What if inequality isn’t as bad as we’ve been led to believe?
That is the upshot of new research by Juan Sanchez and Lijun Zhu of the Federal Reserve Bank of St. Louis. They looked at changes in the prices of various items, and they found that the things that poor people buy more of have gone up in price by a lot less than the things rich people buy more of.
Usually, we measure inequality by looking at differences in real income. But real, in this case, means adjusted for inflation, and inflation is different depending on whether you’re rich or poor. Rich people spend more on college tuition, entertainment and eating out. Poor people devote more to electricity, clothing and eating in.
Sanchez and Zhu found that the prices of education, entertainment and medical care have gone up hugely since 1980 (when the U.S.’s big increase in inequality is generally thought to have begun). But the prices of clothing, electricity, new cars and public transportation have increased only a small or moderate amount. In other words, it is getting more and more expensive to maintain a rich lifestyle, but not much more expensive to support a working-class lifestyle.
Using different inflation rates for different socioeconomic classes weakens the story of widening income inequality. If you use only the consumer price index, a broad measure of inflation, you see working-class people’s income gains since 1980 being eaten up by increased prices. But if you realize that the prices working-class people actually pay on a daily basis haven’t gone up by as much as the CPI, you understand that the income of working-class people has increased more than is generally believed. And since the prices that rich people pay daily have gone up by more than the CPI, that means gains in their real income have been less than is commonly advertised.
Of course, we shouldn’t take this logic too far. The increase in the prices of the goods wealthy people buy makes it harder for working-class people to break into the rich-people lifestyle. That’s doubly true when the item in question is college, which offers one of the best opportunities for climbing the socioeconomic ladder.
There is also a deeper reason why this kind of finding shouldn’t let us stop worrying about inequality. It goes to the very heart of why we care about inequality in the first place.
One reason is our sense of justice. It just doesn’t seem right for working-class people to slave away for days for the same amount of money that a rich person can earn in a few hours. But that’s only part of the problem. Inequality also has negative social consequences. People don’t simply care about the goods and services their money can buy.
For one thing, people are concerned about differences in social status. Unfortunately, in our culture and most others income and wealth are significant determinants of respect. When we have a very unequal economy, we end up giving inordinate status to the people on the top of the socioeconomic ladder, and less to those on the bottom.
People also want to believe that the economy is fair and rewards effort and hard work. Economists regularly find that people have an aversion to unequal outcomes in experiments. Of course this depends on many things, such as the perception of whether the winners earned their winnings. But since nobody ever knows for certain the degree to which rich people really deserved their money — how much did the executives of Lehman Brothers get paid in 2008? — inequality will tend to leave a lingering suspicion of unfairness in the minds of those with less.
So there are plenty of reasons to care about inequality besides the simple calculus of material wealth and deprivation. Inequality doesn’t just impose hardships on the poor. It risks turning us into a society of winners and losers. That in turn can lead to unhealthy behaviors among the working class, who respond to economic unfairness, and to their own low status, by messing up their lives with drugs, violence and family breakdown.
In other words, if you’re afraid that we’re moving toward a Dickensian world in which the poor starve in the street, don’t fret. But if you — like me — are concerned about a society in which respect is increasingly reserved for only a few rich people, then you should still be worried.
Noah Smith is an assistant professor of finance at Stony Brook University.