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Wrong, revisited

Posted By Russ Roberts On June 14, 2009 @ 11:20 am In Uncategorized | Comments Disabled

In response to this post [1], a lot of comments discussed inequality.

It is easy to confuse inequality and absolute well-being.

If the income of poor people is growing at 3% a year and that of rich people 5% year, then inequality will grow. But the poor will be doing much better. In fact, in roughly a generation—25 years—if that trend continues, the poor will double their material well-being.

The chart I discussed in that earlier post is not just about inequality. Let me show the chart again, and the lesson that Justin Wolfers at Freakonomics wanted the reader to from it:

Agraph [2]

Wolfers talks about inequality growing. But that's not the key point. Here is the key point as he describes it [3]:

Economic growth since the mid-1970’s just hasn’t delivered much for many families. Read the full Goldin and Katz posting [4], over at VoxEU, for a deeper understanding of why. (Hint: It’s education.)

In light of this, perhaps there’s no paradox in the fact that happiness hasn’t grown in the U.S. since the 1970’s [5].
Rather than inferring that growing income doesn’t raise happiness,
these data remind us that for most of the distribution there hasn’t
been much income growth.

Here is what I wrote:

The chart is highly misleading. It implies that poor people have done poorly while rich people have thrived. Rich people have thrived. But so have poor people.

I care about how poor people—say the two bottom quartiles—are doing in absolute terms. The chart implies they are making no progress. The chart implies that if you were poor in 1973, you're still desperately poor a generation later.

I have seen longitudinal data that says this is grossly inaccurate (don't have at hand–will try to find it.) But the simpler point is that this chart implies that poor people have made no progress. But the chart is meaningless. Because it is not the same people, because it ignores the enormous demographic changes since 1973 because of the increase in divorce, this chart does not address the question of whether poor people have shared in the tremendous economic growth of the last 35 years.

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[1] this post: http://cafehayek.com/2009/06/wrong.html

[2] Image: http://cafehayek.com/images/old/6a00d834518ccc69e20115701959ed970c-800wi

[3] he describes it: http://freakonomics.blogs.nytimes.com/2009/06/12/economic-growth-across-the-income-distribution/#more-13103

[4] Goldin and Katz posting: http://www.voxeu.org/index.php?q=node/3640

[5] happiness hasn’t grown in the U.S. since the 1970’s: http://freakonomics.blogs.nytimes.com/2008/04/23/the-economics-of-happiness-part-5-will-raising-the-incomes-of-all-raise-the-happiness-of-all/

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