Rich getting richer while the poor get poorer? Don’t believe it, says Alan Reynolds in today’s Wall Street Journal. This article kicks off the publicity for his new book, Income and Wealth. Reynolds says the studies that show increasing inequality based on tax-return information are flawed. David Henderson, whom I respect greatly, has an article in TCS Daily that comments on Reynolds and summarizes several of Henderson’s articles that reach the same conclusion. Greg Mankiw provides links to several other articles, on both sides of the story, including Paul Krugman’s Rolling Stone article. The Krugman article is probably a good summary of the left perspective, but I haven’t read it. (I can’t read Krugman’s popular writing without running losing my lunch, even when I agree with him. I think I sometimes agree with him, but nausea overcomes me before I can be sure.) Also check out comments about the poor earning money in the underground economy in Marginal Revolution.
I’m not an expert in this field, and I have not read all the literature, but from what I see, it seems that there is likely some increase in income inequality, for a wide variety of reasons (including technology, globalization, marriage patterns, personal choice, and tax policy). However, the most shrill claims go far overboard. Further, the claims that this is all due to Republican policy and fat cat corporate CEOs ripping off the public are mostly bogus, and wildly overstated even when they have a germ of truth in them.
Business Strategy Implications:
1) Be cautious about betting on the high end market. It is far less stable than many people assume. I hear "the rich will always have money," but sales of luxury products are very sensitive to capital gains and to the profits of closely-held corporations and proprietorships, which are highly variable.
2) Don’t abandon the lower end market on the theory that the poor are too squeezed to have discretionary income to spend. The data on consumption across families show much greater equality of spending than of earning.