Some Lifestyles Are More Equal Than Others
There’s a good argument going on at DiA over whether the widely-perceived increase in inequality in terms of wealth and income might not be overstated. (To follow the argument, start here and work backward.)
If I understand correctly, the argument that inequality has been overstated works something like this:
Apparently large increases in inequality really reflect different rates of inflation at different levels of wealth. Low-cost goods have largely remained low-cost and have increased in quality, so inflation for consumers in, say, the bottom three quartiles of income has been very low or even negative for some time. Meanwhile, while quality has also increased in high-end goods, their cost trajectory has been much more varied, with the prices of some good skyrocketing well beyond any measure of increased quality. (The typical example being the Sub-Zero refrigerator.) Therefore, the apparent increase in inequality is overstated; if you measure in terms of purchasing power relative to the actual basket of purchased goods, the wealthy haven’t gotten as much wealthier as you’d think, and the apparently stagnant wages in the bottom half of the income scale can actually buy a lot more than you’d think.
That’s a pretty persuasive argument if the data backs it up. Hold everything else constant and assume that two consumers are identical except that the one who earns more spends the excess on a luxury car, while the one who earns less buys an economy car. If, from one year to the next the prices of luxury cars go up, while the prices of other cars and all other goods as well as both consumer’s earnings stay constant, the second consumer will no longer be able to afford the car he wanted to buy, and will have to settle for a lower-end model. He will experience the loss of purchasing power we call inflation. The first consumer, on the other hand, will see no change in his purchasing power. He couldn’t afford the luxury car before, and he can’t afford it now.
That picture describes one widely-observed economic development. Two notable trends of the past twenty years have been the development of a mass upper class and the widespread experience, within that class, of a sensation that they are not keeping up with the truly wealthy, that their apparently high incomes mask an actual slipping of living standards. And to some extent, this sensation is an artifact of human psychology rather than economic reality. We don’t properly account for the enormous quality improvements in, say, computer technology, to the same extent that we account for the increase in cost in, say, gasoline.
And while it’s also not what people are talking about when they talk about inequality as a problem, the ability to substitute goods is relevant at every income level. If the price of beef rises but the price of chicken doesn’t, we’ll eat more chicken and less beef. Unless you believe that a beef-heavy diet is objectively superior, that substitution preserves purchasing power in the face of an increase in the price of one item in the basket. Larger-scale changes process similarly. If the cost of baseball tickets skyrockets out of reach, but the cost of a theater-like experience of watching baseball at home drops from astronomical to very much within reach, well, most of us will change our patterns of living, and go to fewer live baseball games and watch more games at home. Even if the price of gasoline skyrockets, more of us will telecommute or move closer to where we work; this will affect housing prices and patterns of wages and prices across a host of other sectors. The point being: in the very short term, a change in the price of one good in the basket will change the price of the basket, but pretty quickly the actual composition of the basket adjusts. That’s why you can’t measure inflation just by looking at a static basket of goods.
But not all goods are readily substitutable. And some of those that are not are really quite essential.
Consider some of the goods whose prices have certainly increased faster than the general rate of inflation:
- Higher education – Health insurance – Real estate (a proxy for safe neighborhoods with good schools)
The thing about goods like these is that there are no good substitutes. If the cost of health insurance rises inexorably, there’s not really anything you can substitute for that. Indeed, even if the quality of health care has improved in many ways – new surgical procedures, better prostheses, less-addictive pain medications, etc. – there’s no way to substitute other goods for health insurance to bring the overall proportion of health insurance expenditures back down. Instead, health care costs inevitably trade off against other goods.
Similarly with higher education – or education generally, using the cost of real estate as a proxy for the cost of public schooling. Any claims to an increase in quality in education will probably be laughed out of the room (houses certainly have gotten bigger on average, which is one crude measure of quality), but even if there were measurable increases in quality, there’s no real way to substitute other goods for education. If the cost of going to college goes up, you’ve got to pay it if you want to go to college – and the debt you take on will reduce your effective income well into the future. If the cost of living in a neighborhood with a good school goes up, putting it out of reach, you’re going to wind up living in a neighborhood with a not-so-good school. That your house in that neighborhood may be a bit larger than it would have been 25 years ago is small consolation: the essential good that you were trying to buy is now out of reach.
