Relative prices

by John Quiggin on January 5, 2007

Obviously, I’m not the only one who gets annoyed by pieces pointing to purchases of consumer goods as evidence that rising inequality isn’t really a problem. As Henry says, this is a tired shtick that lots of us are sick of.

But, as an economist, it particularly annoys me when this claim is put forward by people who claim to understand markets. I’ve been going on about this for yearsand years.

The most important thing that happens in markets is that relative prices change. If prices change, but income and preferences don’t, what we expect is that people will consume more of the goods and services for which prices have fallen and less of those for which prices have risen. So, when Jeff Taylor tells us that

With price points dropping below the $1000 mark, high-end TVs are moving down-market fast with Wal-Mart leading the way.
we can all cheer this renewed verification of the Law of Demand. But, of course, this tells us precisely nothing about what’s happening to inequality.

More importantly, since we know that prices are increasing (and, for most US workers, increasing faster than wages over the last few years), it’s obvious that if TVs are getting cheaper, other things must be getter dearer in real terms. With this hint, it’s not hard to find examples – college tuition and health care are obvious candidates.

So, if you want to show that increasing inequality isn’t really a problem, looking at sales figures for consumer durables won’t cut it. You need to look at the proportion of the population without health insurance or the accessibility of college education to the working class.

Of course, the big decline in US national savings means that consumption has grown more strongly than income for most goods and services. This raises a lot of complex issues.

It’s possible to make a case that the income stats overstate the growth in inequality. But it’s unlikely that someone who doesn’t understand the basics of relative prices is going to do a good job of making this case.

{ 24 comments }

1

vadim 01.05.07 at 1:53 am

TVs are getting better and cheaper. Healthcare is getting better and more expensive. Public K-12 education is getting both more expensive and worse. As far as I can tell, this is where inequality is the greatest and growing the fastest. Perhaps people who write so much about how inequality is growing and the government should do something about it could talk a little about why the government is so utterly failing to reduce inequality in the one area where it’s already in charge.

2

Bruce Baugh 01.05.07 at 2:18 am

“The government” doesn’t have much influence over many aspects of schooling – rival levels and districts do, and the wealthy ones tend to ferociously resist anything that might involve leveling. And of course to the extent that there is federal leverage, it’s been used most powerfully (in the No Child Left Behind Act) in the service of an anti-public education agenda, since NCLB is designed to guarantee that sooner or later every public school will fail to meet a changing standard and be defunded.

3

Timon Braun 01.05.07 at 4:02 am

The proportion of people with health insurance is a much cruder indicator than simply looking at the average outcomes for specific diseases. It is also inexact to connect the outrageous cost of college with poverty. Poor people can’t afford college because it is too expensive, and it is too expensive because it has rigidly resisted any encroachment on the leisured professor/ leafy campus/ fancy gym/ anti-economizing-technology model. Making college affordable will only be possible if it actually becomes cheaper, something that has no constituency among the rich, who don’t need it, or the professoriate, who can’t blamed for preferring cushy seminars with smart kids to halls full of underprepared ones. Does anyone here know of prominent American professors who are demanding widely expanded enrollments in modest infrastructure? There is an incredible amount of fat to cut and efficiency to be gained, if the people who profess to care about inequality would like to do anything about it.

4

Bob B 01.05.07 at 5:50 am

I’m evidently in need of new guidance. Not that long ago, Henry here was being all ironic about economists:

“‘Real’ economists apparently believe that demand curves always slope downwards, even when empirical evidence tells you that they don’t”
http://crookedtimber.org/2006/11/15/economics-and-ideology/

Now John Quiggin is saying:

“what we expect is that people will consume more of the goods and services for which prices have fallen and less of those for which prices have risen”

Who is correct?

5

jim 01.05.07 at 8:00 am

@4: Both of them. “What we expect” is the general rule: in general demand curves slope downwards. But the general rule is not always the case. There are exceptions. Theory cannot substitute for experiment.

I have to say I have some sympathy for Jeff Taylor and company. When I was young, in the lower reaches of the middle class, we _did_ measure our relative positions by the number and quality of the consumer durables we had acquired. It’s easy to be tempted to extrapolate this time and class bound measure to all of society.

6

stuart 01.05.07 at 9:03 am

These sorts of statements always give me an impression of merely being an updating of the same behaviour that was being criticised in Juvenal’s “bread and circuses” quote.

