Why Income Inequality Doesn’t Matter

Synopsis

I argue that income inequality by itself is not that important an issue, and that it gets far too much attention in the political discourse, relative to other problems and issues. I argue that instead we should focus more directly on making the poor better off, and worry less about relative levels of wealth or income.

Introduction

I am writing partly in response to this article (http://www.theguardian.com/world/2014/jun/16/australias-richest-1-own-as-much-as-bottom-60-says-oxfam?CMP=twt_gu), though I think my argument applies more broadly than this article alone. Let me first present my basic approach to the issue. I am strongly influenced by John Rawl’s “maximin” principle, which essentially states that social and economic systems and resources should be arranged such that “they are to be of the greatest benefit to the least-advantaged members of society”. That’s where I think the focus should be: how can we make the most marginalized and the needy better off?

Bad Arguments from Oxfam

Given that, I ask what value there is in discussing income or wealth inequality per se? (Aside: this article conflates the two, which I think is sloppy at best and disingenuous at worst). Income inequality can increase because the rich are getting richer while the poor are staying the same, or because the poor are getting poorer while the rich are staying the same, or some mix of both. I care about the latter situation much more than the former. Indeed, empirically for the most part the poor have been getting richer, globally and within Australia, but not as fast as the rich.

Consider this quote from the article:
“The report said some economic growth was essential to drive growth and progress, but extreme wealth concentration threatened to exclude hundreds of millions of people around the globe from realising the benefits of their talents and hard work. It could also affect economic growth and poverty reduction.”

I think this is just a confused way of looking at things. If economic growth is not benefiting some subset of society, that is a problem we should be concerned about, and it will be manifested in growing income inequality. But its not as if the income inequality caused the problem. Its just a sign that some people aren’t benefiting. That’s relevant because if we focus too much on the inequality per se, we will be missing the deeper causal mechanisms of what is going on, and why some people aren’t benefiting. Also, while growing inequality can be a sign that some people are not benefiting from economic growth, that need not be the case. It could be that they are simply benefiting somewhat less than the rich, and indeed it could be the case that attempting to redirect resources from rich to poor in such cases could even make the poor absolutely worse off.

Bad Arguments from Hockey

I’ll also respond to some remarks from the “other side”, as quoted in the article:
“Hockey said uninterrupted economic growth over two decades had served Australia well, with official data showing average real household disposable income had increased from $540 per week in 1994 to over $820 per week now.”

This may be true but it does not support the contention that inequality is nothing to worry about. Average real incomes will increase even if only the top 1% are getting richer and everyone else is staying the same. Empirically that isn’t the case, and if you look at the data in Australia even the lowest percentiles have gotten better off in real terms, however the growth isn’t as large as this average makes it appear. Quoting the average in this way is misleading. (Aside, I’m interpreting this as mean household income. My remarks are less relevant if this is the median, but its not totally clear.)

Political Power

Some people argue that income/wealth inequality per se is a problem because it leads to inequality of access to power or influence over political institutions. I agree that this is true, but I question how much difference an increase in the gini coefficient from 0.3 to 0.4, or an increase in the percent of wealth owned by the top 1% from 40% to 60%, is going to make on such matters. The rich always have more power and influence. I am dubious that increasing the gap really changes this very much. Nor am I convinced that trying to reduce inequality per se is the best way to tackle this issue of relative power, as opposed to more direct measures like campaign finance reform or reforms in the criminal justice system.

Conclusion

So, to sum up, my overall point here is that income inequality is at best peripherally relevant to what our main concerns should be, which is maximising the position of those most marginalised and most disadvantaged in society. Reducing inequality is neither necessary nor sufficient for this, so I think excessive focus on it is a distraction. Instead, public debate should focus more on specific problems and specific proposals to remedy them. What concretely can be done to aid the disabled, or to combat urban poverty, or to reduce drug-related crime, or to assist single parents? What are the effects, good and bad, of minimum wages, higher/lower marginal tax rates, medical copayments, school vouchers, etc? Serious discussion about these issues would potentially be useful. I don’t think that sound bites like “Australia’s richest 1% own as much as bottom 60%” are especially informative or useful in this regard.

