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May 21 2008 3:45PM EDT

China Helps the Poor, Not the Middle Class

Very good discussion of income inequality over at Felix's blog by way of James Surowiecki's column in the latest New Yorker, which is by way of this paper appearing to show that income inequality between the rich and the poor is less than we generally think it is -- thanks to trade with China.

But I think there is one aspect of the research that's being overlooked which is worth expounding upon here.

What Christian Broda and John Romalis are looking at in their paper is inequality as measured by the income differential between the top 10 percent and the bottom 10 percent of earners. The following chart from the paper shows that this bottom 10 percent earns somewhere less than $20,000 per year. (click image for larger version)

income.375.gif

This next chart shows inflation -- when factoring in both trade with China and new goods bias -- was relatively much lower for those earning less than $12,000 to 15,000. (click image for larger version)

inflation.375.gif

Inequality can be used to talk about different concepts, and I think those of us who don't fall into the less $15K-per-year income bracket (unless you're in school of course), can forget about this. Broda and Romalis don't do a great job of distinguishing it either.

The upshot to all of this is that it can make sense to say that inequality between the richest and the poorest may not be as wide as we thought it was, given conventional measures, but that trade with China apears to have had little to moderate effect on inequality between the middle class and the rich.

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