7

Tyler Cowen 01.05.07 at 9:04 am

You are poking at strawmen by constructing an all-or-nothing view as to whether inequality matters or is present. The point remains that consumption data provide real information about living standards. If consumption is robust, we should be more optimistic than otherwise. There are legitimate disputes as to the weights to be placed on wealth, income, consumption, and other numbers, but everyone serious thinks that consumption data matter. I simply don’t understand why you think that so many polemics against your intellectual opponents will advance understanding on a very difficult issue, maybe you could address this.

8

Bruce Baugh 01.05.07 at 9:24 am

Timon Braun: You are decades behind the times. Please read up on the circumstances of adjunct professors. The now-defunct weblog Invisible Adjunct is a good starting place, with links to hard data and analysis along with a very articulate personal account. Many of the current problems faced by colleges and universities come from administrators acting just as you’d wish them to.

9

Barry 01.05.07 at 9:35 am

timon braun: “Poor people can’t afford college because it is too expensive, and it is too expensive because it has rigidly resisted any encroachment on the leisured professor/ leafy campus/ fancy gym/ anti-economizing-technology model. “

Um, you don’t know much about higher educaton in the USA, do you? There are a large number of colleges which cater to those who can’t afford the expensive colleges. Some of these are community colleges; others are 4-year institutions. However, employers prefer the graduates of the expensive universities, for the higher-paying jobs.

10

John Quiggin 01.05.07 at 10:22 am

Tyler, the post gave a link to a reasonably detailed discussion of the issues regarding consumption and income inequality, and I said explicitly that “It’s possible to make a case that the income stats overstate the growth in inequality”. But we’re not going to have a serious discussion of these issues, as long as silly arguments like Taylor’s continue to get a prominent run.

11

Tom T. 01.05.07 at 10:52 am

I don’t understand what relative prices have to do with inequality. As Vadim mentions, decreased consumption of health insurance and college education in the face of rising prices is also just an illustration of the Law of Demand. In essence, aren’t you just saying that “inequality doesn’t depend on the consumption of X, rather it depends on the consumption of Y and Z”? As Jim points out, you and I might agree that health insurance is more important than cable TV, but to a swath of twentysomething men willing to gamble on their continued good health, that may not be true. And what if Y and Z move in different directions — health insurance coverage rates go up but college participation goes down — is that more inequality or less?

Or to come at my question from a different direction, suppose the multi-millionaire CEO falls out of favor, and top marginal income-tax rates swing back into 70-90% territory, and the stars align such that upper and lower income quintiles start to move closer to one another rather than farther apart. Such a circumstance would generally be characterized as a reduction in inequality, I think, but even in this world aren’t there going to be differences in relative prices? Even if the income of the poor is coming up and the income of the wealthy is coming down, it’s still possible for health insurance and college costs to be rising while the cost of a TV falls, isn’t it?

Just so it’s clear, I’m not trying to support the use of TVs as a measure of inequality, or to argue that inequality isn’t increasing. I’m just wondering what any of these consumption measures have to do with it.

12

Michael E. Sullivan 01.05.07 at 11:30 am

tyler at 7:

I’m not john q, but I’ll address it. I see john’s statement as signficantly less polemic than the typical example of what he’s responding to. In my romp through the libertosphere, the kind of argument john complains about is common, and not just among rabid commenters and fringe bloggers. John’s case is a pretty concise explanation of why this sort of cherry picked comparison is ridiculous.

The general point that you can’t simply reject the things whose prices have increased the most in a considerations of cost of living is dead on, and lot of libertarians completely ignore it in polemicizing against the welfare state.

You’re absolutely right that the data isn’t all that clear, and that consumption matters, and I don’t think I’ve seen your site ever pull the kind of three card monte game with statistics that sometimes slips out at more ideologically driven blogs. But this is very clearly a general trope for the economic right, and the ammunition to demolish the more ridiculous versions of it needs to be out there and available. I don’t think John has overstepped here at all.

13

sara 01.05.07 at 12:01 pm

Great. So functionally uneducated people with no health care can buy and watch cheaper TVs (while eating even cheaper junk food).

Precisely the consumer goods that allow actual social ascent (instead of its consumer fantasy) are too expensive for poor people. Especially quality education.

Right-wing economists are very stupid if they don’t see that this is a long-term problem — the creation of an unproductive and unhealthy work force. “Let them watch TV while eating Doritos,” the modern Marie Antoinette says.

