Wal-Mart is famous for its low prices, but according to a new analysis by a couple of University of Chicago profs, Wal-Marts price cutting has also cut something else (or at least restrained its growth): inequality. Steven Levitt reports:
Inequality is growing in the United States. The data say so. Knowledgeable experts like Ben Bernanke say so. Ask just about any economist and they will agree. (They may or may not think growing inequality is a problem, but they will acknowledge that there has been a sharp increase in inequality.)
According to two of my University of Chicago colleagues, Christian Broda and John Romalis, everyone is wrong.
Their argument could hardly be simpler. How rich you are depends on two things: how much money you have, and how much the stuff you want to buy costs. If your income doubles, but the prices of the things you consume also double, then you are no better off.
When people talk about inequality, they tend to focus exclusively on the income part of the equation. According to all our measures, the gap in income between the rich and the poor has been growing. What Broda and Romalis quite convincingly demonstrate, however, is that the prices of goods that poor people tend to consume have fallen sharply relative to the prices of goods that rich people consume. Consequently, when you measure the true buying power of the rich and the poor, inequality grew only one-third as fast as economists previously thought it did — or maybe didn’t grow at all.Why did the prices of the things poor people buy fall relative to the stuff rich people buy? Lefties aren’t going to like the answers one bit: globalization and Wal-Mart!
More. (HT: Restrained Radical) Of course, food prices are currently on the rise thanks in part to the ethanol mandates imposed by the government last year, and this may well cancel out Wal-Mart’s inequality canceling effect. Still, if it wasn’t for Wal-Mart’s comparatively low prices, the effect of this would be even worse. Maybe this news will make some of Wal-Mart’s more trenchant critics reconsider whether equality is all its cracked up to be. Then again, maybe not.