Absolute vs. Relative Wealth (February 1, 2006)

A lot of policy discussions mix up absolute versus relative wealth and costs. It is important to focus on the one you care about, or you can make weird decisions. A few examples of places it shows up:

• Overall income. Folks often talk about a relative income level ("middle class", "bottom fifth") as opposed to absolute income levels ("under $30,000", "millionaire").
• Poverty itself. In fact, poverty is often discussed in relative terms. Sometimes poverty is defined in terms of the ability to provide for basic needs, while other times it is defined in terms of relative income, e.g. half the median income.
• Cost of living. Many folks talk about a "cost of living" that is a moving target. They then talk about income as compared to this cost of living. In many discussions, it would make better sense to talk about an absolute cost of living, e.g. what it takes to buy enough food and shelter and so on to live. The moving cost of living is more about the cost that average folks are spending, but as income goes up that spending goes up as well.
• Health care. Often people write about "health care costs" or "the cost of health care". When they do so, they invariably use a moving target for "health care" just as the folks who talk about "cost of living". I would love to see at least a few people talk about "absolute health care" just like "absolute poverty". There ought to be a "health price index" to parallel the Consumer Price Index.

It also shows up when comparing different countries against each other. I enjoyed reading Robert E. Lucas, Jr.'s article about the relative versus absolute wealth around the world over the last few thousand years. Before the industrial revolution, every country was poor but every country was close to equally poor. Nowadays, wealth is highly inequal. Countries vary by a factor of 20 or 30. On the other hand, practically all individual countries have become wealthier, including those at the bottom!

These two measures of wealth matter because they frequently appear in policy discussions. Which one prefer depends on your values. Relative wealth in many ways produces societies that are pretty to look at. For example, nomadic native Americans lived a very romantic life, from the outside. On the other hand, absolute wealth helps the people themselves. Those living on a reserve today may well be poor in a relative sense (I don't know), but they no longer face starvation if the hunt goes poorly one year.

I fall in the "absolute" camp. I think most native Americans would prefer the security of an absolutely wealthy life, to the romance of impoverished nomadic life. I know that that's the choice I prefer myself. It's deeply wrong to improve a "society" at the expense of the people who live in it. In my book, it's the people that matter.