DISQUS

But mk, if you are poor, you do know what you are missing out on. You know what houses in nice neighbourhoods are, you know what an expensive education is, and what comprehensive health insurance is (not to mention yachts and German kitchenware). The fact that these things were not in your poor person's consumption bundle to begin with, does not mean that you are indifferent to them becoming even more unobtainable.

What's the measure of inequality that matters? The fact that the living standards of the poor have moved closer to the rich, in so far as they can now afford more cheap food & cheap imports ...or the fact that the rich person's consumption basket has moved further beyond their reach. I lean toward the latter - I think this research shows inequality has increased.

mk

What worries me is that the goods in the rich consumption bundle may include a good education, health care and housing in a safe neighborhood - rather than just yachts and designer German kitchenware.

Goods like these (education etc.) probably include feedbacks to income, so if they are getting further beyond the reach of poor people, that looks like pretty bad news to me - news which is only partially mitigated by the fact that cheap food, clothes and goods in the poor consumption bundle have gotten cheaper.

Will,

I think you can interpret 'capabilities' as consumption possibility frontier, feasible consumption set, something like that.

mk, I'm going to try to get you to bounce back again. I don't think it's right that "we only care about price changes that impact the utility of my optimal bundle." I think that with the relative income and price movements we are discussing, some of the things that the rich enjoy have gotten even further beyond the reach of the poor, even though these things are not in the poor's optimal consumption bundle, and that matters when we're thinking about how unequal society is.

mk

Nicely put. In my parable the rich can now buy much more gruel than they could before (even though they choose not to) and the poor can buy less beef wellington (even though they choose not to) so , while own-consumption adjusted incomes may not have diverged, this still amounts to an increase in inequality. As you have it, changes in feasible consumption sets may be the kind of 'inequality that matters'.

duh - I meant 'decile' not 'declines' in 1st para.

Will,

Thanks for the reply. Yes I used an example with changing proportions of rich & poor in an attempt to get at what I thought the issue was in a simple way; this does not mean I think the proportions of the population in each income declines changes!

When I wrote in terms of neutralising 'concerns' (which may have been a mistake) I was trying to get at whether the 'kind of inequality that matters' (i.e. concerns us) has increased. In my example, I meant to suggest that while increased gruel buying power for the poor may decrease the kind of inequality that matters to some extent, the inequality that matters has more to do with who is eating beef wellington and who is eating gruel.

I'll try to get closer to reality. Say the top decile eats beef wellington and the bottom eats gruel. Now say the real wage as measured against an economy-wide average price index is unchanged for the poor, but trebles for the rich. At the same time gruel prices fall and beef wellington prices rise by exactly the right amounts so that, when adjusted by their own consumption baskets, the ratio of income between the top and bottom deciles “has risen only 2 percent in this period”. The real income of the rich, measured against the economy average price index, has increased by much more. Perhaps we also need to assume that beef wellington is sufficiently expensive so that the gruel price decline income effect is not large enough for the poor to now choose to purchase a little beef wellington. I'm not sure how well this new story now fits the Broma paper – I haven’t read it closely enough to figure out how they calculate their adjusted change in income ratios - but would you say that in my little revised parable, the sort of inequality that matters has increased?

Say the population consists of two types, rich and poor, with fixed nominal incomes. The poor eat gruel and the rich eat beef wellington. Now say that the price of gruel falls but the proportion of poor people in the population rises. Nothing else changes.

Should the gruel price decline be presented as something that stops us worrying about the increased proportion of poor people?

Clearly an increase in the number of poor people accompanied by falling gruel prices is preferable to the same increase but stable prices, which I imagine Lance would agree to, so it may reduce our concerns about increased inequality to some extent. But isn't Lance right that falling gruel prices do not neutralise concerns about rising inequality?

You'd have to modify my parable to make it reflect the subject in hand more accurately , but I think it captures the issue at stake.

I'm sorry if I've missed the substance of your argument, but I think what you're saying is that the realisation that 'choice architecture' matters just gives us one more thing to think about, when we're designing cafeteria layouts or pension policies.

So presumably, once we've thought it all through, you'd have no special objection to deciding to put the cream cakes here rather than there in the cafeteria, because we want do discourage cream cake eating, or making pension contributions an opt out rather than opt in, because we want to encourage pension contributions?

And presumably, being a libertarian sort, you rather like the fact that this control tactic is soft, and it's easy for people to choose to do other than the policy maker intends, should they wish to? But isn't that really all that's claimed for liberal paternalism - it's just much more attractive than introducing compulsory restrictions?

Hmm, I can't help feeling that I must have missed your point.