When the Rich Get Richer, what happens to the poor?
If Matt is a jealous guy, then as Bill Gates grows even richer Matt's envy may cause him to suffer a welfare loss. But if the middle class and poor are not envious, are they made worse off as income inequality increases?
It depends. If the super-rich use some of their $ to finance nice musuems and art galleries and Buffett-Gates their money to solve public health challenges then society could be improved along some dimensions.
Alternatively if this crew uses their money to purchase 100,000 square foot homes in desirable areas then the price of land will skyrocket and the middle class will be squeezed out.
Below I report on a new NBER working paper on this subject. My only serious question here relates to the supply side. How do for profit firms respond to income inequality? Joel Waldfogel keeps making the point that in many markets there are fixed costs to producing a variety. If Matt wants a purple shirt, the average fixed cost of producing such a shirt would be a lot lower if there were lots of other people who also want purple shirts. Joel's point is that there are preference externalities. If the middle class shrinks, will they have more trouble finding their ideal varieties as it isn't profitable for suppliers to make them.
Do Rising Tides Lift All Prices? Income Inequality and Housing Affordability
Janna L. Matlack, Jacob L. Vigdor
NBER Working Paper No. 12331
Issued in June 2006
NBER Program(s): AP EFG
---- Abstract -----
Simple partial-equilibrium models suggest that income increases at the high end of the distribution can raise price paid by those at the low end of the income distribution. This prediction does not universally hold in a general equilibrium model, or in models where the rich and poor consume distinct products. We use Census microdata to evaluate these predictions empirically, using data on housing markets in American metropolitan areas between 1970 and 2000. Evidence clearly and unsurprisingly shows that decreases in one's own income lead to less housing consumption and less income left over after paying for housing. The effect of increases in others' income, holding one's own income constant, is more nuanced. In tight housing markets, the poor do worse when the rich get richer. In slack markets, at least some evidence suggests that increases in others' income, holding own income constant, may be beneficial.
It depends. If the super-rich use some of their $ to finance nice musuems and art galleries and Buffett-Gates their money to solve public health challenges then society could be improved along some dimensions.
Alternatively if this crew uses their money to purchase 100,000 square foot homes in desirable areas then the price of land will skyrocket and the middle class will be squeezed out.
Below I report on a new NBER working paper on this subject. My only serious question here relates to the supply side. How do for profit firms respond to income inequality? Joel Waldfogel keeps making the point that in many markets there are fixed costs to producing a variety. If Matt wants a purple shirt, the average fixed cost of producing such a shirt would be a lot lower if there were lots of other people who also want purple shirts. Joel's point is that there are preference externalities. If the middle class shrinks, will they have more trouble finding their ideal varieties as it isn't profitable for suppliers to make them.
Do Rising Tides Lift All Prices? Income Inequality and Housing Affordability
Janna L. Matlack, Jacob L. Vigdor
NBER Working Paper No. 12331
Issued in June 2006
NBER Program(s): AP EFG
---- Abstract -----
Simple partial-equilibrium models suggest that income increases at the high end of the distribution can raise price paid by those at the low end of the income distribution. This prediction does not universally hold in a general equilibrium model, or in models where the rich and poor consume distinct products. We use Census microdata to evaluate these predictions empirically, using data on housing markets in American metropolitan areas between 1970 and 2000. Evidence clearly and unsurprisingly shows that decreases in one's own income lead to less housing consumption and less income left over after paying for housing. The effect of increases in others' income, holding one's own income constant, is more nuanced. In tight housing markets, the poor do worse when the rich get richer. In slack markets, at least some evidence suggests that increases in others' income, holding own income constant, may be beneficial.
posted by Matthew Kahn at 7:49 AM
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