyramid is taller, the base is broader, but the overwhelming majority of consumption occurs at the base. Changing the distribution of money has no effect on that.

  • ike

    obama is all about class division and was elected on that premise.Now everyone that shops WalMart is labeled even if they get ripped off by loss leader baits to overpricing.WalMart has always hired part time to avoid benefits.
    Obamas war on wall street and banks has cost us leadership as he wallows in campagn rheotoric even now as his views are seen dimly by even the most conservative.obamacare not top notch insurance whine union breakers blocking views of illegal immigrants taking menial jobs from unemployed citizens.
    so let us give 35 billion to afghanistan so the leaders can plot with terrorist for our overthrow as our boys return in caskets from a useless war.longing for the clinton era again.walmart could be as they wished bank walmart and as sears found out blow themselves up//
    ike