China, Wal-Mart, and Inequality

by Don Boudreaux on July 14, 2008

in Inequality, Myths and Fallacies

Here’s a letter that I sent recently to the Washington Post.

E.J. Dionne uncritically quotes Rep. Barney Frank’s assertion that freer trade makes incomes more unequal: “Free trade has increased wealth, but it’s been monopolized by a very small number of people” (“Capitalism’s Reality Check,” July 11).  Rep. Frank and Mr. Dionne ought to study recent research by the University of Chicago’s Christian Broda and John Romalis.  These scholars find that official measures of income distribution – which do show increasing inequality in recent years – greatly overstate inequality because they fail to account for the differential impacts of trade and big-box retailing on the purchasing power of the poor relative to that of the rich.

Data from 1994 through 2005 show that trade with China along with the retailing efficiencies of Wal-Mart have lowered the prices of the goods that poor people buy much more than they’ve lowered the prices of the goods that rich people buy.  The result is that, as Prof. Broda reports on his blog, “real inequality in America, if you measure it correctly, has been roughly unchanged.”

Donald J. Boudreaux

A link to this paper by Broda and Romalis can be found here.


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