(Yes, I know that the original quote is apocryphal.)

14

Functional 01.05.07 at 1:00 pm

Two contradictory themes:

Quiggin: “accessibility of college education to the working class.”

Barry: “There are a large number of colleges which cater to those who can’t afford the expensive colleges. Some of these are community colleges; others are 4-year institutions.”

Both are true. Harvard (as per Quiggin’s link) and its ilk are very expensive. But — what do you know — Harvard can’t take 300 million students, and even if it did, the value of a “Harvard” education would become meaningless. Barry’s observation is much more on the money — college education is more available than ever, for those people who are willing to pursue it. There’s no serious argument that this is not true — does anyone think that college education was more available back in, say, 1950, when incomes were more equal but only around 10% of people went to college at all?

But, of course, this tells us precisely nothing about what’s happening to inequality.

Really? Precisely? This isn’t a very precise use of words. The fact that more people can afford consumer goods that were formerly accessible only to the rich may not be a perfect proof that inequality doesn’t matter, but it tells us “precisely” nothing? Wow.

Thought experiment: Incomes were much more equal (let’s say) in medieval Iceland than they are today. Quiggin is saying that it tells us “precisely nothing” that — even in the presence of inequality — poor people today are better able than medieval Icelanders to buy decent clothes, shoes, cars, furniture, food, housing, and so forth.

Again, wow. I agree with the limited statement that it’s more important for poorer people to have health insurance than TVs, but still — “precisely nothing.”

15

Timon Braun 01.05.07 at 2:25 pm

I graduated from Berkeley two years ago, so I may be grossly outdated by now. In my experience there were a lot of overworked graduate students and pseudo professors for things like language classes and within huge lectures courses, but also significant waste (mostly unused classrooms, overbuilt facilities, masturbatory seminars.)

And to Barry, of course you’re right, but it would make a difference if some of the bigger schools helped create cheaper alternatives to the 12th century model. Also, state schools may be cheap at the point of use, but the costs are borne by someone (And thank you taxpayers for the rooftop pool at Hearst hall!) What I was objecting to is how the education establishment address themselves to politicians when college costs go up, rather than face problems they could solve.

16

Functional 01.05.07 at 3:13 pm

Never mind — Quiggin was using language precisely after all:

“But, of course, this tells us precisely nothing about what’s happening to inequality.”

Right — consumption tells us “precisely nothing” about inequality. That’s certainly true, although very question-begging. The whole point of bringing up consumption in the first place is to make the rather banal point that quality of life is overwhelmingly more important than inequality, and moreover that quality of life may have risen in many ways at the same time that inequality was rising. This is consistent, to be sure, with the Quiggin’s claim that quality of life may have, over the past few decades, diminished in one or two ways due to inequality, but it’s rather slippery to insinuate that inequality was the ONLY thing that affected quality of life during that time.

17

Ginger Yellow 01.05.07 at 6:53 pm

Except that the person who brought up consumption wasn’t talking about quality of life. He was using the fact that some people (all 80,000 of them) were buying PS3s to deny the existence of inequality:

Contrary to the Edwards’ pitch that labor-hostile companies are leaving American workers destitute, somebody is making some money out there in America. More importantly, they are making it in many, many cases without a union card. This reality will very hard for union-funded Democrats like Edwards to ignore as the 2008 presidential campaign unfolds. Hewing to the union rules, clear evidence of prosperity, like perhaps a shortage of $600 game machines, will have to be swept out of the campaign.

18

Ginger Yellow 01.05.07 at 6:54 pm

Sorry – 80,000 was the Japanese PS3 launch. It was 200,000 in the US.

19

radek 01.05.07 at 11:02 pm

But, of course, this tells us precisely nothing about what’s happening to inequality.

Which points to the fact that Taylor, as I said in the other thread, is not talking about inequality but rather (absolute) poverty. I keep hampering on about this but it’s one of my pet peeves when glibly people conflate the two, whatever ideological points they’re trying to score.

Anyway, if we’re talking about inequality in consumption and even quality of living, when relative prices change what matters is the proportion of total budget that people at different incomes spend on the given category. If poor people spend most of their money on food and no money on yachts, and the relative price of food/yachts goes down this makes the poor better off.
Looking at CPI data, from Jan 2001 to Nov 2006, overall CPI has gone up by about 15%. The price index for Food and Housing has gone up slightly higher than this though the difference probably isn’t significant. Prices of recreation and transportation have gone up significantly slower than this (all those PS4!). Price of education has gone up slower but again it’s not that significant of a difference. Price of medical services however has gone up significantly faster (about 27%).

