Saturday, July 26, 2008

It's not easy being green rich...

It is one of those articles you read and then realize how widely the researchers missed the point for most readers.  On the subject of income inequality, economists analyzed spending patterns to arrive at the cheerful conclusion the poor are doing just fine compared to the hard-pressed rich.
A challenge to the conventional wisdom is set out in a recent research paper* by Christian Broda and John Romalis, both of the University of Chicago’s business school. They argue that standard measures of inequality do not reflect differences in the way that the rich and poor spend their money. A person’s demand for a particular good or service does not rise in exact proportion to his income. As he grows richer, the pattern of his spending changes, as well as the amount. In particular, high-wage households spend a greater share of their income on services and a smaller share on “non-durable” items, such as food, clothing, footwear and toiletries.

For most of the past three decades, the price of non-durable goods has been falling relative to the price of the services—investment advice, personal care, domestic help and so on—that the rich spend more of their money on. If these differences between the inflation rates faced by the rich and the poor are taken into account, the rise in inequality is reduced and may even vanish.  [More]
Let me offer my interpretation. Comparing the cost to maintain a comfortable lifstyle to one where you live paycheck to paycheck may be an interesting experiment for tenured economists, but it does not address the issues of income and wealth inequality in the US.

So financial planners are more expensive - does this imply being wealthy is tough? Consider the fact that well-to-do citizens could (gasp!) shop at Chinese-supplied Walmarts and reap the same savings. They could plan their own finances!  Or care for their own children.

Compare those options with the poor.  If you are already dependent on low-priced necessities what choices do they have?

Perhaps it is a clever thought-problem that challenges "conventional wisdom", but it is a callous disregard of actual life circumstances to suggest the rich are struggling like the poor.

1 comment:

Ol James said...

If the upper crust would do some checking they would be surprised. The fancy labeled items were probably made in the same factory as those on Wally-Martz shelves.
I have to wonder, is it being frugal...or just a tightwad?? Only your banker knows for sure.