Sunday, October 03, 2010

Inflation and Inequality

Will Wilkinson has argued that if you want to understand how inequality has changed over time, you can’t use a single inflation index. The rich and poor buy different things.

This is strikingly true when you compare the 14th century to today. Average consumption then might have been 60% on food, 20% on clothing, and 5% on domestic servants. However, when we look at the median consumer, halfway between the top and the bottom, spending on domestic servants was probably close to zero.

The top 1%, in contrast, might spend 30% of their much larger income on food for their immediate family, 10% on clothing for the same, and 25% on servants.

For those bundles of goods, inflation would be about 500 times for the median household, 800 for the average household and 1800 times for the rich.

Unskilled wages, benefiting from increased productivity in a mechanized world, increased about 6,000 times.

Now of course, the bundle of goods consumed by both has changed, but Broda's research suggest that the rich still spend a greater share of their income on high inflation goods than the poor.

Using a single inflation index overstates the gap in welfare between the rich and the poor.

And perhaps as important, by the material standards of 1380, everyone reading this is rich. It's not just that the price of a lot of things has come down relative to our incomes, it's that we can have some of them at all. We can have coffee and orange juice for breakfast instead of beer. We can eat a potato instead of bread.


And we can watch this:

And this:

Oh, and we have Google Books at our fingertips. Dead actors will perform for us. We can see auroras on Saturn and the glint of sunlight on Kraken Mare.

Living in a world where Cate Blanchett can make movies I like to watch instead of spending her time spinning thread or doing embroidery enriches me much more than her having $48 million dollars makes me feel poorer.


Steve Muhlberger said...

This post enriches me, too.

Nicholas said...

I second that.


Who has a domestic, and they're worth every penny.

andrewjameslowry said...

Excellent post. I liked the second video. Synchronized swimming without the silly nose plugs.

I really want a domestic or a servant.