Lane Kenworthy, The Good Society
Inequality of income and wealth is inevitable. There is no practical way to ensure that everyone’s income or wealth is the same. It’s also helpful. We need financial incentives in order to encourage work, investment, entrepreneurship, and innovation.
Yet too much inequality is unfair. Much of what determines a person’s earnings, income, and wealth — intelligence, creativity, physical and social skills, motivation, persistence, confidence, connections, inherited wealth, discrimination — is a product of genetics, parents’ assets and traits, and the quality of one’s childhood neighborhood and schools. These aren’t chosen; they are a matter of luck. A nontrivial portion of economic inequality is therefore, arguably, undeserved.
Inequality might also have harmful consequences for other outcomes we value, from education to health to democracy and more.
Is there a case for reducing income and wealth inequality? If so, how high should this be on our priority list?
- Income inequality
- Wealth inequality
- Is income inequality harmful?
- Does low income inequality result in low wealth inequality?
- Is wealth equality a prerequisite for well-being?
- Should we increase homeownership in order to reduce wealth inequality?
- How much should we care about reducing economic inequality?
- Reduce income and wealth inequality, but not above all else
Since the late 1970s, income inequality has been rising in most of the rich democratic nations. This is particularly true for inequality between those at the top and everyone else — roughly, the top 1% versus the bottom 99%. Figure 1 shows that top-end income inequality, measured as the share of income that goes to those in the top 1%, decreased steadily in many of these nations from the early twentieth century through the late 1970s. But since then it has increased.
In the United States, the rise has been quite large, to the point that top-end income inequality has returned all the way back to the very high level of the early 1900s. But it isn’t just the US. There’s been a rise in nearly all of these countries, even the Nordics.
There appear to be seven key causes of the rise in top-end income inequality: increases in product market size due to globalization and technological advances, the shift to a “shareholder value” approach to corporate governance and new pay mechanisms for top management, financialization, the rise in stock prices, labor union weakening, reductions in top tax rates, and increases in the power of large firms in some industries.1
In many of the rich democracies, inequality also has increased within the bottom 99%, as we see in figure 2. (Here the comparable data only go back to the 1960s.) Once again, the rise in inequality has occurred not only in the United States but also in most of the affluent democratic nations.
In most of these countries, much of the rise in bottom-99% income inequality has happened above the median. The spread between households at the 90th percentile and those at the median (50th percentile) has increased steadily and to a greater extent than the spread between households at the median and those at the bottom.2
There are two principal sources of rising inequality within the bottom 99%.3 The first is increased wage inequality. Since the late 1970s, wages above the middle have risen faster than for those in the middle. This development has multiple causes, including shifts in educational attainment, globalization, technological change, and union decline.
The second source is changes in household structure and employment. Initially, the rise in women’s employment tended to reduce income inequality by reducing the share of households with zero earners or a single earner. More recently, however, the employment rate has been growing faster among women who have an employed partner, and this tends to boost income inequality. The share of households with just one adult has been rising, which increases household income inequality by increasing the share of households with only one earner or no earners. Rising marital homogamy is another contributor to rising inequality; more people are coupling with a person whose employment and wages are similar, so high earners are becoming more likely to be paired with other high earners, moderate earners with moderates, and low earners with other lows.
Shifts in taxation or government transfers could have contributed to the rise in income inequality between upper-middle-income and middle-income households, but there is little evidence to suggest that they did.
Why didn’t income inequality increase between households in the middle versus those at the bottom? One reason is the pay has risen at about the same pace for both groups. In addition, increased movement of women into paid work helped household incomes grow for those in the middle, while increases in government transfers did the same for those at the bottom.4
Wealth typically is distributed more unequally than income. In the United States, for instance, the top 1% of households get about 15% of the income in any given year, while the top 1% of wealth holders have about 35% of the wealth.
Figure 3 shows the top 1%’s share of the wealth since the early 1900s in four countries for which long-run data are available — France, Sweden, the United Kingdom, and the United States. In each of the four, wealth inequality decreased in the first half of the twentieth century, then was flat until around 1970 or 1980, and since then has increased a bit.
