Sunday, August 17, 2008

Income: Wealth and "Inequality"

In The Economist (, the London-based news and business weekly that calls itself a newspaper, a department called "Economics Focus" offers one page of theory that usually is clearly enough written to be mostly understandable.
In the July 26 column, the story was that the long-term rise in American income inequality may be less than originally reporter. Two professors at the University of Chicago business school have challenged the conventional wisdom. Christian Broda and JOhn Romalis argue that standard income inequality measures don't reflect how the rich and poor spend their money. Different sets of goods and services have different rates of inflation, they say. Accounting for these differences removes most of the increased differences in income inequality. Low cost imports from China offset more than 25% of the measured increase in income inequality claimed since 1994. Ah, globalization.
Now that the real world of real estate prices has caught up with metro Albuquerque—the average home price was down 2.9% during the first half of 2008—Willem Buiter's thoughts, in the August 9 edition, on a wealth effect" from changing housing values are worth note. A wealth effect means that as the value of something such a home increases, we each feel wealthier and tend to spend some of that paper profit. And vice versa. A shift in the overall value of housing does not affect household wealth in the aggregate, Buiter says. Here I didn't quite get the explanation, but whatever. If there has been a housing bubble, which was the case in a good many places around the nation, landlords will lose the part of the housing value that did not reflect housing fundamentals. Also, lenders may cut credit access, which indeed seems to be happening. But there is some good news. If housing prices drop, more people can afford to buy a home.

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