How Much Should We Be Concerned about Income Inequality?

American income inequality is much deplored by many news media and politicians on the left.  And there is little doubt that it has been getting worse in recent years.  The question is what we should, as a society, be doing about it.

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Let’s refer to an excellent book which I highly recommend, Steven Pinker’s “Enlightenment Now.”  In it Mr. Pinker shows that human progress has been slowly but surely increasing ever since the beginning of the industrial revolution started in the late 18th century.

In a chapter on inequality, he points out that “income inequality is not a fundamental component of well-being.  It is not like health, prosperity, knowledge, safety and peace. . . .  Economic inequality should not be confused with unfairness or with poverty.”

How do we reconcile the obvious improvements in living standards in recent decades with the conventional wisdom of economic stagnation?

  • The first point is the difference between relative and absolute prosperity. It is not a sign of stagnation if the proportion of income earned by the bottom fifth does not increase over time.
  • The second confusion is the one between anonymous and longitudinal data. Joe the Plumber has probably moved into a higher pay class by gaining experience or moving to a higher paying job while someone else has taken his place in the bottom fifth.
  • A third point is that low incomes have been mitigated by social transfers. Counting these social transfers, disposable incomes for the bottom four quintiles grew dramatically, and in roughly equal measure, between 1979 and 2010.
  • The fourth reason for the confusion is the difference between income and consumption. “When poverty is defined in terms of what people consume rather than what they earn, we find that the American poverty rate has declined by 90% from 1960, from 30% to just 3%.” The two forces, globalization and technology, which have caused income inequality to increase, have at the same time decreased inequality in what matters most.

Summary.  Inequality as not the same as poverty, and it is not a fundamental dimension of human flourishing.  As societies escape from universal poverty, they are bound to become more unequal.  In short, the world has become less equal but the people have become much better off.

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