What accounts for the significant reduction in wealth inequality during the first half or two-thirds of the twentieth century? Four developments appear to have been crucial.5
A key part of the story was declines in the value of private assets, which are disproportionately owned by those at the top. Businesses and property were destroyed during the two world wars. Land values fell as economies transitioned from agriculture to manufacturing. The value of businesses and stocks plummeted during the Great Depression. Persistent lack of confidence in the stock market along with new financial regulations and new taxes on dividends and profits kept corporate and stock values relatively low through the 1950s and 1960s. In western European nations, there also was some post-World War II nationalization of formerly private firms.
Second, homeownership rates increased significantly, particularly after the invention of government-backed 30-year fixed-interest-rate mortgage loans in the 1930s. This facilitated wealth accumulation among the middle class.
A third contributing factor was historically rapid rates of economic growth in the 1940s, 1950s, and 1960s, coupled with institutions — strong labor unions, in particular — that ensured a significant amount of this growth trickled down to the middle and lower parts of the distribution via rising wages and employment. This reduced the income share of the top 1%, which in turn reduced its grip on wealth.
Fourth, during these decades all affluent countries enacted and expanded new taxes on income, and in some instances on wealth.
The OECD has current wealth inequality data for more countries. According to those data, shown on the vertical axis in figure 4, the United States has the most top-end wealth inequality of any rich nation.6
As I just noted, homeownership and home values have been a key determinant of over-time trends in wealth inequality. When comparing across countries, a helpful measure is the share of the population that owns a home outright — that is, without a mortgage loan. This is strongly correlated with the top 1%’s wealth share, as we see in figure 4. Wealth inequality tends to be higher where fewer people are homeowners who have fully paid off their home loan.7
IS INCOME INEQUALITY HARMFUL?
In recent decades a growing number of observers have concluded that income inequality has adverse effects on an array of outcomes we value, including education, health, economic growth, happiness, and more.8
Is income inequality harmful? I’ve examined the experiences of the world’s affluent democratic countries during the period of rising inequality.9 Many of the most prominent predictions of harmful effects are supported only weakly or not at all. The evidence suggests that income inequality hasn’t slowed the growth of college completion. It either hasn’t reduced the increase in life expectancy or the decrease in infant mortality or, if it has, the impact has been small. It looks unlikely to have contributed to the rise in obesity. It hasn’t slowed the fall in teen births or homicides since the early 1990s. It hasn’t reduced economic growth. It hasn’t hindered employment. It isn’t systematically linked to the occurrence of economic crises. It hasn’t reduced income growth for poor households. It doesn’t appear to have affected average happiness. In the United States it has had little or no impact on trust in political institutions, on voter turnout, or on party polarization.
For some outcomes — interpersonal trust, the Great Recession, and household debt — the evidence is ambiguous or it is too soon to make an informed judgment.
On the other hand, in the country with the highest level of inequality, the United States, the evidence pretty strongly suggests that income inequality has reduced middle-class household income growth. It also has increased disparities in education, health, family formation, family stability, and happiness, and it has reduced residential mixing.
DOES LOW INCOME INEQUALITY RESULT IN LOW WEALTH INEQUALITY?
Does wealth inequality correspond to income inequality when we look across the rich democratic nations? Perhaps surprisingly, the answer is no, as figure 5 reveals. The top 1%’s income share is on the horizontal axis, and the top 1%’s wealth share is on the vertical. The position of the United States is consistent with what we might expect; it has the most income inequality and the most wealth inequality. But across the other nations there is no correlation at all.10 Especially notable is the position of the Netherlands, Denmark, Sweden, and Norway. These countries have among the lowest levels of top-end income inequality but some of the highest levels of top-end wealth inequality.
So even if a country is able to hold income inequality at a moderate level, that is no guarantee it will also have a low level of wealth inequality.
IS WEALTH EQUALITY A PREREQUISITE FOR WELL-BEING?
