Thinking Clearly about Economic Inequality

In honor of Bastille Day, and my sister’s birthday, I give you my long-in-the-works Cato paper on inequality. Here’s the very compressed abstract:

Recent discussions of economic inequality, marked by a lack of clarity and care, have confused the public about the meaning and moral significance of rising income inequality. Income statistics paint a misleading picture of real standards of living and real economic inequality. Several strands of evidence about real standards of living suggest a very different picture of the trends in economic inequality. In any case, the dispersion of incomes at any given time has, at best, a tenuous connection to human welfare or social justice. The pattern of incomes is affected by both morally desirable and undesirable mechanisms. When injustice or wrongdoing increases income inequality, the problem is the original malign cause, not the resulting inequality. Many thinkers mistake national populations for “society” and thereby obscure the real story about the effects of trade and immigration on welfare, equality, and justice. There is little evidence that high levels of income inequality lead down a slippery slope to the destruction of democracy and rule by the rich. The unequal political voice of the poor can be addressed only through policies that actually work to fight poverty and improve education. Income inequality is a dangerous distraction from the real problems: poverty, lack of economic opportunity, and systemic injustice.

Read it, talk about it, complain about it, blog it!

This is best read with my collaborator Brink Lindsey’s “Paul Krugman’s Nostalgianomics: Economic Policies, Social Norms, and Income Inequality” as a more empirically-focused companion piece.

Author: Will Wilkinson

Vice President for Research at the Niskanen Center

17 thoughts

  1. Excellent paper, very interesting indeed. This suggests that it would be more fruitful for economic egalitarians to redouble their efforts at persuasion at the level of the alleged injustice rather than continuing to point out that income inequality is high and rising, as if that fact speaks for itself.A recent report and survey (…) by the Rowntree Foundation here in the UK (one of the many charities which serves as an arm of the welfare state) seemed to echo this, to the consternation of many on the left. One of the main findings was that “attitudes to income inequality were expressed within the context of a belief in fair inequality on the basis of desert. As such, participants were not opposed to high incomes they perceived to be deserved.” There is also an effect, apparently, whereby someone's perceived deservingness is influenced by an observer's knowledge of their income; the whole thing is very interesting. I'm not an expert, but I'd imagine the findings would be even further along in this direction in the US, where there is by far a greater cultural ethos of personal responsibility (to my English eyes, at least!).

  2. Interesting paper. You might be interested in (if you're not already familiar) with the work of researchers like Rajan, Zingales, and Rodrik, all of whom discuss inequality from a political economy standpoint. It certainly looks like societies such as Brazil, South America, and Columbia face serious problems with policy implementation that are related to their inequality. By contrast, societies like Taiwan, which had serious redistribution programs, built an egalitarian base before growing. If consumption inequality is lower than income inequality, the standard leftist conclusion to draw is that the poor are borrowing to maintain their incomes. This rise in debt is unsustainable, and consumption must fall once the credit bubble pops. You bury this point in a footnote, but given the loss in income among the poorest due to unemployment, and a corresponding rise in savings, consumption is set to go down substantially for the bottom of the distribution. In the long-run, it's hard to imagine that consumption would radically differ from income.

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  4. “In the long-run, it's hard to imagine that consumption would radically differ from income.”doesn't that depend on what kind of consumption you are talking about and whether you are talking about the dollar value of consumption or its utility? think of some good that delivers an decreasing marginal utility, like cars. if you can afford a working automobile you gain the utility of a working automobile; even though there is a huge difference in the amount of income it takes to drive a hyundai versus a maybach.

  5. The dollar kind. Income is spent on consumption, or is saved for future consumption. So if the consumption inequality between the 'rich' and the 'poor' lags income inequality, the rich are saving more, and have the resources for higher future consumption. A greater savings inequality is the flip side of consumption inequality being low. Whether even this matters depends on if they're simply buying a more expensive variant–as in a car. If they're actually getting something much better–say on health care or education–or using the money to preserve inter-generational status, then it's a bigger issue. Cowen's new book argues that as we consume more things for free/online, consumption spending becomes a worse marker for welfare.

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  7. Hi Will.Love your work.I noticed a typo in your paper on page 21,Moreover, the fact that income statistics are collectedby government bureaus does not mean—than— national-level patterns of income are especiallyrelevant to the moral evaluation of our…I could be wrong, I am young.Keep on trucking,

  8. I didn't read the whole thing, but I hope you talked some about specialization. As certain people become more specialized and have more complex skill sets and knowledge, they are going to be paid more while those with limited skill sets and knowledge will be paid less.The most advanced computer programmer is likely to make significantly more income than a basic waiter at a restaurant. It's natural for that gap to grow as the knowledge and skills required to be that top-level programmer increase exponentially whereas the skills for the waiter don't increase much at all.

  9. “There is little evidence that high levels of income inequality lead down a slippery slope to the destruction of democracy and rule by the rich”Latin America.

  10. thesoftpath – Luke Lea is a retired landscape gardener and part-time writer. He was born in Chattanooga, Tennessee in 1942 and grew up in Ferger Place, a planned neighborhood development not unlike the ones proposed in these pages. He attended Johns Hopkins University and the University of Tubingen before graduating from Reed College with a liberal arts degree in 1966. By then he had already begun researching some of the ideas described in this book, working on assembly lines both here and abroad, as a professional carpenter building houses, and as a professional gardener in partnership with his wife Pat, a garden designer. They have two grown children and live in Walden, Tennessee, a small town on Signal Mountain near Chattanooga. The Soft Path is his first book.
    lukelea says:

    Hi! I am from a working-class background (made my living doing manual labor). Do you discuss in your paper the issue of changes in real disposable income per hour worked for various classes? I.e., income after taxes (and transfer payments to for food and housing), health care expenses, and expenses directly associated with holding a job: transportation to and from work, childcare, etc.? If so then I will definitely read your paper.

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