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5 thoughts on “Why Income Inequality Doesn’t Matter

  1. Very true. I feel that most people act and seem green with envy regarding the fact that they are not in the fabled 1%, and as such try to tear them down. As someone in the 99%, I harbor no ill-feeling to the people better off than I am. In any society, there will always be people in the top 1%. Sure, they may not hold such a large proportion of the countries wealth, but that proportion really holds no relevance to this debate. The fact that rich people own 60% is neither here nor there. It does not add, or subtract, from the argument that we should work to improve the living conditions of the poor.

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  2. Aside from a few typos this isn’t a bad take on matters. While you’re correct the original article is lacking precision, when you’re discussing inequality the issue of whether it is wealth or income matters less than than the overall trend, that is to say regardless of of the source, the problem is the same. Also if you plot income growth vs growth in wealth plus rising inequality you will see a definite positive correlation. Here is the inequality for the US over the last century:

    http://piketty.pse.ens.fr/files/capital21c/en/pdf/F0.I.1.pdf

    Now let us consider top tax rates in rich countries:

    http://piketty.pse.ens.fr/files/capital21c/en/pdf/F14.1.pdf

    These line up, since the 1980s top income tax rates have been getting lower and this era has coincided with rising inequality as global economic growth has been on an upward curve throughout this time:

    Therefore one must conclude that rising global GDP (an admittedly crude measure but a useful one none the less when inequality is also being considered) and rising inequality along with falling taxation for the super rich have created the era of rising inequality we’re living in today. Thus I contend that inequality is something to worry about, economic growth in times past was not accompanied by such a sharp rise in inequality although I accept your premise that you’ll always have the rich and powerful, that is indeed a “natural” feature of capitalism.

    Now it is also no co-incidence that the rich and powerful like to remain that way, and that’s why the taxation issue is important. By lobbying governments to lower tax rates for the rich (see Cori Bernadi in the news today), the symbiotic relationship between right wing politics and big businesses feeds this growing inequality – the more rich people there are the more they push governments to pass legislation in their favour, which in turn increases their power in both absolute terms and in how much they can buy themselves a political party or movement. It’s no co-incidence that the cycle of disappointment and anger on the political right in the US is linked to successive generations elected on populist outrage who then care more about what helps big business than the mooing crowds who voted them in.

    I highly recommend you read this article on that subject: http://www.salon.com/2014/06/15/off_with_their_heads_eric_cantor_the_tea_party_guillotine_and_the_certainty_of_conservative_sell_out/

    You’re right to note that inequality is not the only issue, and things like campaign finance reform are crucial to remove the influence of capital from politics as much as possible, however you’re incorrect to say that reducing inequality should not be a priority, as the above should demonstrate.

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    • “These line up, since the 1980s top income tax rates have been getting lower and this era has coincided with rising inequality as global economic growth has been on an upward curve throughout this time…Therefore one must conclude that rising global GDP (an admittedly crude measure but a useful one none the less when inequality is also being considered) and rising inequality along with falling taxation for the super rich have created the era of rising inequality we’re living in today”
      If I understand you correctly, you are saying that because we have observed falling marginal tax rates on the rich and global GDP growth to coincide with rising income inequality over the past few decades, that therefore we can conclude that the former have been a cause of the latter. This does not follow, as correlation does not imply causation. I think falling marginal tax rates may be a factor, but I also think ‘skill biased technical change’ as it is called, has been a major factor. At any rate, I’m not especially interested in debating the reasons why inequality has increased, as I don’t think that is especially relevant to my argument, which is, to reiterate, that it is the welfare of the poor and marginalised that we should focus on and care most about, not inequality per se.

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  3. That’s unless inequality itself leads to undesirable outcomes, which can’t be dismissed out of hand.
    AFAIK there isn’t clear evidence, at least re health – andrewleigh.org/pdf/HealthInequalityOUP.pdf – but it’s a matter of debate.

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