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.