Inequality Reading

I’ve just finished reading two books about inequality. One is a beautifully written (and short) tome by Robert Frank, entitled Falling Behind: How Rising Inequality Harms the Middle Class. Over the years, many people have argued that one of the costs of inequality is envy (ie. your income enters negatively into my utility function). But Frank argues that there are other impacts as well. For example, he contends that increased expenditures by top earners can affect the middle-class because it leads to an ‘expenditure cascade’. Frank gives the example of housing, in which higher incomes cause those at the top of the distribution to build larger mansions, which in turn leads the next tier to build larger houses, which in turn means that the middle-class must spend more on housing or face the prospect of sending their children to below-average schools. He argues that the same cascade process operates in the cases of motor vehicles, professional wardrobes for job applicants, and gifts given to co-workers. In each instance, expenditures on positional goods by the most affluent individuals in society changes what is considered ‘adequate’ by those at the middle of the distribution.  

I had only four minor quibbles about Frank’s conclusions. First, I think he overplays the negative impact of inequality on health. As Angus Deaton points out in a sweeping literature review, the theory in this area is stronger than the empirics (my own modest contribution to the debate – coauthored with Sandy Jencks – reaches the same conclusion). Second, he tends to repeat points for emphasis. Third, he makes the odd claim that US class sizes have become larger (they’ve become much smaller, as the statistics show). And fourth, he tends to make points he’s already made. But in the broad scheme of things, these aren’t terribly substantial.

The other inequality book I’ve been reading lately is Frank Stilwell and Kirrily Jordan’s Who Gets What: Analysing Economic Inequality in Australia. Unlike Robert Frank’s book, which is much more theoretical, Stilwell and Jordan’s tome has lots of useful facts and figures on inequality. A chapter titled “The Poor” draws mainly the standard ABS sources, while the chapter on “The Rich” has more diverse sources, drawing on Stilwell’s work analysing the BRW Rich List, CEO salary data, and my own work with Tony Atkinson using tax data. Neat discussions of regional differences and gender round out the “what’s going on” part of the book. I’m less enamoured by the chapter on happiness (I take the old-fashioned view that growth matters), and don’t agree with all the policy suggestions at the end, but you don’t have to concur with the prescription to find the diagnosis interesting.

I had been thinking that I might write a book on Australian inequality, but between Stilwell and Jordan, and recent data-driven books on inequality by Michael Schneider (La Trobe) and Peter Saunders (UNSW), the field seems to be becoming increasingly crowded.

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9 Responses to Inequality Reading

  1. Andrew Leigh says:

    Andrew, another take on the inequality debate is this paper by Sotirios Zartaloudis from the Policy Network that discusses differences in equality between the US and Europe:

  2. Sinclair Davidson says:

    in which higher incomes cause those at the top of the distribution to build larger mansions, which in turn leads the next tier to build larger houses, which in turn means that the middle-class must spend more on housing or face the prospect of sending their children to below-average schools

    Is there empirical evidence to support this? In Australia?

    Most of the housing stock is second-hand. People tend to move into existing homes. An increase in the size of homes would occur slowly. The McMansion boom is a middle-class phenomenon. Even if the top 0.1% of income earners built larger mansions, are we to believe that is driving the McMansions?

  3. conrad says:

    I agree with Sinclair on this and note that it isn’t even true of new housing either — at least in Melbourne, a disgusting McMansion type house (think Werribee, Melton and all those new housing estates between Melbourne and Geelong) costs less than a smaller place in a richer suburb. I imagine the same is true in Western Sydney — houses in the new estates appear much bigger than those in the richer suburbs yet are cheaper to buy.

  4. Bruce Bradbury says:

    I would argue that the positional goods argument with respect to housing also applies in Australia, but in a slightly different way. Instead of increasing the quantity of housing (ie house size) it acts mainly via the price of land. If land is fixed in supply, an increase in average incomes will bid up land prices. If average incomes are rising faster than median incomes then the standard of living of the median household will fall.

  5. ChrisPer says:

    “4th he tends to repeat points he’s already made” :-)

  6. Sinclair Davidson says:

    Nice long piece in the Fin today on inequality with many quotes from Andrew and Bo Gregory. Recommended reading. Not that I agree with much of it. Two things jumped out at me. First, the notion that we shouldn’t ‘blame’ people who are poor due to their own life style choices. This view will become more popular over the life of the Rudd government, I suspect. The other thing was a quote from our own Andrew on where the wealth in Australia was congregating. At the tippy top – great expression. We’re told judges, top bureaucrats, politicians and CEOs are driving the wealth increases.

    Now I don’t begrudge politicians for their salaries and with proper incentive structures would be happy for them to be paid more. But I do note that 3/4 of those driving the wealth are the State, not the private sector. There is something wrong with that.

  7. tyamoni says:

    The United States misunderstood the preferential treatment to the income gainer and the property owner in 1925 as a correct selection.
    It was misunderstood that the tax system was irrelevant to business, and praised the boom at the high graduated income tax rate of 50-73% at that time.
    The income deregulation plan decreased to 25% was executed. The world great depression following the large sudden fall of stock prices was caused in 1929 since it continued for four years.

    It graduated increased taxes and it did and the income restriction strengthening was done from 25 rate of income tax.. % to 63->92% in dramatic form three years later.
    The result and the United States completely recovered national revenue before burst of the economic bubble of holding off, and put the rise in the unemployment rate on the real economic recovery orbit in only six years.
    However, the tax increase plan of the United States is evaluated as the policy
    unavoidably taken, and is clear also in forcing a large tax cut policy of Reagan Administration that generates large-scale fiscal deficit after 50 years and present child Bush administration.
    It graduated eased and the decrease in the income re-distribution function was caused in done Reagan tax system and Bush tax system.
    And, the proliferation of a high propensity to consume of inside low income Shasou was not able to be used.

  8. Andrew Leigh says:

    Sinc, we merely chose those groups because we can get long-run data on their salaries – as a check on our tax-derived series. But it’s not the case that most of those in the top income groups are employed by the public sector!

  9. Patrick says:

    I noticed that part about judges and politicians – I hadn’t even noticed the authors and I stopped reading at that point because I figured that the authors obviously had no idea what they were talking about!

    Sorry – but at least you know now that my positive feedback can be taken at face value :)

    Also, a number of links relevant to this book are on this post and comments where NG reviews the Economist’s critical review of Krugman’s new book, which latter cites inter alia Frank Rich’s book in his (boorish) response. The Economist responds, and wins on (quite a few) points, imho.

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