20 May 2008

Economists Discover the Law of "Separate but Equal"

On June 9, the 30th day of the McCarthy Army hearings, Army Defense Counsel Robert Welch challenged Roy Cohn to provide McCarthy's list of 130 Communists or subversives in defense plants "before the sun goes down."

McCarthy stepped in and said that if Welch was so concerned about persons aiding the Communist Party, he should check on a man in his Boston law office named Fred Fisher, who had once belonged to the National Lawyers Guild, which Attorney General Brownell had called "the legal mouthpiece of the Communist Party."

Welch responded, "Until this moment, Senator, I think I never gauged your cruelty or your recklessness..."

When McCarthy resumed his attack, Welch interrupted him: "Let us not assassinate this lad further, Senator. You've done enough. Have you no sense of decency, sir, at long last? Have you left no sense of decency?" When McCarthy once again persisted, Welch cut him off and demanded the chairman "call the next witness."

At that point, the gallery erupted in applause and a recess was called.

Until this moment I think I never gauged the cruelty or recklessness of some conservative economists, politicians and their masters the Pigmen. They have created a wreckage of financial devices and led us on the edge of a societal precipice. Have they not done enough? Have they no sense of decency left at long last?

Must they now attempt to define the poor as those who by their nature prefer cheap and shoddy goods, and a lower standard of life, and who are therefore are separate but equal with the wealthy who are genetically compelled (entitled?) to require the finer things in life?

The words to lowlifes like McCarthy and Cohn still fit after all these years, to those lacking the basic integrity of the schoolyard, who thrive on and generate conflict, and who will say or do almost anything in their pursuit of the will to power.

Inequality and Prices
May 20, 2008
Lane Kenworthy’s weblog

Steven Levitt and Will Wilkinson point to a new paper that Levitt says “shatters the conventional wisdom on growing inequality” in the United States. The paper is by Christian Broda and John Romalis, economists at the University of Chicago.

Here’s their argument: income inequality has increased over time. But analysis of consumption data indicates that people with low incomes are more likely than those with high incomes to buy inexpensive, low-quality goods. In part because those goods increasingly are produced in China, their prices rose less between 1994 and 2005 than did the prices of goods the rich tend to consume. Hence the standard measure of inequality, which is based on income rather than consumption, greatly overstates the degree to which inequality increased. The incomes of the rich rose more than those of the poor, but because the cost of living increased more for the rich than for the poor, things more or less evened out.

Their point that the prices of some goods have risen less than the overall inflation rate, and that this is due in large part to imports from China, seems perfectly valid and worth making. It has important implications for our understanding of how absolute living standards for America’s poor have changed over time.

But I’m not sure why Broda and Romalis, or Levitt and Wilkinson, think this should alter our assessment of the trend in inequality. Do they mean to suggest that the revealed preference of the poor for cheap goods is exogenous to their income? In other words, people with low incomes simply like buying inexpensive lower-quality goods, and they would continue to do so even if they had the same income as the rich. Likewise, the rich simply have a taste for better-quality but pricier goods, and they would continue to purchase them even if they suddenly became income-poor. If this is the assumption, I guess the conclusion follows. But I can’t imagine the authors, or anyone else, really believe that.

Actually, Levitt may believe it. “How rich you are,” he says, “depends on two things: how much money you have, and how much the stuff you want to buy costs” [my emphasis - LK].

Consumption is worth paying attention to. But income is important in its own right because it confers capabilities to make choices. What matters, in this view, is what you are able to buy rather than what you want to buy.

If a rich person with expensive tastes gets an extra $100,000, she can continue buying high-end clothes and gadgets. Or she can choose to purchase low-end Chinese-made products and save the difference. Suggesting that if she opts for the former there has been no rise in inequality is not very compelling.