Tag: inequality

Inequality in income and consumption

My hypothesis is that while inequality in terms of income or wealth (measured in rupees/dollars) has been growing, consumption inequality is actually coming down. I hope to do a more detailed analysis using data, but I’ll stick to an anecdote for this this introductory blogpost.

The trigger for this thought came about a year back, at a meeting in one of the organisations I’m associated with. The meeting wasn’t terribly interesting, so I spent time checking out the guy sitting next to me, whose Net Worth I knew is at least a couple of orders of magnitude more than mine.

He was wearing a Louis Philippe shirt, and I have several shirts of that brand. He had a Parker pen, and I use a Parker too. He had a rather fancy watch whose brand I do not recall now, but my Seiko isn’t that bad in comparison. And he had an iPhone, which cost four times as much as the phone I used then (a Moto G), but not out of reach for me.

I can go on but the gist is that while our income and wealth levels were different by an order of magnitude, our consumption wasn’t all that far off. I must admit that I’m also a so-called “1-percenter” in terms of income (recall a study which said that 99th percentile of income in India is Rs. 12 lakh per annum), so I was also part of the power law tail, yet the marginal difference in consumption to income levels was strikingly low.

Since this is an introductory blog post on this topic, I posit that this is a more general trend and applies at many other levels. The thing with inequality is that income (and wealth) is usually distributed according to a Power Law (unless the state is extremely coercive and extractive), so as the economy grows, inequality as measured by measures such as the Gini coefficient is bound to increase (here’s a nice but hard-to-read paper by Nassim Nicholas Taleb on why the Gini coefficient is flawed for fat-tailed distributions such as the power law).

Yet, as the economy grows, more people are pushed beyond a “basic level” of income where they are able to afford “necessities” (and certain kinds of luxuries), so inequality as measured by consumption will actually be lower. The challenge is in measuring such inequality appropriately.

I’ll mention a couple of more anecdotes in support of this. One sector where inequality has fallen is in commute. Some rich old-time Bangaloreans look back in nostalgia at a time when there was no congestion on the streets of Bangalore, and how the city has since deteriorated. Yet, that congestion-free travel was then available only to the extremely wealthy (who could afford private vehicles) or lucky (my father waited for four years to get his first scooter because of limited supply). Public transport infrastructure was abysmal and buses infrequent.

Now, a larger proportion of the population can afford private vehicles and public transport has also improved (though not by much), making life better at the lower end of income/wealth levels. And the rich (who had exclusive access to roads in private cars earlier) are faced with higher congestion.

Another obvious example is the telephone. Very few people had them even twenty years back (we applied for ours in 1989, only to get “allotted” a phone in 1995), and now pretty much everyone has a basic mobile phone now (and with cheaper smart phones, even some relatively poor people own smart phones).

This is a theory worth pursuing. Need to analyse how to collect data and measure inequality, but I think there’s something to this hypothesis. Any thoughts will be welcome!

Aggregate quality of life

I was going through some discussions on the “Bangalore – Photos from a Bygone Era” (membership required to view) group on Facebook. From some of the discussions, it is evident that people are nostalgic about the quality of life in Bangalore in “those bygone days” compared to now (irrespective of your definition of bygone).

For example, someone was marvelling about how empty the HAL airport used to be in those days, until it became intolerably crowded in the late 1990s necessitating the construction of the new airport in Devanahalli. Someone else, perhaps in the same thread, wondered about how one could make a dash from HAL airport to Commercial street and back in 30 minutes “back in those days”. Outside of the group, I remember Vijay Mallya mention in an interview a couple of years back about how when he was young he could drive from his home in the middle of town to HAL airport in 15 minutes, and it’s not possible any more.

Reading such reports, you start thinking that life back in those days was truly superior to life today.

While narratives like the above might indeed make you believe that life in a “bygone era” was significantly superior, what that doesn’t take into account is that life was possibly superior for only certain people back then – airports were empty because tickets were prohibitively expensive and the monopolist Indian Airlines ran few flights out of Bangalore. Traffic was smooth because there were few cars, so if you were lucky to have one you could zip around the city. However, if you were not as lucky, and one of the many who didn’t have access to a personal vehicle, things could be really bad for you, for you had to either walk, or wait endlessly for a perpetually crowded bus!

One of the ostensible purposes of the socialist model followed by India in the early decades after independence was to limit inequality. Yet, the shortages that the system led to led to widening inequality rather than suppressing it. By conventional metrics of inequality – such as the Gini coefficient, it might be that wealth/income inequality in India today is significantly higher than in the decades immediately after independence.

However, if you were to take into account consumption and access to living a certain way, inequality today is far lower than it was in those socialist years. In the 1970s you could get an asset only if you knew someone that mattered (my father waited four years (1976-80) before he was “allotted” his scooter. His first telephone connection took six years (1989-95) to arrive), and this only served to exacerbate the inequality between those that had access to the “system” and those that didn’t. Today on the other hand you are able to purchase any asset on demand as long as you can afford it! And so a lot more people can afford a “reasonable” quality of life that was beyond them (or their ancestors) back in those days!

What we need is a redefinition of the concept of inequality from a strictly monetary one to one based on consumption and access to certain goods and services. While wealth inequality is indeed a problem (because of lower marginal utility of money the super-rich don’t spend as much as the less rich), what matters more is inequality in terms of quality of life. And this is something standard measures such as the Gini coefficient cannot measure.

I tried getting some students work on a “quality of life index” to show the improvements in quality of life (as explained above) since the “bygone era”. Perhaps I didn’t communicate it well enough, but they just stuck to standard definitions like per capita income, education, life expectancy, etc. What I want to build is an index that captures and tracks “true inequality”.