That Angus Deaton has the Nobel and we don’t - we wouldn’t gain one in aggregate let alone individually - is true. It is still true that the mouse may look at the King, that even Blind Homer nods and all that. We’re thus not entirely sure that this new IFS Deaton review on inequality is going to be of much use, In fact we think it will end up being entirely misleading.
Any such report will depend upon the numbers that go into it. Has inequality increased? If so which kind? What are the exact numbers being used, where did they come from, how were they composed? And if they start from this sort of point then the report is indeed going to be wildly misleading:
And there is much evidence to support their belief. For example, not only have median wages been stagnating in the US for the last 50 years,…
Well, no, they haven’t. Nominal wages have obviously risen. To get to real wages we must subtract inflation. Here we generally use the consumer price index. We know that the CPI for the US has been overstated over the decades. By exactly how much is still argued but anywhere from 0.5 to 2% per annum is considered within the reasonable range. That makes real wages from 128% to 269% of what they were 50 years ago. We might describe only a 28% rise as stagnation over that time but a near threefold rise isn’t.
Wages not being the number we should be using anyway. Compensation - what’s the total amount gained by going off to work? That has risen strongly - as it must have done for productivity has and the labour share hasn’t fallen until very recently. The is ably described by Paul Krugman, here.
Rising inequality - or falling, whatever - isn’t even well described by wages or compensation anyway. It’s the post tax, post benefits situation that matters. The American welfare state - yes, we know the claim that it doesn’t exist but they do spend some $trillion a year on it - has indeed grown over this time.
And then even that’s not the important number. We want, if we want to know anything about inequality that matters, to look at inequality of consumption, not income. Consumption being determined not by cash income alone, we have to add the consumer surplus to get that. That explosion of free stuff from Big Tech in recent decades hugely, vastly, changing that relationship between GDP and the consumer surplus.
After all, if we’re studying inequality we should note that access to the Google search engine is estimated - realistically too - to have a value of $18,000 a year, email some $8,000, Facebook some $1,000 and you, me, Jeff Bezos, Warren Buffett and Bill Gates - well, not Gates as he has to use Bing - and the homeless guy using the library computer all have equal access at exactly the same price, $nothing.
If our starting point, our input into our analysis, is that US median wages have been static this past five decades then we’re simply not going to end up with an accurate portrayal of current inequality. After all, garbage in, garbage out isn’t restricted to computing.
We’re willing to be pleasantly surprised by the IFS Deaton examination of inequality. But we don’t think we will be. We expect the inputs to their musings to be the incorrect yet currently fashionable and that’s really not a good way to be doing science.