Which returns me to a frequent harping-point: inflation is unequally distributed across the basket of goods because productivity gains have been unequal in different sectors. When we see big gains in productivity in one sector and no similar gains in another sector, and individuals can adjust their purchases to take advantage of this, the economy as a whole experiences healthy growth without inflation, and everyone feels wealthier. But when we see no gains in productivity in an essential sector, that sector will chew up more an more of our income without giving us any higher return in terms of quality. And, since there’s always a segment of society wealthy enough not to be troubled by these kinds of changes in prices, what you get is a real increase in inequality.
There are other factors to consider when we look at the lowest-quintile income sector: the catastrophic failure of our worst schools, the pervasiveness of family breakdown, poor nutrition, competition from a huge pool of labor entering the global market (whether employed overseas or migrating here), dramatic increases in manufacturing productivity leading to lower overall employment in the sector (a global phenomenon), and the relative stinginess of the American welfare state, and no doubt other factors I haven’t mentioned. It’s probably helpful to think of inequality in terms of three different problems:
- The problem of poverty, particularly multi-generational poverty – The problem of lack of productivity growth in essential service sectors (health care and education) driving well-above-inflation price increases in these sectors – The problem of the rise of the “super-rich” particularly from changes in the financial services sector
The first of these is a vital moral problem, and I don’t intend to slight it, but I question how much it actually matters to overall economic performance. The last of these is mostly a cultural problem, albeit one that may have significant political implications. The middle problem strikes me as the one with the most important economic and social consequences.
Building off of my comment in Jim’s post, one of the things I started work on when I was down South was a pop-philosophy/self-help book organized around the idea of “take advantage of what’s offered in abundance.”
The germ of the idea is that a lot of people ruin the experience of being on a boat by trying to make it like living on land, hook up to a state-run power grid, water supply, and sewage system. That’s a lot of infrastructure capability and reliability for one person/couple/family to try to duplicate against limitations of space and money; and the “solutions” tend to spiral, leading to boats that are more more expensive and less independent, while only being marginally more comfortable (if at all.)
But I have a certain squeamishness about the pop philosophy/self-help genre. The copy of “Shop Class as Soul Craft” my father sent me last year remains unopened; while in the last year I’ve re-read “Boats with an Open Mind” for what must be the 12th or 15th time. Sort of like Jim’s novel, my own foray into long-form writing remains an unorganized collection of notes and half-baked essays.
— Tony Comstock · Sep 27, 03:18 PM · #
Tony,
If I were to offer a single piece of advice for enjoying and getting the most out of life life while traveling and/or living and working in different contexts, it would be “When in Rome….”
— Jim Manzi · Sep 27, 03:52 PM · #
No doubt excellent advice, mostly.
Except what the “Romans” have been doing for the last few years is borrowing money in all sorts of ill-advised ways to buy more chicken and more beef; leaving them both in debt and in poor health.
— Tony Comstock · Sep 27, 04:04 PM · #
Again, the conservitards studiously ignore one of the real problems, the bell curve of IQ.
The 40percenters (between the mean and functional retardation) DON’T NEED COLLEGE— they need trade school, voc-ed.
Obama has actually done something about that with his graduate-a-year-early and his bricolage of junior colleges into trade schools.
What have you got to offer, conservatism? Vouchers?
But there is no evidence vouchers work.
No….having failed with NCLB to make all american above average, you are now campaigning to make all teachers above average.
Conservatism— where even the smart people are retards.
Obama made voc-ed cool.
— matoko_chan · Sep 27, 04:05 PM · #
The first of these is a vital moral problem, and I don’t intend to slight it, but I question how much it actually matters to overall economic performance.
You’re not wrong in questioning that. What that fact implies is that our concern with overall economic performance as usually constituted is a moral failure and an analytical sham.
— Freddie · Sep 27, 05:53 PM · #
On the bus now, and still ruminating on “the Romans”.
This whole wealth thing must be the topic de jour because over at James Fallows’ blog there’s a nice infographic on how people think wealth is distributed vs how they think it should be vs how it actuallly is
It would seem that it’s hard to know whether or not one is in Rome, and what it actually is that Romans actually do.
