Reducing inequality: what’s the problem?

I’ll be doing a series of guest posts at Crooked Timber this week on strategies for reducing income inequality in the United States. I’ll cross-post them here.

Here’s the problem (more discussion here):

There are two linked components to this rise in inequality: the surge in incomes for those at the top of the distribution and the slow growth of incomes for those in the middle and at the bottom.

Is this really a problem? Would it be better if income inequality were reduced? I think so, for the following reasons.

1. Fairness. Market processes have produced enormous incomes for various financial operators, CEOs, entrepreneurs, athletes, and entertainers in recent decades. A good bit of this is due to luck — being in the right place at the right time, genetic talent, having the right parents or teacher or coach, and so on. I don’t mind some inequality due to luck, and I recognize that monetary incentives are helpful. But the current (or recent, I should say; the downturn will reduce top incomes somewhat) magnitude of inequality in America strikes me as unfair. An income of several hundred million dollars when the minimum wage gets you about $15,000 is too much inequality. What’s the proper amount of income inequality? I don’t have a precise answer, but that doesn’t mean it’s wrong to feel that our current level is excessive.

2. Inequality’s consequences. Even if you don’t worry about exorbitant incomes in and of themselves, there’s no avoiding the fact that they have consequences for the incomes and well-being of Americans in middle and lower parts of the distribution. The social pie isn’t zero-sum. But our economy hasn’t grown faster in the past few decades than it did before, so the dramatic jump in incomes among those at the top has come in part at the expense of the rest of us. The following chart offers one way to see this. It shows GDP per family and median family income over the past six decades. Relative to growth of the economy, incomes in the middle (and below) have increased slowly since the 1970s.

As Robert Frank has pointed out, super-high incomes also have led to an arms race in consumption, especially in housing. Spending among the rich has escalated dramatically, encouraging middle- and upper-middle-class households to take on more and more debt in order to keep pace.

Over the past decade a number of social scientists have looked at the effect of inequality on other societal outcomes. We have studies suggesting that inequality is bad for education, health, crime, economic growth, economic mobility, civic engagement, political participation, political influence, and political polarization. I’m not convinced that all of these findings are correct, but some of them are quite plausible.

So what should we do? Stay tuned.

3 thoughts on “Reducing inequality: what’s the problem?

  1. Good post, but I take issue with this statement in particular:

    “Spending among the rich has escalated dramatically, encouraging middle- and upper-middle-class households to take on more and more debt in order to keep pace.”

    Perhaps I am off base here. However, I interpret this to mean that most people view material possession as an indicator of social standing. This no doubt is true but I think it is more true in recent years than it was in the past (although I am not really old enough to know so I’ll need some confirmation on that point). Materialism of course is a problem unrelated to income inequality, but one that perhaps is exacerbated by income inequality.

    We need to change perceptions so that people understand they are not the clothes they wear, the cars they drive, or the 3 story house that they live in. We should be reducing income inequality so that everyone has affordable health care, so that everyone has ample educational opportunity. With rising incomes, the middle classes should have more leisure time, to spend with their families, to exercise, to vacation. Income inequality will ensure people can afford healthy foods, participate in social activities, and save for retirement.

    I’d like to reiterate – we should not be reducing income inequality so that everyone can afford designer clothes and feel equally good about themselves. Any middle class household taking in massive debt because they felt that their consumption should keep pace with that of the rich, I have no pity for.

    /rant

  2. Great topic and I like the tone…so many blogs are into bashing and name calling which accomplishes nothing.

    First Graph: I have mixed opinions. I can’t decide if I hate or like the fact that a certain group of people can get ahead so much farther and faster than me. If it were just people getting lucky or because they were clever, then I don’t mind so much. Its an incentive for me to be clever. If its a group that has inside information, or inside advantages that make it nearly impossible for me to be in their club, then I start to hate it. Or if the money allows them to have that much more political clout to further prevent me from being in their club.

    As long as I have a shot at being one of those One-percenters I am ok with the situation.

    Second Graph: I am not an expert by any means on this topic, but it does seem that productivity gains can, at least partly, explain the rise in GDP with out corresponding rise in household income. Computers and robots have allowed workers to produce more with less labor, and is a central goal of corporations to be more productive. Part of the solution to this inequality is for workers to train in jobs that pay better. For example, there is a on-going shortage of nurses and it is a fairly well paid profession. Also, there are lots of service businesses you can start on your own.

    In summary, I guess I am more inclined to look for answers to these inequalities that involve people making better or smarter choices, or working harder, or seeking training. I work with blue collar workers and I see many of them who just don’t try very hard.

    Keep up the good blogging!

  3. In regard to this statement, and to give it some context to those who question its voracity:

    “As Robert Frank has pointed out, super-high incomes also have led to an arms race in consumption, especially in housing. Spending among the rich has escalated dramatically, encouraging middle- and upper-middle-class households to take on more and more debt in order to keep pace.”

    It’s an absolute truth when you consider it from the perspective of the man at the lower income level. I grew up in a rural area. Little industry, low crime, beautiful scenery. As the explosion of wealth (the top 5%) took hold in the late 80’s through just a few months ago, our area (and every other one like it across the country) was inundated with wealthy folks building palatial second homes, developers swallowing up tracts of land for “planned” communities (b/c our community wasn’t “upscale enough”), and prefab expansion on a scale that made the locals heads spin.

    The effect was that property taxes skyrocketed. Property that had been used for light manufacturing and agriculture (read good jobs for this lower-middle working class region) went to build McMansions, Starbucks, and fancy restaurants that only the newcomers could afford.

    Finding housing now – if you’re a local – means moving in with your parents or paying 3/4 your income for a “luxury” apartment designed by someone from Atlanta or New York.

    The grocery stores have all raised their prices to make room for the newcomers tastes in “gourmet”, and the old car dealer out on the highway now caters exclusively to the BMW and SUV crowd. We can’t find a good used truck for a reasonable price without driving a hundred miles west (away from the water front.)

    Did I mention our wells have run dry? The fish are dead from all the construction run off, and what the construction mud didn’t kill – the golf courses and their toxic chemicals finished off for good?

    That, and the newcomers can’t handle the months from November through March, so they all leave their places abandoned – and get angry when squatter break in, steal their stuff, and demand the local sheriffs department (all six of them) “do something”.

    This was a wonderful place to grow up. You could make a living and we had a real sense of place and community. But now our kids can’t make ends meet the way our parents easily did. Meanwhile, they see how “the other half lives” – on land they all but stole, and then destroyed for their mini summer palaces.

    Good jobs are gone (unless you call working at the Brew-Thru a good job.) The community is shot. And everything is expensive.

    Believe me. The rich getting richer has made it harder (impossibly harder) for simple people. We cannot combat them. At least not within the “law”… which defends them… and abandons us.

    “I work with blue collar workers and I see many of them who just don’t try very hard. ”

    If we seem lazy, it’s becuase we are broken and hopeless. Our pride and sense of belonging to something we recognize, something meaningful, is gone.

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