Why globalization ameliorates income inequality
Posted by: McQ
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 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.
