Income Inequality II: Keeping up with the Jones's

I was reminded to write the previous post when I came across this blog entry by Paul Krugman, on his NY Times blog earlier this afternoon.

It has taken up the theme of rising income inequality, and advanced it by charting its historical development over the past 100 years.



In the chart above, Krugman takes us through the progression from the "gilded age", the "great compression", "middle class america", and "the great divergence" (post 1970s).

Krugman attributes the reduction in income inequality in the "great compression" (late 1930s to middle 1940s) to FDR and the New Deal.

If this is correct, this is the first time the true impact of the New Deal to broader society has really sunk in with me. On the other hand, you can't help but note that the "great compression" corresponds with the WW2 years...

Krugman states that:

"We’re no longer a middle-class society, in which the benefits of economic growth are widely shared: between 1979 and 2005 the real income of the median household rose only 13 percent, but the income of the richest 0.1% of Americans rose 296 percent."


I haven't got the tools to assess the validity of the statistics Krugman cites (lies, damned lies etc...) but prima facie it is a powerful argument.

The conclusion is not 100% clear though. Does this signal a bad thing?

If the standard of living - which is normally what matters to the man on the street, isn't it? - has continued to rise as it has during the same period, then does it really matter if the richest among us are getting richer?

Are we more concerned in broader societal outcomes (average standard of living) or keeping up with the Jones's?

P.S. there are some interesting comments to be read after Krugman's post.