Ten Miles Square

Blog

April 23, 2012 11:48 AM The Great Divergence: A Dialogue

Entry 2: Why is the level of income inequality the right thing to focus on?

By Mark Schmitt and Brink Lindsey

This week, the Washington Monthly is featuring a conversation about economic inequality, prompted by Timothy Noah’s new book, The Great Divergence: America’s Growing Inequality Crisis and What We Can Do about It. Participants are Mark Schmitt, director of the fellows program at the Roosevelt Institute, and Brink Lindsey, senior scholar at the Kauffman Foundation.

From: Brink Lindsey

To: Mark Schmitt

Let me start out by making clear where I stand on a few things. Although there is a messy statistical food fight about the exact dimensions of the phenomenon, I have no doubt that the rise in U.S. income inequality over the past generation is real and substantial. Further, I believe that concern about increased inequality is entirely appropriate: we really do need to figure out why this is happening. Finally, I’m convinced that at least one aspect of the phenomenon - the growing class divide along educational lines - is a serious problem whose amelioration ought to be a major priority for policymakers. Indeed, I’ve got a book in the works, tentatively titled Human Capitalism, that deals with this very issue.

All that said, I must admit I was disappointed by Tim Noah’s book. It’s intelligently and gracefully written, and Noah has a gift for distilling and explaining highly complicated social science. Nevertheless, I feel that on the whole the book confuses more than it illuminates. Unlike you, Mark, Noah does care very much about inequality, and he basically takes it as a given that everyone else should too. Fairly late in the book he admits, “Up to this point I’ve assumed the reader would instinctively believe that growing income inequality was inherently undesirable in a democratic society.” And the chapter that immediately follows that admission, “Why It Matters,” is in my opinion the weakest in the book.

Because Noah is convinced that the change in the overall pattern in incomes, standing alone, is a Very Bad Thing, it’s clear that he really wants to believe that it is caused by other Very Bad Things. Consequently, he systematically understates the extent to which the rise in inequality is actually a byproduct of positive, healthy social developments. And with his flawed conception of why inequality has risen, many of the policy prescriptions he offers don’t address the real problems that rising inequality is signaling.

I don’t believe that the level of inequality, on its own, tells us anything useful about the state of a society or the justice of its institutions. As my former colleague Will Wilkinson has pointed out, the U.S. and Ghana have roughly the same Gini coefficient - the leading metric for overall income inequality. Yet Ghana ranks 135th out of 187 countries on the United Nations’ 2011 Human Development Index, while the U.S. ranks 4th. It thus seems beyond serious dispute that the Gini coefficient by itself is virtually useless as an indicator of social well-being.

It follows, therefore, that there really can’t be an optimal Gini coefficient, since very different societies can have the same number and societies with similar levels of human flourishing can have very different numbers. Therefore, the mere fact that the income distribution today is more unequal than it was during 1945-70 doesn’t tell us anything about whether the U.S. is better or worse off as a result. Who can say that the Gini coefficient from the early postwar decades was at the right level? On what basis?

Meanwhile, why is income inequality the right thing to focus on? There are good reasons to conclude that consumption is a better measure of material well-being than income, and most studies show that the trends in consumption inequality are much more muted than those for income. Well, you might argue, income isn’t just about consumption, it’s also about amassing wealth. OK, so let’s look at wealth inequality. While it has risen in recent decades, it’s still far lower than it was in Tim Noah’s “golden age” of the 1950s and ‘60s.

OK, after throwing all this cold water on the importance of income inequality, why did I say at the outset that the rise in inequality is a legitimate subject of concern? Because, although the change in the overall income distribution by itself may be meaningless, it could be signaling the existence of real problems. First of all, if one large group of people is making healthy gains in well-being, while another large group is falling farther and farther behind, it’s appropriate to ask why. Are there injustices or structural barriers that are preventing the lagging group from taking advantage of the same opportunities that the leading group is capitalizing on? Second, if a tiny group at the very top is surging ahead of everyone, it is likewise appropriate to examine what’s going on. In particular, is this clique of big winners rigging the game in some way?

In the U.S. context, it turns out asking these questions does put us on the trail of real problems. I’ll talk more about them as this dialog unfolds. But for now, I’ll just say that these problems need to be addressed on their own terms, not because of their effect on the Gini coefficient. After all, as I’ll try to show, much of the rise in income inequality is the consequent of Very Good Things, not Very Bad Things.

Finally for now, just to flag an issue for later discussion, I agree with you that the consequences as well as the causes of increased inequality are worth thinking about. It’s certainly possible that an extremely lopsided distribution of income, no matter how innocuously it came about, could lead to unhealthy social developments. Possible, but in early 21st century America I don’t see it. More on that later.

Previous Entry | Next Entry

Comments

  • tom on April 24, 2012 12:32 PM:

    A couple of things:

    1. The difference between consumption inequality and income inequality is debt, correct? So the reason consumption inequality isn't as large as income inequality is increased debt; i.e. those on the top are lending money down to allow increased consumption, which I'd argue is a mirage of health, not health itself.

    2. Also, is material well-being the best measure of societal health? In other words, what's the end game?

  • Mike Alexander on April 28, 2012 3:47 PM:

    Mr Schmitt,

    The statement you made that wealth was more *un*equal in the 1950's and 1960's than it is today while pretax income was the opposite was very surprising to me.

    I don't have any wealth data in my archives, just income. I was wondering if you could provide an url to the databased from which you derived that statement.

    Thanks very much,

    Mike Alexander

  • Mike ALexander on April 28, 2012 4:12 PM:

    Cancel that request. I found the wealth data. Turns out the source I used for income also had wealth, I just wasn't interested in it back then and didn't transcribe it.

    Yep wealth was more concentrated in the 1950's than today.