Ten Miles Square

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February 01, 2013 3:52 PM Optimal Income Inequality?

By Matthew Kahn

The NY Times has published an impressive piece by Thomas Edsall about consumption and income inequality. If you read this long piece, I have the feeling that most of the RBC community will embrace David Autor’s points. If you agree with every word he writes, what is the policy prescription? I would suggest that the Heckman Equation is the best answer.

When I lecture about “progress”, I ask students to think about their demand for a time machine. Which subgroups of the population would prefer to live now versus living in the past? For the urban poor, would they prefer to be in 2013 Los Angeles or 1913 Los Angeles? How much would they be willing to pay not to live their lives in 1913 Los Angeles? I would pose the same question to the urban rich. Since there are no markets for time machines, we can’t use revealed preference methods to measure “progress”.

Economists continue to debate balancing the effort incentive effects due to inequality (think of a golf tournament’s non-linear payoffs to first place versus 5th place) versus the envy and “unfairness” introduced by inequality. Our colleague Robert Frank has argued that we have “keeping up with the Jones” preferences. How strong is this desire? How many of us are focused on our own absolute level of well being versus relative well being? Perhaps more importantly, how do we bring back Horatio Alger ? Can you move from rags to riches in modern America or must you move to France?

[Cross-posted at The Reality-based Community]

Matthew Kahn is a professor at the University of California, Los Angeles's Institute of the Environment. He specializes in the environmental consequences of urban growth and related quality-of-life issues.
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