We have good estimates of wealth and its distribution in France from the early 1800s to the present.11 Figure 6 shows the share held by the bottom half of the French population. That share has hovered around 5% of the total wealth throughout this period.
If wealth is a core element of well-being, this would suggest little improvement in living standards for the lower half of the French population. But every other indicator we have suggests exactly the opposite. Health, education, housing, income, economic security, economic opportunity, free time, and much more have improved massively.12
SHOULD WE INCREASE HOMEOWNERSHIP IN ORDER TO REDUCE WEALTH INEQUALITY?
One of the best ways to reduce wealth inequality is to boost home equity among the middle class. But is that a good policy goal? There are benefits to homeownership, but it also has drawbacks. It may reduce geographic mobility by tying people to a particular home.13 And it renders their wealth vulnerable to swings in housing market prices.
HOW MUCH SHOULD WE CARE ABOUT REDUCING ECONOMIC INEQUALITY?
To a host of prominent observers, economic inequality is one of our most important problems and needs to be fixed.14
“There must be a better distribution of wealth, and maybe America must move toward a democratic socialism.” -Martin Luther King, Jr., 1966
“The problems in rich countries are not caused by the society not being rich enough (or even by being too rich) but by the scale of material differences between people within each society being too big…. Attempts to deal with health and social problems through the provision of specialized services have proved expensive and, at best, only partially effective…. Greater equality can address a wide range of problems across whole societies.” -Richard Wilkinson and Kate Pickett, 2009
“We are, in fact, paying a high price for our growing and outsize inequality: not only slower growth and lower GDP but even more instability. And this is not to say anything about the other prices we are paying: a weakened democracy, a diminished sense of fairness and justice, and even … a questioning of our sense of identity.” -Joseph Stiglitz, 2012
“Inequality of this extent — of the sort we are now experiencing — is very dangerous for our economy and it’s very dangerous for our society and our democracy.” -Robert Reich, 2013
“Inequality is the root of social evil.” -Pope Francis, 2014
“There should be no billionaires.” -Bernie Sanders, 2019
“In a period marked by internationalization of trade and rapid expansion of higher education, social-democratic parties failed to adapt quickly enough, and the left-right cleavage that had made possible the mid-twentieth-century reduction of inequality gradually fell apart. The conservative revolution of the 1980s, the collapse of Soviet communism, and the development of neo-proprietarian ideology vastly increased the concentration of income and wealth in the first two decades of the twenty-first century…. The study of history has convinced me that it is possible to transcend today’s capitalist system and to outline the contours of a new participatory socialism for the twenty-first century — a new universalist egalitarian perspective based on social ownership, education, and shared knowledge and power.” -Thomas Piketty, 2020
“Every billionaire is a policy failure.” -Oxfam, 2023
The chief rationale underlying this view is that economic inequality may worsen other things we value — health, education, safety, economic growth, democracy, happiness, and more. If it does so, then perhaps we should care a great deal about reducing it.
However, as I’ve noted, there is little evidence that it has such effects. In the United States, it does appear to have reduced middle-class income growth and to have increased disparities in education, health, family formation, family stability, and happiness.15 But those effects may be unique to this nation that has such exceptionally high inequality.
So the case for caring deeply about less inequality comes down mainly, it would seem, to normative considerations. The amount of income and wealth inequality that exists in the United States, and probably in some other affluent democracies, is unfair, because much of what determines where people end up on the economic ladder is beyond their control. Less economic inequality would be fairer.
Even so, in a society where many of life’s needs and wants — safety, housing, childcare, schooling, medical care, work, time for family and leisure, retirement income, eldercare, and much more — are assured by government programs, it isn’t clear that a moderately high level of income or wealth inequality is especially problematic.16 Denmark, Norway, and Sweden have some of the highest levels of wealth inequality among the rich democracies, and Sweden and Norway have more billionaires per capita than the United States.17 Despite this, in the contemporary Nordic countries there is plenty of economic security, little material hardship, abundant freedom, and most people (including immigrants) say they are quite satisfied with their lives.18 On the whole, life there is very good.19 In this kind of context, people may not be especially bothered by the fact that some persons have a lot of income or wealth, just as they aren’t too upset that some persons are exceptionally intelligent or good looking or socially adept.
