Don’t Cry for the Poor After All They Get to Shop At Dollar General: Inequality and Multiple Price Indices

Will Wilkinson writes

Nobody has a problem with the idea that Americans and Canadians face different rates of inflation. Oh, different currencies? Then nobody has a problem with the idea that the French and the Spanish face different rates of inflation. Suppose God took the wealthiest, middle, and poorest third of Americans and put each group in their own new country. They all use U.S. dollars, just like the French, Germans, and Spanish all use the Euro. Would you freak out were you to find that inflation, as measured by a consumer price index, is different in these different countries? No, you would not freak out. It would be perfectly natural for each country’s government statistics nerds to track a basket of goods typical for that country’s consumers.

The price index problem is a gnarly one that I won’t pretend I have fully wrapped myself around. I struggled with a bit in the 90s when tech was growing so fast that everyone knew it was screwing with the indices. Since then I have left it alone.

To answer Will’s question though, I am puzzled at different price indices for different Eurozone countries. My understanding is that inside the Eurozone we have labor mobility, we have capital mobility and we have a standardized system of business law. That sounds close enough to me to induce the law-of-one-price.

The law-of-one-price is the idea that the exact same good should sell for the same price from two different vendors. If we observe different prices then that tells us that the good is somehow different. For example, an espresso in Paris is not the same as an espresso in rural Slovakia because the espresso in Paris comes with the ability to drink it on Parisian streets. People like Parisian streets and they like drinking their espressos there.

This is presumably why people choose to live in Paris despite the fact that land, housing and just about everything else is cheaper in Slovakia.

Thus, I would argue, saying Paris has a higher cost of living is just another way of saying that out of all the places that Europeans could live, work and shop relatively more of them prefer Paris and prices reflect that.

Also, I am not arguing that Parisians have more control over their lives.  An argument that Will acknowledges and waves away.

clearly, wealthier people have more such control than poorer people. Moreover, there can be no doubt that there is some value in having this kind of control, and that this is one of the things that money buys (in a sense of “buys” broader than the one that concerns the BLS). My sense is that critics of multiple price indexes believe that once we take into account the deeper utility or value of this kind of control over our own consumption pattern, we’ll see that overlooking the fact that the quality of low-cost goods has improved faster than the quality of high-priced goods has not led us to overestimate inequality, in a sense of “inequality” broader than income inequality.

Now, I am more than willing to entertain arguments to this effect, but it does need an argument. And it needs to be acknowledged that raising the question of the value of higher-level control over one’s consumption choices has no real relevance to the methodological correctness of using different price indexes for the rich and poor to estimate trends in income growth and inequality.

I largely agree that trying to value control only confuses the matter. If we are going to get into that then we have to start thinking about the hotshot computer programmer who spent all his high school days learning code because he couldn’t get a date with the prom queen. If he would have traded away all his subsequent earnings for one night under the stars with the girl of his dreams is he richer or poorer than the former quarterback who is now working at the mall selling the games our programmer designed?

However, that’s not the argument I am making. I am arguing that the fact that people who have more money choose to buy good X  and that retailers internalize this fact and charge more money for good X is hefty evidence that good X is more desirable and therefore better. Hence, we shouldn’t call people poorer because they choose to buy it.