Income Inequality (18): No Such Thing – Good Thing – Necessary Evil – Gone Thing?

Attitudes towards income inequality in the U.S. differ widely.

  • There are those who deny that there is any, or better that there is enough to be worried about (see here for an example, or here).
  • Others say that it’s a good thing, and that there should be more of it. People are very different in their talents and work ethic, and rewarding the highly productive and creative ones for their efforts – which is only “fair” – automatically results in income inequality, because the unproductive and uncreative will not be rewarded, or less generously.
  • And then there are those who believe income inequality is a necessary evil. They don’t particularly like huge differences in rewards for activities which are, after all, often hardly comparable in any quantitive sense (is it so much more worthwhile to invest your efforts and creativity in the development of the iPhone than in the education of your children?). But they do believe that financial rewards stimulate productivity, and that higher rewards stimulate more. And increased productivity ultimately benefits us all, even those who are worse off and on the wrong side of the income inequality. (This is a version of “trickle down” economics).
  • Still others think that income inequality isn’t a problem any longer, given the effect of the recession on high earners.

Note: these 4 views aren’t necessarily incompatible. One and the same person can, as I see it, hold at least 3 of them at the same time. (E.g. you can believe that there isn’t much inequality, that what is left will soon be gone, and that you hope it will be back one day).

I think only the third view has some relation to the truth. Regarding the first view:

The basic conclusion of this data, that the nation [the U.S.] suffers from extreme and growing income inequality, is essentially irrefutable. Bruce Judson (source)

Regarding the second view: I object to it not because I don’t want to reward people or because I think justice has nothing to do with merit. On the contrary. I object to it because it assumes that different people and different activities can be placed on a single scale of merit and reward. It’s impossible to compare activities and say that one deserves a $10.000 per year reward (i.e. income) and another activity, compared to this first, is 10 times more deserving and hence deserves a $100.000 per year reward. Merit isn’t just a financial or quantitative thing, and hence it cannot – at least not exclusively – justify income inequality. Moreover, the income inequality that we see in the real world has little or nothing to do with merit. Most people aren’t paid according to any definition of merit. In the best case, they are paid because of their talents, which isn’t anything anyone deserves. In all other cases – and in the large majority of cases – people’s pay or income is determined by factors such as luck, family, networks, playing on the stock exchange etc., and none of these things are even marginally related to merit. In a society that rewards people for their creativity and productivity, you expect to see high levels of social mobility, and that’s precisely what you don’t see in the U.S.

Regarding the third view, I do believe that it is essentially correct, but it obfuscates many of the problems caused by income inequality. Hence, even if economic efficiency doesn’t justify efforts to limit income inequality, other things do.

The fourth view would seem to make sense intuitively. A lot of the income of the very wealthy comes from the stock markets, and the recession has pushed these markets down.

Professor Saez concludes that “the most likely outcome is that income concentration will fall in 2008 and 2009.” But, he follows this conclusion by stating that in the absence of significant policy actions such declines will be temporary: “Based on the US historical record, falls in income concentration due to recessions are temporary unless drastic policy changes, such as financial regulation or significantly more progressive taxation, are implemented and prevent income concentration from bouncing back. Such policy changes took place after the Great Depression during the New Deal and permanently reduced income concentration till the 1970s. In contrast, recent downturns, such as the 2001 recession, lead to only very temporary drops in income concentration.” Bruce Judson (source)

Moreover, the poor are also suffering as a result of the recession, not in the same absolute measures as the rich, but that is because they have less to lose in the first place. However, what they do lose as a result of the recession is for them relatively more important.

Recent data show that income inequality hasn’t actually decreased in 2008. Maybe in 2009… The recession only got started late in 2008.