REDUCE INCOME AND WEALTH INEQUALITY, BUT NOT ABOVE ALL ELSE
There is good reason to object to the high and rising levels of income and wealth inequality in the United States. Yet I fear that putting inequality reduction front and center might be harmful rather than helpful. It may foster a conviction that the key to addressing America’s social, economic, and political problems is to reduce the top 1%’s share or the Gini coefficient. That could distract attention from more direct and effective efforts to address those problems.
Such efforts include fully universal health insurance; improvements in eligibility, duration, and benefit level for various social insurance and social assistance programs; wage insurance; early education; enhanced financial support for college; sector- and occupation-specific minimum wages; an expanded Earned Income Tax Credit; and monetary policy less tilted toward inflation avoidance.20 Policy changes like these would go a long way toward improving economic security, enhancing opportunity, and ensuring shared prosperity in America. Inequality of political influence could be lessened via direct reforms, such as introduction of a strong transparency rule and heavy public funding for election campaigns.
Policy changes such as these will require more tax revenue. Here lies another troublesome consequence of a focus on inequality reduction: a sizable portion of the American left has come to think of taxation solely in terms of its redistributive impact. The aim of tax reform, in this view, should be to reduce income inequality. The change many favor is higher tax rates on the top 1% or 5%. Yet while that may reduce income inequality, it will not provide the US government with anywhere near the money it needs to do the sorts of things I’ve just mentioned. Instead, the chief aim should be to increase revenues. In my estimation, the US ought to be thinking about how to get an additional 10% of GDP in coming decades, and that cannot be accomplished by increasing the taxes of only those at the top.21
Some of the programs I’ve mentioned would help to reduce income inequality by boosting the incomes of households on the lower and middle rungs of the income ladder. Indeed, focusing on economic security, opportunity, and rising living standards might be an effective route to lessening income and wealth inequality. The American public has never shown much appetite for redistribution. Even during the past four decades, as income inequality has shot up, the main detectable reaction among Americans has been a desire to expand programs that focus on opportunity. That does not mean it’s impossible to take steps to reduce inequality in the market distribution or to increase redistribution. It means programs that do this are more likely to be supported if they are not marketed as a means to achieve inequality reduction.
Other programs I listed above are public services. Though childcare, schooling, and health care don’t reduce the measured degree of income inequality, since they do not change household incomes, they do reduce inequality of living standards.22
It would be good if there were less economic inequality in the United States. But it’s a mistake, in my view, to put inequality reduction at the top of the agenda.
- Lane Kenworthy, “Income Distribution,” The Good Society. ↩
- Kenworthy, “Income Distribution.” ↩
- Kenworthy, “Income Distribution.” ↩
- Kenworthy, “Income Distribution.” ↩
- Lane Kenworthy, “Wealth Distribution,” The Good Society. ↩
- A different data source suggests Switzerland is similar to the US or possibly more unequal. Anthony B. Atkinson and Salvatore Morelli, “Chartbook of Economic Inequality,” 2014. ↩
