Whenever there is a presidential election in the United States, all the candidates will line up to talk about the dangers of too much international trade. The 2008 election was no different when it came to international trade. At the time, renowned economist Christian Broda wrote an article about some of the half truths that are churned out by candidates regarding trade.
They point to the American jobs being lost to outsourcing, the destruction of local businesses because of cheap chain stores such as Wal Mart, and other potential calamities.
The reality is not as simple. In fact, much of what the media and political candidates say is not true. As an economist, Broda argues that there are only two ways to determine how rich a person is. A person’s wealth is determined by how much money they have, and how much they can buy with that money. If someone receives a 200% increase in their salary, but goods also go up by that price, are they any richer than they were before?
When people in the United States look at the income inequality in the United States, they are only looking at the raw data, not spending power. They do not realize that the prices of goods, and inflation, has a different impact on the upper and middle class.
One way to look at the change of income inequality is to measure how much money the rich have vs. how much money the poorer Americans get. When these figures are compared, there is a clear increase in inequality from 1994 to 2005. However, when you include inflation in this equation, the answer changes completely.
The difference in inflation for the richest 5-10% of Americans was 6% more than the poorest 5-10% of Americans during that time period. When this is factored into the calculation, it shows that there was no change to inequality from 1994 to 2005.
Why did inflation change more for richer Americans as opposed to poorer ones? Cheap goods that came from China and other Asian countries. These goods get cheaper because of globalization. In contrast, richer people will spend more in the service industry, which does not have to deal with trade or other international competition.