Inequality update

Scott Winship of the Brookings Institution has a recent paper out on inequality, in which he scrutinizes how common complaints/accusations about income inequality comport with the facts. Some highlights:

• Recent work by Harvard's Christopher Jencks (with Dan Andrews and Andrew Leigh) shows that, over the course of the 20th century, within the United States and across developed countries, there was no relationship between changes in inequality and economic growth.10 In fact, between 1960 and 2000, rising inequality coincided with higher growth across these countries. In forthcoming work, University of Arizona sociologist Lane Kenworthy also finds that, since 1979, higher growth in the share of income held by the top 1% of earners has been associated with stronger economic growth across several countries.

• The fact is that the median family today has nearly twice the purchasing power of its counterpart in 1960. The basic well-being of today's family is significantly better than that of a family living in the supposed golden age.

• The experience of the recent recession suggests that people lower on the income distribution do not benefit when the wealthiest Americans earn less: Between 2007 and 2009, when the share of total U.S. pre-tax income received by the top 1% of earners fell from 18.7% to 13.4% (erasing the gains of the previous five years), median income fell by 5%.16 Cato Institute scholar Alan Reynolds notes that the poverty rate tends to fall when the share of income received by the top 1% rises (and vice versa).

For those with a deep interest in the subject, the entire paper is worth reading in full.

Don Boudreaux, meanwhile, examines the income inequality from a philosophical angle and absolutely nails it:

I care – very deeply – whether the process for pursuing one’s life’s goals is fair or not. I want everyone to have as fair a chance in the economy as is humanly possible. I despise special privileges that stack the deck either in favor of Jones or against Smith. (We can have a debate about what the details of “fair process” and “special privileges” look like, but this post is not the place for such a debate.) But I do not care about differences in monetary income or wealth as such. 

If (by whatever criteria) the process is fair, then the outcomes are fair. If the process is not fair, then at least some outcomes are lamentable. If those lamentable outcomes involve too little income for Smith and too much for Jones, then this income difference is evidence of the unfair or skewed or crony-fied process. But the object of my concern in such situations isn’t the income difference as such; rather, it’s the unfair or skewed or crony-fied process that gave rise to it. 

I’m all for correcting the process, and would be no less in favor of correcting the process if I were told that such a correction will increase income inequality as I would be in favor of correcting the process if I were told that such a correction will decrease income inequality. Again, income differences can at best serve as evidence of a problem; the differences themselves – the income inequalities themselves – are not the core problem.

Read the whole post, as well as this great follow-up that addresses a common critique of his position.