- Carlotta Balestra and Richard Tonkin, “Inequalities in Household Wealth across OECD Countries: Evidence from the OECD Wealth Distribution Database,” Statistics Working Paper 2018/01, OECD, 2018; Orsetta Causa, Nicolas Woloszko, and David Leite, “Housing, Wealth Accumulation, and Wealth Distribution: Evidence and Stylized Facts,” Economics Department Working Paper 1588, OECD, 2019; Fabian T. Pfeffer and Nora Waitkus, “The Wealth Inequality of Nations,” American Sociological Review, 2021. ↩
- Richard Wilkinson and Kate Pickett, The Spirit Level: Why Greater Equality Makes Societies Stronger, Bloomsbury Press, 2009; Robert B. Reich, Aftershock, Knopf, 2010; Joseph E. Stiglitz, The Price of Inequality, W.W. Norton, 2012; Goran Therborn, The Killing Fields of Inequality, Polity Press, 2013; IPPR Commission on Economic Justice, Prosperity and Justice: A Plan for the New Economy, Polity Press, 2018; Heather Boushey, Unbound: How Inequality Constricts Our Economy and What We Can Do about It, Harvard University Press, 2019; Thomas Piketty, Capital and Ideology, translated by Arthur Goldhammer, Harvard University Press, 2020; Jeffrey D. Sachs, “How Inequality Fuels Covid-19 Deaths,” Projective Syndicate, 2020; Christopher Pierson, The Next Welfare State?, Polity Press, 2021. ↩
- Lane Kenworthy, “Is Income Inequality Harmful?,” The Good Society. ↩
- Pfeffer and Waitkus, “The Wealth Inequality of Nations.” ↩
- For other rich democratic nations these data are available only since 1960. ↩
- Steven Pinker, Enlightenment Now, Viking, 2018; Max Roser, Our World in Data. ↩
- David Blanchflower and Andrew J. Oswald, “Does High Homeownership Impair the Labor Market?,” Working Paper 19079, National Bureau of Economic Research, 2013; Causa, Woloszko, and Leite, “Housing, Wealth Accumulation, and Wealth Distribution.” ↩
- Martin Luther King, Jr.: Speech to SCLC staff, quoted in Peter Dreier and Michael Kazin, “How Socialists Changed America,” in We Own the Future: Democratic Socialism — American Style, edited by Kate Aronoff, Peter Dreier, and Michael Kazin, New Press, 2020, p. 35. Wilkinson and Pickett: The Spirit Level, pp. 25, 233, 240. Joseph Stiglitz: Stigliz, The Price of Inequality, W.W. Norton, 2012, p. xxii. Robert Reich, “Inequality for All,” Commonwealth Club, 2013. Pope Francis: Twitter, @Pontifex, April 28, 2014. Bernie Sanders: Twitter, @BernieSanders, September 24, 2019. Thomas Piketty: Piketty, Capital and Ideology, translated by Arthur Goldhammer, Harvard University Press, p. 966. Oxfam: Oxfam, “Survival of the Richest: How We Must Tax the Super-Rich Now to Fight Inequality,” 2023, p. 9. ↩
- Kenworthy, “Is Income Inequality Harmful?” ↩
- Dean Baker, “Wealth Inequality: Should We Care?,” Center for Economic Policy Research, 2021. ↩
- Torben M. Andersen, Jesper Roine, Bernt Bratsberg, Knut Roed, Michael Svarer, Michael Rosholm, Tuomas Takalo, Otto Toivanen, Guttorm Schjelderup, Julian V. Johnsen, Katrine V. L.ken, Helena Holmlund, Nabanita Datta Gupta, Bent Jesper Christensen, Andreas Bergh, Johanna Mollerstrom, and Kalle Moene, Nordic Economic Policy Review: Whither the Nordic Welfare Model?, Norden, 2015, ch. 11. ↩
- Anu Partanen, The Nordic Theory of Everything, Harper, 2017; Lane Kenworthy, Social Democratic Capitalism, Oxford University Press, 2020. ↩
- Even skeptics tend to reach this conclusion. See, for example, The Economist, “Special Report: The Nordic Countries,” 2013; Michael Booth, The Almost Nearly Perfect People, Jonathan Cape, 2014. ↩
- Lane Kenworthy, “What America Needs,” The Good Society. ↩
- Kenworthy, “What America Needs.” ↩
- Gosta Esping-Andersen and John Myles, “Economic Inequality and the Welfare State,” in Oxford Handbook of Economic Inequality, edited by Wiemer Salverda, Brian Nolan and Timothy M. Smeeding, Oxford University Press, 2009; Lane Kenworthy, Progress for the Poor, Oxford University Press, 2009, ch. 7. ↩