CPI and the Rat Race There is a very interesting article from Slate about the current Boskin/CPI debate. It is by the MIT economist Paul Krugman, and you can find it at http://www.slate.com/Dismal/96-12-21/Dismal.asp and/or on Paul Krugman's web page, link from the end of my Econ section. A common criticism of the Boskin report is that if it really true that the Consumer Price Index (CPI) has been overstating inflation by about 1.1% for the last 20 or 30 years, it would be completely counter to the widespread notion that wages are falling and the US economy is getting ever worse. The first point here is that Krugman agrees with me (and against most of the rest of the country) on this issue: he claims that, from an absolute perspective, things ARE better now than in the past. I have been posting this for years, see my web page files "Are THINGS getting Better or Worse?" Turn Down the Future?? After citing many examples, Krugman goes on to make some astounding assertions. In spite of the much better living conditions today in the US than in 1950, he says that if a median income family of 1950 had the choice to be moved forward to 1990 and live with an income at the 25th percentile level (below middle, but better by objective standards) they would REFUSE! Why? (I ask astonished). Well because THEN they were "middle class" but today they would, for the first time have a TV, car and computer, but they would be "poor". My first question: does he think a black middle income family from 1950 loved those Jim Crow Laws, the back of the bus, and lynching so much that they would refuse the offer? Or people going blind from cataracts would not want to move to a world where restoring their vision is a minor outpatient procedure? Or people who need an organ transplant to live? OK, lets just consider heathy white families. He says in the 1950's people didn't have all the TV and CD's and computers that we do, but they were happy in knowing that they couldn't get rich like the Kennedys or Rockerfellers or Astors, etc, even if they tried. They were in the Middle to stay. But today people are unhappy because they see young kids just out of school becoming millionaires every day (athletes or computer geeks, etc) and so they feel like a failure (in the midst of all that material stuff) because they see that others have even more. Does (other peoples) Money Buy Unhappiness? People are happier in a more equal society, even if they have less; as long as everyone has less also. And Krugman favors not just less material wealth, but a MORE RIGID society as well. If people cannot rise above their station, they will not feel that they have failed. They will know their place. In my "stratification" file, he likes society E better than A. Does this mean that given the choice of doubling the real income of everyone in the society, or of cutting it in half, he would say CUT? Because if it were double, the richer would benefit more, and things would be more unequal. But the cut would harm the rich more and make us all more equal. (Now repeat the process N times.) Now this is probably the case for some people: who knows how many? I know that in my case, if I have the money to live the life that I want (travel to the Caribbean in the winter, sail on the lakes in the summer, listen to Mozart when I eat, etc), it does not destroy my pleasure to know that Michael Jordan or Bill Gates has a LOT more money than I do. And if a time traveler offered to take me 40 years forward to a Star Trek world of living healthy till 150, instant access to all knowledge, and seeing the galaxy, but being "poor" (by THEIR standards), I would say "Let's GO! How about you? For another view of all this, see the Steve Landsburg Slate article "Wealthier Than Thou: Is it enough to be rich, or must others be poor?" (Link next to this file). Mason Clark replied with a quote from Adam Smith to the effect that wealth is relative. Hi, Well you certainly have some big names in economics on your side. Besides Adam Smith, Paul Krugman has a recent article in Slate that supports your view. (CPI and the Rat Race). But consider my simple "thought experiment" (a device often found useful in the physical sciences). The "Wealth Fairy" offers you a choice: everyone in the country can have their real income (or wealth, take your pick) either double or be cut in half over the next year. If the spread between rich and poor is more important in determining poverty/economic well being than the ABSOLUTE living standard, then you, (and Adam Smith and Krugman) would by logic be forced to say that poverty would be INCREASED by a doubling of either. And there is a wider spread in total wealth than in incomes. So to REDUCE poverty, you would choose to half all of our wealth. Now if that sounds logical to you, then you must be an economist! And does anyone else out there find something odd in the Krugman/Thurow situation? These two MIT economists make $25,000 and $50,000 per speech and $250,000 and $500,000 per year respectively. And mostly what they promote is the claim that income inequality is a BAD THING! Tom Miller wrote: > Your "wealth fairy" argument, while amusing, is a straw man, and an odd > argument given the usually rigorous thought that goes into your posts. > Krugman clearly states that he is talking about "relative" economic > differences, not absolute ones. While doubling of all wealth changes > the absolute differences, it has no effect on the relative differences, > and thus has no impact on status. So everyone, including Krugman, > myself, and you (possibly excluding Jay Hanson), would prefer that > wealth double. > > Tom Miller. Hi, Recall the common charge against Reagan that "the top 20% got 80% of the gain" or whatever. This kind of "fact" is used to show that the spread of wealth/income is increasing. (and of course no mention of the parallel "fact" that during the Carter years the top 1% got ALL the gain, but this is another story). Now say that YOU are finance minister of a country with a relative wealth distribution as below: 1 billionaire and 2 millionaires,(the rich): 3 with 500,000, 5 with 200,000, and 4 with 100,000: the "middle class", and 2 with 1000 (the poor). Not an unreasonable distribution : 15% rich, 75% middle class, and 10% poor. Now you meet the Wealth Fairy and choose DOUBLE. Everyone should be happy. But you are then accused: Miller is FAR WORSE than Reagan!!! During the Miller administration, the RICHEST 5% of the population got 99.8% of the national wealth gain, and the richest 15% got 99.99% of the gain. (Check it out!) I think you would be seen as increasing the gap between rich and poor. Even though, as you say, in some sense you did not. Perhaps this is more clear the other way. If the wealth of EVERYONE were cut in half, would this not close the gap? And if this were done N times, would we not all become equal (equally poor!) as N becomes very large? WEALTH FAIRY ON STEROIDS OK, so doubling the wealth of everyone does not really change the distribution (even if 99.99% of the gain does go to the rich.) To make my point, just change the terms: the choice is UP or DOWN. If you select UP, every dollar of wealth for those with over $1 million will become 3 dollars of "real" increase. And every one with more than $100,000 will have their wealth double. Those with under $100,000 will have their wealth increase by 15%. But if you select DOWN, every dollar of the rich will fall to 33 cents, and of the middle group ($100,000 to $1 million) to 50 cents. Those with under $100,000 will lose only 15 cents per dollar: $1000 will become $850. Now the choice WILL either make EVERYONE better off (but the rich will gain more in both relative and absolute terms). Or EVERYONE will have less, but the rich will lose more, and the society will be "more nearly equal". And this is not as abstract/theoretical as it may sound. The "rich" have a greater fraction of their total wealth in the stock market than society as a whole. When the stocks go up in value relative to inflation (as has been the case since the early 1980's), the "rich" gain a greater share of the total national wealth. But when real stock prices fall (as from the mid 1960's until about 1980), the wealth share of the rich drops and we become "more equal". The stock market (Dow-Jones) approximately tripled from 2000 to 6000 in the past decade. If most of your wealth was in stocks, it did too. If a part of your wealth was in stocks (the middle group), your total wealth could easily have doubled. And median family income increased by about 15 percent from 1980 to 1990, if the nominal increase is corrected for inflation by the "Boskinized CPI". -- ,,,,,,, _______________ooo___( O O )___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) For a good time call http://www.geocities.com/capitolhill/4834