Tuesday, September 16, 2008

We Won The War on Poverty Without Even Noticing It: Thanks To Cheap Imports From China

The abstract of the paper “Inequality and Prices: Does China Benefit the Poor in America?” by University of Chicago economists Christian Broda and John Romalis:

Over the past three decades there has been a spectacular rise in income inequality as measured by official statistics. In this paper we revisit the distributional consequences of increased imports from China by looking at the compositional differences in the basket of goods consumed by the poor and the rich in America. Using household data on non-durable consumption between 1994 and 2005 we document that much of the rise of income inequality has been offset by a relative decline in the price index of the poor. By relaxing the standard assumptions underlying the representative agent framework we find that inflation for households in the lowest tenth percentile of income has been 6 percentage points smaller than inflation for the upper tenth percentile over this period.

The lower inflation at low income levels can be explained by three factors: 1) The poor consume a higher share of non-durable goods —whose prices have fallen relative to services over this period; 2) the prices of the set of non-durable goods consumed by the poor has fallen relative to that of the rich; and 3) a higher proportion of the new goods are purchased by the poor. We examine the role played by Chinese exports in explaining the lower inflation of the poor. Since Chinese exports are concentrated in low-quality non-durable products that are heavily purchased by poorer Americans, we find that about one third of the relative price drops faced by the poor are associated with rising Chinese imports.

From the article "How China Helps America’s Poor" at The American:

In their newest study, Broda and Romalis contend that inequality has actually grown very little over the last decade. According to their research, the perceived rise in inequality—accepted as gospel by many economists and political figures—comes down to a simple measurement error, namely, focusing only on income, rather than on the prices of goods that particular groups consume.

“We are underestimating the gains from trade,” Broda says. “The current statistical interpretation ignores the fact that a poor household today can access goods that, in the 1960s, they could not—microwaves, DVDs—and, more importantly, that the prices of the staples that lower-income households consume have also gone down dramatically.”

Indeed, he claims that lower-income Americans, who tend to spend more on certain goods, have made impressive strides over the past decade, thanks largely to U.S. trade with China.

Broda and Romalis found that in the sectors where Chinese imports have increased the most (especially nondurable goods such as canned food and clothing), prices have fallen dramatically. They estimate that about one-third of the price decline for the poor is directly associated with rising imports from China. “In the sectors where there is no Chinese presence,” Broda says, “inflation has been more than 20 percent.”

“In the ’60s, all the talk was about trying to win the war against poverty,” he adds. “The bottom line with our study is that we may have won the war against poverty without even noticing it. Here we have Congress debating why the poor in America haven’t been able to grasp the great economic growth we’ve seen in the last 30 years. ‘It’s been only concentrated in the top 1%,’ they say. And, absolutely, that segment has grown a lot. But that doesn’t mean that the poor haven’t been able to access part of that progress.”


At 9/16/2008 3:13 PM, Anonymous Anonymous said...

So how do we get government to recognize non-government solutions to poverty?

At 9/16/2008 4:07 PM, Anonymous Anonymous said...

China has all our money now, so they own us.

Nobody is poor with communism. We may no longer own anything outside of those nifty non-durables, but it doesn't matter. There are no Americans left.

At 9/16/2008 9:33 PM, Blogger save_the_rustbelt said...

Gee, the folks who lost their jobs, homes, health insurance and pensions can be really happy now.

Reminds me of the joke, Bill Gates takes 9 homeless guys into a bar for a drink, an economist drops in and calculates that the 10 have an average net worth of $6B each.

At 9/16/2008 11:07 PM, Anonymous Anonymous said...

Threatened by a "financial tsunami," the world must consider building a financial order no longer dependent on the United States, a leading Chinese state newspaper said on Wednesday.

"The eruption of the U.S. sub-prime crisis has exposed massive loopholes in the United States' financial oversight and supervision," writes the commentator, Shi Jianxun.

"The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States."


Don't get to comfy frat boy.

At 9/16/2008 11:27 PM, Anonymous qt said...


Take a pill and lighten up.

Obviously, this is the first time around for you. If you have lived through previous financial crises, you figure out that we end up getting through them.

The first time is like losing your virginity. After a while, you realize it's not the end of the world.

Life does go on. The sun will rise tomorrow even if Lehman Bros. goes bankrupt. Ten years from now, you won't even remember the name of the firm.

Take it from a menopausal female.

At 9/16/2008 11:46 PM, Anonymous Anonymous said...

"Just and fair", meaning, "we want the right to steal from the West". These are Communists talking, after all.

At 9/17/2008 1:59 AM, Anonymous Anonymous said...

Perhaps these so-called gains are unraveling: Food and energy constitute a disproportionate share of the low-income market basket and haven't been getting more affordable lately.

Even the housing market woes have not been kind to the poor: residential rents in my area are up 25 percent over the last three years.

At 9/17/2008 1:15 PM, Blogger juandos said...

"Threatened by a "financial tsunami," the world must consider building a financial order no longer dependent on the United States, a leading Chinese state newspaper said on Wednesday"...

Who cares what the Chinese whine about? What are they going to do if they don't get paid? Whine to the Democrats and hope the Obama Global Poverty Act mitigates the situation?

Funny how anon whines like a Democrat...

Funny how all things domestic have taken a serious turn for the worse since Nov. of '06...

At 9/17/2008 7:20 PM, Blogger Matt said...

"Food and energy constitute a disproportionate share of the low-income market basket and haven't been getting more affordable lately."

Depends on what you mean by lately. If you mean the last year, than yeah, but relative to the gains of the 40-60 years, we're doing pretty well.

Check out to http://www.american.com/archive/2008/july-august-magazine-contents/how-are-we-doing

and see Fig 3: What work buys (HT: CD)

At 9/17/2008 10:00 PM, Blogger juandos said...

Hey matt, thanks for the How Are We Doing? link...

Good stuff sir!

At 9/17/2008 11:13 PM, Anonymous Anonymous said...

Matt - looks interesting but I couldn't make out the text below the graph indicating what the columns represent.

At 9/18/2008 8:28 AM, Blogger OBloodyHell said...

> that the 10 have an average net worth of $6B each.

This is why the figure used for tracking that statistic is the MEDIAN, not the MEAN, sub-genius. The MEDIAN net worth would be roughly zero.

P.S. if anyone in the rustbelt had a brain, then a larger percentage of them would have MOVED 20 years ago when the collapse of the rustbelt's industrial infrastructure had become a fait accompli by the "creative destruction" nature of economics itself.

So don't save the rustbelt. GTFOut of it. If 20% of that population had had brains enough to move to where there were actually jobs, then not only would they be better off, but the ones who stayed behind would be, too.

Duh and Q.E.D.


> http://www.reuters.com

You're citing reuters, numbnuts. If you imagine that there is anything bad about the US that they won't print, you're even stupider than I already think you are.

At 9/18/2008 8:30 AM, Blogger OBloodyHell said...

> Funny how all things domestic have taken a serious turn for the worse since Nov. of '06...


How dare you skewer the Dems like that!!

At 9/18/2008 8:34 AM, Blogger OBloodyHell said...

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From now on, you will be as protected from Non Democratic Thoughts transmitted via the internet just as thoroughly and effectively as you are when you access the TV news.

The Democratic Party hopes to have it legally mandated for all ISPs within the year.

To demonstrate its effects, we present you with the following, unfiltered picture:

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At 9/18/2008 4:54 PM, Blogger juandos said...

"Now, here is the same picture, filtered through Democravision(TM)"...


OBH that was funny!...


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