The hippies are lying to you. America does not have an inequality problem, nor are wages stagnant.

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In a recent paper weaving together several strands of new research, [Robert] Gordon [an economist from Northwestern University] reports that improved use of income datasets "shows that there was no increase of inequality after 1993 in the bottom 99 percent of the population."

...

Mr Gordon's surprising conclusion is based upon recent studies showing that measured income inequality has been overstated due to inadequacies in traditional methods for constructing price indices and estimating real income. In the latest version of a much-discussed paper Christian Broda and John Romalis find that

... the relative prices of low-quality products that are consumed disproportionately by low-income consumers have been falling over this period. This fact implies that measured against the prices of products that poorer consumers actually buy, their “real” incomes have been rising steadily. As a consequence, we find that around half of the increase in conventional inequality measures during 1994–2005 is the result of using the same price index for non-durable goods across different income groups.

Many popular narratives about inequality are grounded on the alleged fact that wages and incomes at the middle and bottom of the distribution have been stagnant for decades. It appears that this, too, may be an artefact of insufficiently sophisticated methods for building the price indices used to calculate rates of inflation. Using an updated price index, Christian Broda, Ephraim Leibtag, and David Weinstein find that

... the real wages at the 10th percentile increased by 30 percent from 1979 to 2005. In other words, the real wages of low earners have not remained stagnant, as suggested by conventional measures, but actually have been rising on average by around 1 percent per year.

http://www.economist.com/blogs/democracyinamerica/2010/09/inequality_myth?fsrc=scn/fb/wl/bl/inequalitymyth

[one...two...tree 2,762]

I'll be interested in reading Krugman's response to Gordon's argument - that the data has been looked at the wrong way until Gordon figured it out.

The great divergence: Since the late 1970s the America I knew has unraveled. We’re no longer a middle-class society, in which the benefits of economic growth are widely shared: between 1979 and 2005 the real income of the median household rose only 13 percent, but the income of the richest 0.1% of Americans rose 296 percent.

Most people assume that this rise in inequality was the result of impersonal forces, like technological change and globalization. But the great reduction of inequality that created middle-class America between 1935 and 1945 was driven by political change; I believe that politics has also played an important role in rising inequality since the 1970s. It’s important to know that no other advanced economy has seen a comparable surge in inequality – even the rising inequality of Thatcherite Britain was a faint echo of trends here.

On the political side, you might have expected rising inequality to produce a populist backlash. Instead, however, the era of rising inequality has also been the era of “movement conservatism,” the term both supporters and opponents use for the highly cohesive set of interlocking institutions that brought Ronald Reagan and Newt Gingrich to power, and reached its culmination, taking control of all three branches of the federal government, under George W. Bush. (Yes, Virginia, there is a vast right-wing conspiracy.)

Because of movement conservative political dominance, taxes on the rich have fallen, and the holes in the safety net have gotten bigger, even as inequality has soared. And the rise of movement conservatism is also at the heart of the bitter partisanship that characterizes politics today.

Why did this happen? Well, that’s a long story – in fact, I’ve written a whole book about it, and also about why I believe America is ready for a big change in direction.

For now, though, the important thing is to realize that the story of modern America is, in large part, the story of the fall and rise of inequality.

http://krugman.blogs.nytimes.com/2007/09/18/introducing-this-blog/

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You're ghey for Krugman

[JohnSmith2007 353]

Krugman has a political ax to grind. I trust him no more than any other OP-ED writer.

[one...two...tree 2,762]

You're ghey for Krugman

[I AM NOT THAT GUY 5,715]

Wrong medal, but it still doesn't mean squat.

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Steven, check out the thread on this article on the economist's facebook page. It will remind you of VJ back when it was more active. This PR forum feels like s a graveyard compared to how things once were.

[JohnSmith2007 353]

Yeah, really means something. Can I remind you that Al Gore, Obama, Arafat and Carter all got the worthless prize as well? It is a political award now and has nothing to do with achevement.

[evli1966 88]

Yeah, really means something. Can I remind you that Al Gore, Obama, Arafat and Carter all got the worthless prize as well? It is a political award now and has nothing to do with achevement.

Arafat out of all of them probably earned it.

But I agree almost worthless.

[one...two...tree 2,762]

Steven, check out the thread on this article on the economist's facebook page. It will remind you of VJ back when it was more active. This PR forum feels like s a graveyard compared to how things once were.

Good stuff. (I was at class earlier)

I like this response:

I'd like to instead like(sic) to quibble the actual article's quotes: "This fact implies that measured against the prices of products that poorer consumers actually buy, their “real” incomes have been rising steadily."

So, to use the Economist's "Big Mac Index" as a control, what this person is saying is if a poor person spends $3 on a hamburger at a fast food chain and I (a "limousine liberal," whatever that means) spend $20 on a hamburger at Morton's Steak House, that we're then even on purchasing power parity, and thus have no income inequality?

No?

Then how exactly would you justify using different price indexes for poor people vs rich people?

This is INCOME inequality, right? While "real" income vs "marginal" income quite correctly needs to take things like insurance benefits (and government assistance) into account, I'm a little unsure how any part of calculating incomes for high-wage or low-wage earners should be differentially affected by prices?

Because the different things they buy are differentially affected by inflation?

Cadillac health plans and cadillac hamburgers still require "higher income" than medicare and burgerking.

[ready4ONE 5,400]

I love the argument that prices for low quality goods have declined thus increasing the purchasing power of the poor. Priceless!

[Pooky 3,343]

I love the argument that prices for low quality goods have declined thus increasing the purchasing power of the poor. Priceless!

That's why you're not an economist.