Debating forms of inequality

The special double holiday issue of the Economist (22 December) includes a piece on inequality which is essentially a rebuttal to Paul Krugman. In his recent book, The Conscience of a Liberal, the New York Times columnist and Princeton professor emphasises widening income inequalities in America. The Economist concedes they are widening but argues they only tell a small part of the story:

“measures of income inequality are misleading because an individual’s income is, at best, a rough proxy for his or her real economic wellbeing. Because we can save, draw down savings, or run up debt, our income may tell us little about how we’re faring. Consumption surveys, which track what people actually spend, sketch a more lifelike portrait of the material quality of life. According to one 2006 study, by Dirk Krueger of the University of Pennsylvania and Fabrizio Perri of New York University, consumption inequality has barely budged for several decades, despite a sharp upswing in income inequality.”

However, consumption surveys also have their limits. The Economist argues that broader measures of well-being show that inequality is narrowing in many respects:

“This increasing equality in real consumption mirrors a dramatic narrowing of other inequalities between rich and poor, such as the inequalities in height, life expectancy and leisure. William Robert Fogel, a Nobel prize-winning economic historian, argues that nominal measures of economic well-being often miss such huge changes in the conditions of life. “In every measure that we have bearing on the standard of living…the gains of the lower classes have been far greater than those experienced by the population as a whole,” Mr Fogel observes.” (The Economist reference is to Fogel’s The Escape from Hunger and Premature Death 1700-2100 Cambridge University Press 2004).