In the discussion of inequality, one common retort is to argue that the poor are not really poor since they often wear excellent shoes and clothes, have iPhones, flatscreen TVs, XBox, and drive decent cars. This is a terribly bad argument for two reasons. First, it reveals a poor understanding of the economy. Amenities like clothes, tvs, iPhones, and even cars constitute an increasingly small faction of the average American budget. This is because continuous productivity improvements drive down the prices of these types of goods. That is like saying because you eat as much fruit as a billionaire, you must be extremely rich. Meanwhile, education, healthcare, housing, and childcare constitute an increasingly large fraction of the American budget. These goods and services are susceptible to Baumol's cost disease: productivity improvements are very difficult in certain areas and hence prices continue to rise. And in these very important areas, the poor are indeed falling significantly behind.
The second point is about risk. The ability to manage risk is one of the most important components of well-being in life, yet often gets overlooked. Shoes, TVs, and Xboxes will not help if you need major medical surgery or need to spend exorbitant amounts of money to defend yourself properly in the legal system. The threat, worry, and concern of becoming bankrupt at any given point in time because of the vagaries of life is something unique for the poor and lower middle class. The ability to completely manage risk by the upper middle class and rich manifests itself in many ways. First, not having to deal with the stress of bankruptcy is an incredible boost to one's quality of life. Second, not having to worry about risk afford freedom in a variety of ways: the freedom to move geographically anywhere, the freedom to leave a job you hate, the freedom to leave a bad relationship, etc. Imagine having to give up these freedoms because of the inability to cope with risk and tell me if that compares to having nice sneakers or a TV.
Because of the the importance of managing risk, wealth inequality is a better proxy for capturing real inequality. Wealth captures both consumption and the ability to manage risk. And wealth inequality is more extreme than consumption and income inequality in the US and is getting more extreme. And even wealth inequality underestimates the real separation between the poor/lower middle class and everyone else. The upper middle class/rich have not only their own wealth but also access to the wealth and support of their significant social networks (social capital). If they need money in case of an emergency, they have wealthy families. If they lose their jobs, they have connections that will help them get another job soon.
So next time someone argues that the poor dont have it that badly, remember two things: (1) differences in access to goods and services such as education, healthcare, housing, and childcare; and (2) the ability to deal with risk in life. It really, really sucks to be poor and we shouldn't let disingenuous arguments about the consumption of amenities obscure the reality.
The second point is about risk. The ability to manage risk is one of the most important components of well-being in life, yet often gets overlooked. Shoes, TVs, and Xboxes will not help if you need major medical surgery or need to spend exorbitant amounts of money to defend yourself properly in the legal system. The threat, worry, and concern of becoming bankrupt at any given point in time because of the vagaries of life is something unique for the poor and lower middle class. The ability to completely manage risk by the upper middle class and rich manifests itself in many ways. First, not having to deal with the stress of bankruptcy is an incredible boost to one's quality of life. Second, not having to worry about risk afford freedom in a variety of ways: the freedom to move geographically anywhere, the freedom to leave a job you hate, the freedom to leave a bad relationship, etc. Imagine having to give up these freedoms because of the inability to cope with risk and tell me if that compares to having nice sneakers or a TV.
Because of the the importance of managing risk, wealth inequality is a better proxy for capturing real inequality. Wealth captures both consumption and the ability to manage risk. And wealth inequality is more extreme than consumption and income inequality in the US and is getting more extreme. And even wealth inequality underestimates the real separation between the poor/lower middle class and everyone else. The upper middle class/rich have not only their own wealth but also access to the wealth and support of their significant social networks (social capital). If they need money in case of an emergency, they have wealthy families. If they lose their jobs, they have connections that will help them get another job soon.
So next time someone argues that the poor dont have it that badly, remember two things: (1) differences in access to goods and services such as education, healthcare, housing, and childcare; and (2) the ability to deal with risk in life. It really, really sucks to be poor and we shouldn't let disingenuous arguments about the consumption of amenities obscure the reality.
