China and Wal-Mart: the champions of equality
The US presidential campaign has sometimes sounded like a contest to prove who despises trade the most. Media reports of job losses to China and the destructive effect of Wal-Mart on local businesses are ubiquitous. In recent weeks, Lawrence Summers and Martin Wolf have in the Financial Times both highlighted the dangers of having high-income countries turn against globalisation. This public debate has taken for granted that inequality in these countries has risen as a result of globalisation.
But has it really? In a recent paper*, co-authored with John Romalis from the University of Chicago, I argue that it has not. The reason is simple. How rich you are depends on two things: how much money you have, and how much the goods you buy cost. If your income doubles but the prices of the goods you consume also doubles, you are no better off. Unfortunately the conventional wisdom on US inequality is based on official measures that look only at the first half, the income differential. National statistics ignore the fact that inflation affects people in different income groups unevenly because the rich and poor consume different baskets of goods.
Inflation differentials between the rich and poor dramatically change our view of the evolution of inequality in the US. Inflation of the richest 10 per cent of US households has been 6 percentage points higher than that of the poorest 10 per cent in the period 1994-2005. This means that real inequality in the US, if measured correctly, has been roughly unchanged.
The reason is just as dramatic as the result. Why has inflation for the poor been lower than that for the rich? In large part it is because of China and Wal-Mart.
Poor families in Ameri ...