Sunday, September 14, 2008

A New Twist On Income Ineqaulity

One of the biggest condondrums for a politician is how to deal with a problem when the reality and the public's perception don't fully mesh. Income inequality is arguably one of these types of problems. Even if its not, is inequality a problem in and out itself? Perhaps its only a problem when the economy is stagnant?

When I first went to work on Capitol Hill, I read Robert Samuelson's The Good Life and Its Discontents and it influenced my thinking heavily on this very problem about reality vs. perceptions in economic policy.

Published in 1995, it addressed the question of why there was so much discontent with things in America at a time when we had never been so prosperous as measured by traditional economic yard sticks (athough now out of print, it can still be had for a song through
Amazon's Z-shops).

The most important lesson from the book that I learned was that there was a large gap between reality and perception in many important areas of public policy, particularly economics. We could feel like we weren't doing well even though, in fact, by all traditional indicators we had never been doing better. Of course, this isn't to say we shouldn't feel the way that we do. Merely that how we feel about our economic situation can't always be explained in wholly rational terms.

For instance, in his review, economist-turned-NY Times Rock Star Columnist Paul Krugman noted:
The spectacular growth in inequality is given barely two pages, while a 15-page chapter is devoted to what Samuelson regards as excessive demands for equality. Rising poverty and homelessness are mentioned largely to question whether things are as bad as they seem in the statistics; the huge rise in poverty among children (a rise that is partly obscured in the overall poverty statistics by the decline in the number of elderly poor) goes unmentioned.
In his other writings, Krugman has made a similar point: equality is an essential part of happiness. To him, people are happier if they're like everyone else in their neighborhood than they are if they became better off than they had been, but their neighbors' prosperity exceeded theirs. So, the name of the game for the past couple decades hasn't been actual life quality per se, but inequality, which is widely acknowledged to be growing (with disagreement as to the causes).

Or has it? Perhaps, again, it depends on your yardstick.

A new study posits that we've only been looking at one half of the equation - income - without considering what's happening in terms of costs. While the things the wealthy have purchased (generally serves) have increased in price, the things lower income Americans purchase (commodities) have fallen:
high-wage households spend a greater share of their income on services and a smaller share on “non-durable” items, such as food, clothing, footwear and toiletries. For most of the past three decades, the price of non-durable goods has been falling relative to the price of the service —investment advice, personal care, domestic help and so on—that the rich spend more of their money on. If these differences between the inflation rates faced by the rich and the poor are taken into account, the rise in inequality is reduced and may even vanish.
Once again, things aren't as bad as they seem.


Stay tuned.

Of course, none of this addresses the government's responsibility to remedy what some might call an uneven distribution of income and others might label an uneven earning of income. What is that responsibility and how do we rememdy this?

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