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.”

Sincerely,
Donald J. Boudreaux

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

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{ 11 comments }

rvturnage July 14, 2008 at 4:01 pm

thanks for the link to the paper Don. I'll file that along side the "Has Wal-Mart Buried Mom-and-Pop?" by Andrea M. Dean and Russell Sobel of West Virginia University. PDF here:
http://www.cato.org/pubs/regulation/regv31n1/v31n1-1.pdf

Both present detailed studies on the benefits of Wal-Mart to local economies and individuals.

Dave July 14, 2008 at 4:05 pm

First, let me start off by saying I don't personally think rising income inequality is really a problem, and I believe that fewer restrictions on trade are preferable.

But the statement "real inequality in America, if you measure it correctly, has been roughly unchanged" is silly. It doesn't matter if the goods that the poor buy differ from those that the rich buy. What makes someone wealthy is the consumption possibilities that they have. The wealthy still have the ability to buy the inferior goods that the poor buy, but instead choose to buy products and services that include a status premium. That the cost of proving status has gone up relative to the price of inferior goods indicates that income inequality is growing, not shrinking.

The poor would naturally want to consume the same goods as the wealthy if they could. But that's the point: they can't. However, the wealthy can buy the same goods as the poor, and in increasing quantities. Hence, real income inequality is, in fact, growing.

Chris July 14, 2008 at 6:09 pm

A friend of my wife's owns a small independent toy store in a mall across a 6-lane road from Walmart. He told her that he cannot buy toys for the prices that Walmart sells them. It is impossible for him to compete with Walmart on price.

Nevertheless, he seems to be doing OK. He doesn't compete head-on with Walmart. He giftwraps; Walmart doesn't. He has story hour. He'll have coffee available for customers, will fill balloons with Helium (even balloons he didn't sell). He occasionally has Karaoke parties. He knows individual customers and talks with their children. Walmart doesn't do these things. He carries a variety of high-quality toys that he picked out specifically knowing his customers — stuff intended to stimulate the brains of children. Walmart generally only buys the big name well-advertised stuff and sells it in all their stores.

It's not an easy business, but it's possible to compete with Walmart and still be successful. You just have to find what they're not doing.

John Dewey July 14, 2008 at 6:41 pm

"It's not an easy business, but it's possible to compete with Walmart and still be successful."

I think Target, Costco, Home Depot, Krogers, Safeway, Best Buy, PetSmart, Sports Authority, and Kohl's are all competing very well with Walmart. I'm sure it's not an easy business for them, just as it is not an easy business for Walmart.

shecky July 15, 2008 at 4:35 am

I would hope free trade makes incomes unequal. Without the prospect of making my income less equal, in the direction above the average, I would not care to engage in free trade at all.

save_the_rustbelt July 15, 2008 at 8:22 am

Is it really healthy to draw such a firm conclusion from one paper?

After all, there are thousands of economists out there creating lots and lots of papers, and it would seem someone should be replicating the results.

On another note, CNBC, the official mouthpiece of Wall Street, it now running shows on the super-rich and the greedy. But let's not jump to conclusions.

(Don, I'm interested in your take on what should happen when executives get very very rich in the "free market," and then the company that enriched them collapsed in a heap of fraud and/or gross incompetence. Any problem with that?)

Hammer July 15, 2008 at 8:46 am

Dave: It is not a question of what they can consume so much as what they do. There is little marginal utility for getting an HDTv with mahogony paneling, but it looks fancy. For 1/6th the price though you could get one that is basic plastic, and does the exact same thing functionally, just less aesthically.
That is the beauty of Wal-Mart and it's kin: one can get more function for less money.

Consider some 50-60 years ago when most families couldn't afford a tv or more than one car. The rich did not have such limits on functionality. Now, even most "below poverty" families in the US have multiple Tvs and cars. Maybe the rich have 300 cars that are really expensive, but the marginal utility is nearly all cosmetic at that point.

When the main differences in purchasing power are not based on function but status, you have a relatively narrow gap. Compare to places like China where many people consider furniture we buy in Wal-Mart for a pittance something to save for.

Chris July 15, 2008 at 9:19 am

John Dewey –

Agree completely. I chose my example because it's a case of a small, locally-owned shop. It's the very sort of store that the anti-Walmart crowd complains is driven out of business by Walmart.

John Dewey July 15, 2008 at 10:13 am

Chris: "It's the very sort of store that the anti-Walmart crowd complains is driven out of business by Walmart."

Any company – very large or very small – should be driven out by Walmart if the company is not providing sufficient value to its customers. I think we agree on this point.

I guess I'm just sick and tired of hearing that crap from the anti-Walmart crowd – that small businesses are somehow noble endeavors that deserve to survive. Why should anyone care about inefficient and out-of-touch small businesses?

I have owned a small retail business for the past 15 years. I've had to adjust my product offerring and my pricing in order to remain competitive with the "big guys". I neither need nor desire any sympathy or assistance from leftist interventionists.

Dallas July 15, 2008 at 11:56 am

Along with helping the poor get equal functionality, the Wal-Mart's of the world are creating world peace. Our DOD needs a real enemy and you keep seeing statements that demonize China. It is hard to use a bunch of 14th century war lords and barbarians to justify nuclear subs, stealth fighters and other multi-billion dollar programs. However, Wal-Mart is making us so economically interdependent, our political class can't behave as aggressively as they would like. China needs the jobs and we need the goods.

John Dewey July 15, 2008 at 1:49 pm

Dallas, I completely agree.

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