For myself, I have become almost pathologically irritated by the use of “use deserve” or “you’ve earned it” in advertising.
— Tony Comstock · Sep 27, 06:03 PM · #
our concern with overall economic performance as usually constituted is a moral failure and an analytical sham.
Yes to the first part (moral failure), no to the second part (analytical sham). Focusing on overall economic performance isn’t an analytical sham, it isn’t directly about solving multi-generational poverty in the first world. That’s not what finding the cure for cancer is about either…
— Ben A · Sep 27, 06:30 PM · #
Fair enough.
— Freddie · Sep 27, 06:50 PM · #
My new VDARE.com column looks at almost exactly the same thing: what are the relative impacts of rising inequality on the middle class cost of living. Like Noah, I focus on the costs of housing, health care, and education.
The super rich don’t take up all that much space, don’t consume a lot of health care, and below the elite ranks, don’t consume a lot of education. In contrast, the growing numbers of people in California who are at the opposite end of the scale have made life much more expensive for those trying to stay in the middle.
The real problem with the growth of the super rich is their increasing influence over politics and intellectual life.
— Steve Sailer · Sep 28, 12:52 AM · #
Tony wrote: “For myself, I have become almost pathologically irritated by the use of “use deserve” or “you’ve earned it” in advertising.”
Me, too.
Steve wrote: “The real problem with the growth of the super rich is their increasing influence over politics and intellectual life.”
Zactly. The super rich take trillions of our dollars and spend it on self-aggrandizement, aka stimulus. Hence, the tea parties as a countervailing force.
— The Reticulator · Sep 28, 03:01 AM · #
It’s interesting that your main conclusion is, essentially, that we need more ‘productivity growth’ in these sectors: education, health care, (and I’ll toss in real estate as it was your third example of non-substitutable goods that have risen in price).
If that’s what we need, we’re in trouble. How pray tell are we going to get significant ‘productivity growth’ in, say, education? And what would that even mean? Similar for health care; a doctor can see N patients a day. Would ‘productivity growth’ mean seeing 10*N patients a day? Yes there will be medical advances and the like, but to count on this for ‘productivity growth’ is stretching it.
And as for real estate, the whole point of it is that it is scarce. No amount of ‘productivity growth’ is going to increase substantially the amount of real estate available on the Upper East Side or Nob Hill.
In fact, these are all examples of things that are either naturally constrained (real estate), and/or their consumption is compelled/subsidized by the government.
Arguably, the reason health care and education costs have risen so much is because we demand so dang much of it way out of proportion to its actual benefit to us. In education, the example of paying $30k+ per year to get a humanities degree is too obvious to point out. As for health care, we (rightly or wrongly) demand that every medical advance, even if 10x as costly, be applied to everyone as fast as possible as a basic human right. An analogy would be if Sub-Zero refrigerators, the moment they came out, became considered a bare-bones basic component of human housing, necessary for the government to step in and provide them if necessary.
These things aren’t expensive ‘because there hasn’t been enough productivity growth’. There’s NOT GOING TO BE ‘productivity growth’ in these things, at least not a significant amount the way one thinks of such growth occurring in i.e. tech industries. These things – all three of your examples – are expensive because they are not only overconsumed but (not coincidentally) their consumption is politicized (housing too – cf. the mortgage interest deduction, and Fannie/Freddie backstopping all loans). So while it’s fair enough to cite their growing costs as a factor pushing towards inequality, I wonder why the obvious direction for a remedy doesn’t appear to occur to you….
— Sonic Charmer · Sep 28, 04:08 AM · #
In education, the example of paying $30k+ per year to get a humanities degree is too obvious to point out.
Sonic Charmer is right. the old paradigm is FAIL.
get a new paradigm.
not every child should go to college.
duh.
Conservatism is just patching failed paradigms anymore— the goal of traditional education in 4-yr colleges post the GI bill, the free market, white patriarchy social cohesion model, industrial factoryfloor high school models…..get a clue.
commonsense != intellect.
Conservatism, where even the smart people are retards.
Commonsense— the set of prejudices accumulated before the age of 18. —Einstien.
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