So as far as medical services go John Q is correct. Education, not so much. Also I’m looking at numbers 2001-2006. Most of the increases in poverty and decreases in lack of access to health insurance took place 2001-2003 (like in the report linked to) and have remained stable since then.

This is a typical case of what happens during and after recession and makes this episode not any different than any previous recessions.

20

John Quiggin 01.05.07 at 11:29 pm

Radek, I think you’re making a distinction without a difference here. The poverty/inequality distinction in essence is that an increase in the income of the rich increases inequality but has no effect on absolute measures of poverty.

But all the discussion here, and in Taylor’s article has been about how well or badly people on low incomes (particularly low-wage workers) are doing. The only reason I’ve put in terms of inequality rather than poverty is that I don’t want to get hung up on issues like poverty lines.

As regards the substantive issues, the trends that concern me have been going on much longer than the current business cycle.

21

radek 01.06.07 at 10:58 am

How well or badly people on low incomes are doing is about absolute poverty not inequality.
So Taylor says:
With price points dropping below the $1000 mark, high-end TVs are moving down-market fast with Wal-Mart leading the way.

and John Q and Henry quote him as saying as:

With price points dropping below the $1000 mark, high-end TVs are moving down-market fast with Wal-Mart leading the way.

I don’t see any statements above about inequality. Or in the article as a whole. I think this is called making hay out of a man. No, wait, it’s making man out of a straw. Or something like that.

Anyway, basic point is, inequality has gone up, poverty hasn’t. So

I’ve put in terms of inequality rather than poverty is that I don’t want to get hung up on issues like poverty lines

if you’re not willing to get hung up on poverty lines how can you even begin to discuss inequality seriously? Poverty’s helluva easier to define than inequality.
And the posts were about taking an article, which made some snark remarkes about Edwards (who slags WalMart but then has one of his staffers ask Walmart for a deal on a PS3) and which goes on to say that there’s a good number of probably low income people who are purchasing a PS3 and then present the article as an examplar of liberterian stupidity in regards to the issues of inequality which the article did not address.

I think this is called taking pots at the cheap.

22

Henry 01.06.07 at 12:11 pm

radek – please produce some, like, evidence that Edwards “[had] one of his staffers ask Walmart for a deal on a PS3.” Do you think that this is at all plausible? Do you think that Edwards _as a politician_ is this deeply stupid? Do you think that _any_ politician in a non-vegetative state would ask a staffer to get a sweetheart deal on a PS3 from a company that he was using as his example of all that is wrong in America in his campaign?

When you’ve done that, perhaps go back to read what Taylor sets out to attack in his article; what he describes as Edwards’ “Two Americas spiel.” Stop for a while then, and meditate on what Taylor’s criticisms are intended to do. Hint: when someone sets out facts which are intended to refute someone’s arguments about whether inequalities are emerging between two Americas, these facts are usually intended to be relevant to the topic of inequality.

Finally, go out and acquaint yourself with the vigorous and unresolved debates on where to set the poverty line, whether to use relative or absolute poverty rates usw. You don’t even have to stray from the economics literature to do so – there’s quite a lot out there.

23

radek 01.06.07 at 11:01 pm

please produce some, like, evidence that Edwards…

Whatever. Maybe Edwards asked maybe the guy did it on his own, who cares, it was an ironic situation worthy of a chuckle. Why’re you getting your panties in a twist?
And I must not have the long distance intertemporal mind reading capabilities you have because after taking your advice and doing some serious meditatin’, contemplatin’ and plain ol’ head scratchin’, I still don’t see anything in there about inequality. Oh and your hint! I thought its brilliance would illuminate the dusty recesses of my limited intellect but alas, it shone with a phony light, like a wil’ o wisp.

Look, the reason I’m being an asshole, is cuz you’re being a condescending prick. I’m quite familiar with the literature and controversies with regard to inequality and poverty.So please…

24

engels 01.10.07 at 12:26 pm

Radek, it’s “Will o’ the Wisp”.

On a side note, do you think you could give the William Faulkner prose style a rest? It does start to grate after a while…

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