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Why globalization ameliorates income inequality
Posted by: McQ on Monday, July 07, 2008

Christian Broda addresses the conventional wisdom which says globalization has increased US income inequality and declares the thesis to be dead wrong.

In fact, he declares in his title that China and Wal-Mart are actually champions of equality and that, in fact globalization helps ameliorate income inequality instead of exacerbating it.
How rich you are depends on two things: how much money you have and how much the goods you buy cost. If your income doubles but the prices of the goods you consume also double, then you are no better off. Unfortunately, the conventional wisdom on US inequality is based on official measures that only look at the first half, the income differential. National statistics ignore the fact that inflation affects people in different income groups unevenly because the rich and poor consume different baskets of goods.
Those baskets of goods include the higher cost (and higher percentage) of services consumed by the rich which aren't affected by trade vs. the consumption of goods, by the poor, whose cost are held down by trade.
Poor families in America spend a larger share of their income on goods whose prices are directly affected by trade – like clothing and food – relative to wealthier families. By contrast, the higher your income, the more you spend on services, which are less subject to competition from abroad. Since 1994 the price of goods in the U.S. has risen much less than the price of services – and, yes, this includes the recent surge in food prices. Paradoxically, focusing only in the last few quarters of high relative food prices misses the fact that the main trend we have observed for decades is exactly the opposite.
So, per Broda, globalization has had a positive effect for lower income buyers:
Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in America. Inflation of the richest 10 percent of American households has been 6 percentage points higher than that of the poorest 10 percent over the period 1994 – 2005. This means that real inequality in America, if you measure it correctly, has been roughly unchanged.
Two of the major players in this scenario which sees the poor actually benefiting from globalization? Wal-Mart and China:
This trend can partly be explained by China. In U.S. stores, prices of consumer goods have fallen the most in sectors where Chinese presence has increased the most. Take canned seafood or cotton shirts, for instance. Exports of China to the rest of the world in these categories have increased dramatically over this decade. Inflation in these sectors has been negative over the last decade, while in other sectors with no Chinese presence inflation has been over 20 percent. Moreover, as China produces goods of relatively low quality, sectors with strong Chinese presence are disproportionately consumed by the poor.

The expansion of superstores – like Wal-Mart and Target – has also played an important role in accounting for the inflation differentials between rich and poor. Superstores sell the same products as traditional shops at much lower prices. Today the poor do roughly twice as much of their buying of non-durable goods in these stores than the rich. So poor consumers have been the biggest beneficiaries of Wal-Mart coming to town.
Of course, for populist political candidates, this isn't something they want to hear. Globalization is "bad". Wal-Mart kills the local mom-and-pop stores which don't have the buying power or global connections Wal-Mart has. And besides, they're non-union. And don't get them started on China.

In reality this is a situation created by demand. And that demand comes from the poorer among us consistently shopping in stores like Wal-Mart because of the purchasing power increase doing so gives their dollar. Because of having that choice, the inflation differentials found in the different shopping baskets purchased by rich and poor are maintained, keeping income "inequality" at a much lower level than "conventional wisdom" likes to admit.

But, don't count on hearing that on the campaign trail.
 
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Comments
Here’s a news flash, the whole anti-globalization movment is, possibly, a bunch of snobs! It costs MONEY to buy locally grown, organic, hemp fanny packs...and if any ya-hoo can get a neat-o fanny pack from Wal-Mart it makes it harder to be "hip."
 
Written By: Joe
URL: http://
Oil price shock means China is at risk of blowing up
 
Written By: Neo
URL: http://
Admitting having never taken as much as an Economic 101 class, I still have to ask- Isn’t this purchasing power increase for the poor basically stolen goods from future generations given the enormous negative effect on the trade deficit?
 
Written By: jfw1961
URL: http://
You know who really has it good in the inflation sweepstakes. Homeless people. The price of meals out of dumpsters has not risen at all in the last ten years. And they don’t have to worry about gas prices. Why they’re even better off than people who can pay less for low-quality stuff from Walmart. And they’re 6% more better off than those losers in the top 10%.
 
