Writing in the Globe and Mail, Macdonald-Laurier Institute Managing Director Brian Lee Crowley argues that innovation helps boost the purchasing power of those from both ends of the income scale.
Those who argue for the need to reduce the gap between the less and the more well-off often ignore the fact that markets and innovation help push down prices. This, in turn, provides more value for a dollar – even if they aren’t making any more than before.
By Brian Lee Crowley, Dec. 12, 2014
A dollar is only worth what it can buy. Because this is the case, when we get exercised over wide gaps in income between the better and the less well-off we miss a whole dimension of inequality that actually matters much more. If those at the bottom of the income scale are actually getting more for their money, their standard of living is rising even though their cash income may not be.
The classic example is Moore’s Law, which states that the computing power of a silicon chip will double every two years. Moore didn’t deal with price directly, yet the computer power available to the ordinary consumer has been rising roughly in accordance with his law, while prices have been falling. That’s why I paid less last year for a replacement laptop far more powerful than its predecessor bought a few years before.
Households at every income level are stocked with electronics whose prices behave in the same way. People at the low end of the income scale are getting more and better and paying less than ever before. Consumers don’t even need big computing power at home. They can buy even cheaper tablets and use on-line software and data storage that are even cheaper. Technological innovation is making computing ever more accessible to the technologically illiterate, who are often the least educated.
This rise in the purchasing power of the poor isn’t only observable in consumer electronics. A revolution in logistics and retailing has contributed massively. Urban elites who like to shop at Whole Foods and The Gap decry income inequality while sneering at Wal-Mart and Costco who have dramatically cut the cost of a wide array of consumer items that their customers actually want to buy. And those retail giants are under pressure from the Amazons and others who have got out of the costly bricks and mortar retailing business. Instead low-income consumers can use their low-cost computing power to shop on-line and cut out the middle man.
They don’t need newspapers and flyers delivered by expensive low-tech newspapers and posties to get good special deals that stretch their dollar farther. They can just monitor Groupon or Ebates. In fact Big Data is increasingly delivering direct to low-income consumers offers of low-cost goods and services specifically tailored to their incomes and buying patterns; the special offers will come to them.
Technology is increasingly allowing those on low incomes to escape the too-high cost of regulated services. They can’t (yet) unplug from the electricity grid, but they can certainly dump their landline in favour of a fixed price cross-Canada calling package on their mobile phone. If developing countries are any guide, that mobile phone will allow them to escape reliance on expensive banking services, as the phone becomes a mobile wallet, chequing account and credit card. Consumers can’t (yet) escape the abusive supply management that drives up the cost of their milk and poultry, but they can escape the local taxi monopoly in favour of Uber. Indeed if they have a car they might be able to become an Uber driver and supplement their income.
Speaking of cars, the moment is coming when they will be the shining example of how globalization increases the purchasing power of the poor. As places like China and India reach ever higher levels of income and technological sophistication, they are applying their impressive intellectual and entrepreneurial abilities to reducing the cost of consumer goods to the point that they are within reach of the teeming millions of their home countries whose incomes are still tiny. As they do, we will benefit from their innovations, and no one more so than those on low-incomes here at home.
China’s Geely brought out its IG car a few years ago to compete head to head with Indian car maker Tata’s Nano. While the average new car price in the US is now over $30,000, these two cars each sell for less than $3000 in their home markets. Forbes writer Haydn Shaughnessy said a few years ago that when this innovation hits North America and meets our standards, these basic cars won’t cost $3,000, but more likely $10,000.
As economist Tyler Cowan notes in the New York Times, emerging economies are keeping down the costs of manufactured goods but they have a way to go before they are innovative enough to send us new products. But if Japan and Korea are any measure of what will happen when they do, markets and innovation will almost certainly continue to allow low-income people to get rising value out of their cash incomes.
Brian Lee Crowley (twitter.com/brianleecrowley) is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.