Thursday, March 28, 2013

Is income equality inherently good or bad? What are it’s causes?

To answer this week's questions: No and I don't know.

No, income equality (or inequality) is not inherently good or bad. As I recently tried  (badly) to explain in a video for, it matters greatly what the source of inequality is. If inequality is the result of free trade, then I see no problem. If it is the result, as it often is, of political power, then I do have a problem with it. I can't understand why income inequality seems to drive people mad while political power inequality bothers so few. Similarly, we know from behaviorial economics experiments that people's perceptions of inequality are highly contextual depending on whether people feel like "the rich" earned the income legitimately or not. See AEI's Arthur Brooks' work on this point.

And I don't know what causes it. If you look around the world, it is really, really, really hard to discern a pattern about what causes inequality.

Reactions to the video: On the one hand, I liked the video for its naked empiricism. This comports well with my own approach to economic freedom. Richard Wilkinson approaches the problem with data in hand, and I appreciate that point. Too often the debate about inequality is hampered by no (or worse selective) data. The evidence does appear to be strong that income inequality is associated with various negative social consequences, at least if you hold income itself constant.  Nevertheless, although I have updated my priors a bit, I remain unconvinced that we can or should do much about income inequality.

A few "yeah, buts...":

1. If you look only at the OECD (i.e., already mostly rich nations) you will see that income itself matters little for various social outcomes. But this glosses over the fact that income matter A LOT for social outcomes when looking at poor countries. The gains to be had by taking say the Democratic Republic of Congo from its current $1500 of average income (or whatever it is -- I didn't look it up) to $15000 are HUGE. The gains to be had by taking the inequality of the U.S. to that of Sweden are mild by comparison. GDP per capita still matters and for most of the world's population, concerns about income inequality are really putting the cart before the horse. To be fair, Wilkinson acknowledges this but so briefly that it would be easy to miss. Frankly, I am more concerned about getting the Congo up to decent living standards than I am debating the finer points of differences in social outcomes across already-rich nations.

2. I think the causality runs mostly in the other direction, especially with regard to social trust, which Wilkinson emphasizes a lot. I think countries with lots of social trust (driven in large part by homogeneous ethnic cultures) are likely to have less inequality naturally and also because they are more willing to redistribute income.  I was influenced on this point by Bo Rothstein (whose recent book I reviewed for Public Choice). The problem is I don't know how you can just create more social trust in a place like the United States.*

3. I wonder what he would say about immigration? Adding poor immigrants to the United States would MASSIVELY increase their well-being, but would also, taking Wilkinson's evidence at face value, increase inequality in the U.S. and thus worsen some social outcomes. Should we really keep these potential immigrants poor in their home countries in order to modestly enhance some social outcomes here?

*Actually, if social trust is most the result of having more homogeneous political bodies, then a strong argument can be made for federalism at a minimum and even breaking the U.S. in to smaller countries. There is a lot of distrust among whites and blacks, southerners and northerners, city dwellers versus rural people, and so on. If our political entities were smaller and more homogeneous, maybe we would have more social trust and ultimately less inequality. Just a thought...What do you think?

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