June 6 2014
Rachel DiCarlo Currie
One reason the debate over economic inequality can get so confusing -- and so slippery -- is the failure of many analysts to distinguish income inequality from consumption inequality.
Two economists who’ve done important work highlighting the distinction are Bruce Meyer of the University of Chicago and James Sullivan of Notre Dame. Meyer and Sullivan estimate that, from 1980 to 2011, the rise in income inequality (45 percent) was almost two and a half times greater than the rise in consumption inequality (19 percent) -- and, moreover, “this much smaller percentage increase in consumption inequality started from a considerably lower base.” In a related study, they calculate that the 2010 U.S. poverty rate as measured by consumption was just 4.5 percent, while the Census Bureau’s official poverty rate -- which measures pre-tax, pre-transfer money income (thereby excluding the value of refundable tax credits, non-cash government transfers, and employer-provided fringe benefits) -- was more than three times higher (15.1 percent).
In other words, long-term wage data tell only part of the economic story, and they often obscure long-term consumption trends. In a recent (and typically excellent) essay, Kevin Williamson of National Review contrasted “the symbolic economy” (i.e., the economy as measured by income figures) with “the physical economy” (i.e., the economy as measured by real-world consumption), to highlight America’s progress:
The physical economy -- the world of actual goods and services -- looks radically different from the symbolic economy. Measured by practically any physical metric, from the quality of the food we eat to the health care we receive to the cars we drive and the houses we live in, Americans are not only wildly rich, but radically richer than we were 30 years ago, to say nothing of 50 or 75 years ago. And so is much of the rest of the world. That such progress is largely invisible to us is part of the genius of capitalism -- and it is intricately bound up with why, under the system based on selfishness, avarice, and greed, we do such a remarkably good job taking care of one another, while systems based on sharing and common property turn into miserable, hungry prison camps.
We treat the physical results of capitalism as though they were an inevitability. In 1955, no captain of industry, prince, or potentate could buy a car as good as a Toyota Camry, to say nothing of a 2014 Mustang, the quintessential American Everyman’s car. But who notices the marvel that is a Toyota Camry? In the 1980s, no chairman of the board, president, or prime minister could buy a computer as good as the cheapest one for sale today at Best Buy. In the 1950s, American millionaires did not have access to the quality and variety of food consumed by Americans of relatively modest means today, and the average middle-class household spent a much larger share of its income buying far inferior groceries. Between 1973 and 2008, the average size of an American house increased by more than 50 percent, even as the average number of people living in it declined. Things like swimming pools and air conditioning went from being extravagances for tycoons and movie stars to being common or near-universal. In his heyday, Howard Hughes didn’t have as good a television as you do, and the children of millionaires for generations died from diseases that for your children are at most an inconvenience. As the first 199,746 or so years of human history show, there is no force of nature ensuring that radical material progress happens as it has for the past 250 years. Technological progress does not drive capitalism; capitalism drives technological progress -- and most other kinds of progress, too.
I was reminded of Williamson’s article when reading what Hoover Institution scholar Richard Epstein had to say about French economist Thomas Piketty’s much-celebrated new book on income and wealth inequality (Capital in the Twenty-First Century). The entire Epstein piece is worth reading, but I found the passage on life expectancy to be particularly important:
There is no way that overall social gains on matters of life expectancy and health can be concentrated in the top one percent of society. To be sure, it is worth noting that infant mortality has always been inversely correlated with wealth. The children of richer people do better than those of poorer people. But look next at the actual numbers. By one British study, infant mortality ranged in 1901 from 247 per 1,000 live births in the poorest group to 94 per 1,000 in the highest group, the so-called “servant-keeping class.” One hundred years later, those numbers dropped to 8.1 per 1000 for the first group and 3.7 per 1000 for the second.
Looking solely at the mortality ratios, you could conclude that, relatively speaking, things have gotten a bit better for the poor, as their children are about 2.19 times as likely to die as the children of rich people, compared to being 2.63 times as likely to die a century before. Yet this analysis misses the forest by looking at the trees. The actual decline in mortality rates at the bottom was about 240 lives per thousand; for the top, it was 90. The huge increases in both areas, where the poor had the most dramatic gains, is the real story. The egalitarian ratio is a side-show.
That same point can be replicated by many other measures of well being. To turn to the United States, life expectancy for the average person born in 1900 was about 47 years. By 1920, that number had jumped to 54 years. By 1998, the number was about 76 years. Throughout this period, life expectancy for females was greater than that for males, even though earned income was greater for men. Try the same experiment by race and the results are still more dramatic. Black life expectancy in the United States in 1900-1902 lagged white life expectancy by 15.8 years (49.8 versus 33.8). By 2010 the gap had narrowed to 3.6 years (78.7 to 75.1).
These figures tell a story that is wholly concealed by Piketty’s income and wealth figures. They show the huge positive influence of technological advances on human welfare. Sadly, his lengthy book is silent about the massive advances in basic science, public health, and medicine that fueled this revolution, creating widespread benefits for the population at large. It is also worth noting that these increases were more dramatic by far in the first decade of the twentieth century than they were in the first decade of the twenty-first century. Neither technology nor politics can explain the difference, but greater regulations and higher tax rates can. The Piketty obsession with income inequality conceals more than it reveals.