Written By: Retief
URL: http://
You know who comes up with more asinine and irrelevant comments than you do, Retief?

Uh, no one.
 
Written By: McQ
URL: http://www.QandO.net
I don’t know, I’m not the one trying to argue that because some people get to buy cheap junk at Walmart they’re really not as unequal as you might think to those who’s shopping includes overpriced designer accessories and employing a gardner and cleaning crew, and an interior decorator and landscape artist.

Sure golbalization provides US consumers with some cheap options, and yes those who are most price sensitive benefit from that. Is that even a drop in the bucket of the increasing inequality of income distribution? It is not.

Developing nations exhibit a system of dual economies. One of prices for necessities within reach of the bulk of the population and another of Land Cruisers, electronica, and other trappings of the material culture of the developed world far out of reach of most people. That is not the model we want the US to move toward.
 
Written By: Retief
URL: http://
I don’t know, I’m not the one trying to argue that because some people get to buy cheap junk at Walmart they’re really not as unequal as you might think to those who’s shopping includes overpriced designer accessories and employing a gardner and cleaning crew, and an interior decorator and landscape artist.
Nothing elitist about your opinions is there Retief?

And btw, being able to buy that cotton shirt at a reduced price at Wal-Mart means those with lower income have more money available to buy "the other trappings of the material culure", if they choose too doesn’t it?
 
Written By: McQ
URL: http://www.QandO.net
"Developing nations exhibit a system of dual economies. One of prices for necessities within reach of the bulk of the population and another of Land Cruisers, electronica, and other trappings of the material culture of the developed world far out of reach of most people. That is not the model we want the US to move toward."

Retief, you need to get out more. I thought you lefties all had passports. Take a trip someplace.

"By 1993 China had 230 million TV sets, becoming the nation with the most TV sets in the world. Statistically, every Chinese family now owns a TV set. For color TV sets, in 1978 every 100 urban families had only 0.59 color set. The number increased 100 times during the 1980s, rising to 59.04 sets in every 100 urban families. The estimated viewership in 1994 was about 80% of the population, nearly 900 million."

That data is from 1993. What do you think the numbers are now?





 
Written By: Harun
URL: http://
Material wellbeing

Urban households possessing (number per household; 2003):

* bicycles: 1.4
* color televisions: 1.3
* washing machines: 0.9
* refrigerators: 0.9
* cameras: 0.5

Rural families possessing (number per household; 2003):

* bicycles: 1.2
* color televisions: 0.7
* washing machines: 0.2
* refrigerators: 0.1
* cameras: 0.02

From Wikipedia. Note the urban/rural split in China is roughly 40/60, so its not as if the urbanites represent some tiny fraction of the population.
 
Written By: Harun
URL: http://
I have come to the conclusion that those on the left are concerned about this income inequality thing only because they think the rich have too much. They really do not seem to care very much about the actual condition of the poor and how it can be improved. Instead of cheering when the lot of the poor improves they complain that the lot of the rich has improved more. Envy seems to be their motivation, just as they claim greed is the motivation of anyone on the right. That would explain their consistenly bad economic choices, such as increasing the luxury tax a few years ago.
 
Written By: timactual
URL: http://
Timactual,

"Envy seems to be their motivation, just as they claim greed is the motivation of anyone on the right."


"Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience."


C. S. Lewis
 
Written By: Ernest Brown
URL: http://
Or, as was said about the soviets, that which is not explicitly authorized is forbidden.


To misquote that old chestnut about the Puritans, a liberal is someone who is outraged that someone, somewhere, is making money.
 
Written By: timactual
URL: http://
Harun, China? Please. Sure the manufactury of the world is a developing nation but hardly the only one. I was thinking, to be more explicit, of Africa.
 
Written By: Retief
URL: http://

 
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