There is little doubt in the economics profession that popular views of income inequality are misleading. Furthermore there is good evidence that the trends that have been observed exaggerate the rise in true inequality. Will aptly summarizes some of the more important recent findings in the area. He could have gone further by noting that inequality seems misleadingly worse when looking at households vs. individuals (people are more able/willing to live alone today, thereby lowering the average) or that high immigration may complicate the story (low-wage immigrants might plausibly raise natives’ income yet still increase dispersion and lower the measured averages) or that a focus on pretax earnings cannot — by definition — show the benefits of progressive tax policy designed for redistribution.
Nonetheless, there is still evidence that income inequality has risen over the last 30-40 years and there is certainly the perception that incomes have grown more unevenly. That the numbers show that the change is smaller than we had first thought doesn’t seem to affect how largely the issue looms in public policy debates. This suggests that much of the debate on inequality is not just about inequality but also beliefs about fairness and about which social outcomes are to be encouraged or critiqued. Figuring out the source of our disagreements is made worse when we look to evidence that is misinterpreted or is poorly tied to the policies we wish to advocate.
While Will tries to get us to focus on the justice or injustice of various social institutions as the “true” issue we should be concerned about, I want to make a different observation that flows from theoretical and empirical considerations about economic inequality.
The desire for greater equality is partly an outgrowth of the worldwide spread of democracy and democratizing tendencies over the last two centuries. Tocqueville was one of the first to notice how important the sense of equality was to democratic America, quipping that Americans “would rather be equal in slavery than unequal in freedom.” But ironically, the very economic growth that has fostered greater material equality of consumption in the industrial era, and the expectations of continued improvements in both absolute welfare and relative equality that have accompanied this growth are likely to make the perception of inequality worse no matter what the data can be made to demonstrate.
And this is because of the problem of positional or status goods. To understand the core idea, it is best to think of the different classes of goods and services that humans consume. Assume for the sake of argument that many, perhaps most goods are theoretically reproducible with improved technology and greater efficiency. Food, clothing, cars, equipment, toys all fall in this category. Expensive as an MRI machine or luxury sports car are today, we can easily imagine worlds in which those goods (or their close substitutes) become cheap enough so that almost anyone could afford them. In contrast there are some goods — let us say, the most desirable housing spot, or the best view of a lake — which cannot be readily multiplied simply by changing technology and improving economy. Then by definition, any changes that improve global availability of the former category of goods, even to the point of absolute equality, will mean that the remaining category of goods that cannot be easily reproduced will loom larger in people’s consciousness. When salt and spices were expensive, access to these were part of the measures by which people differentiated themselves materially. Today, salt is so trivially cheap that it’s not worth considering in a comparative budget. As more items and services — whether TV sets or MP3 players or computers or even triple bypasses — become widely available, then by definition, the goods and services that remain objects of envy and inequality will be those that are most insensitive to improved efficiencies. Hence our sense of perceived inequality might actually increase as material inequality decreases.
Some goods may literally be fixed — there are only so many Picassos in the world today. Others are fixed because they are purely about relative position — there can by definition only be ten top 10 universities or ten best places to live. Some of these — such as desirable locations in a city — might vary with the number of desirable cities and the quality of public access. But the latter will vary in ways that are only tangentially related to improved productivity. And increased wealth will not make access easier. Indeed, to the extent that greater income allows more people to bid for these positional goods, we will be frustrated to find that our expectations of which goods we can consume will not match our reality if everyone gets wealthier at similar rates. Moreover, goods dependent on human labor must perforce become relatively more expensive as people get richer, because to say that people are more prosperous is to say that human labor is more expensive.
The upshot of all this is that the better off we are, the more we spend and focus attention on consuming items which are less amenable to economic and technological fixes.
Housing is an interesting case because it is a curious mixture of a physical commodity reproducible with better technology and a positional good not amenable to productivity gains. Consider what people mean when they say that a house is expensive. They are not usually speaking about the physical structure per se. A new 3-bedroom house costs vastly more in a nice area of San Francisco or New York than an identical house would in rural Idaho or Tennessee. Thus, housing is expensive because certain locations are more desirable. Some of this might simply be snob appeal. Some locations may have more status. But much of that cost is driven by what other people want to do. Where people wish to live is often where jobs are available. Your preferred neighbors are also those with desirable social traits and appropriate income status. Is the local school system good? That has more to do with the quality of the students who attend a particular public school than the physical structure of facilities of the school. The latter are not unimportant, and good schools in good areas are more likely to have more resources as well. But affluent children from good households tend to make better students than poor and ill-prepared children from low income families suffering from various dysfunctions. Good facilities tied to poorly motivated students from uninvolved families located in run-down areas will not appeal to someone paying large sums for a nice house.
These are differences in consumption. But the problem of non-material inequalities will be reflected in payment schemes as well. Growing inequality in high-end compensation has been partly driven by the laudable goal of limiting positional or other non-material perks to the firm’s leaders. One of the perks of management that has slowly been devalued in the more democratic and open marketplace has been security of tenure and freedom from competition. In earlier times or in less open economies, access to control of important firms and the political bureaucracy was more restricted than it is in the major developed nations today. The ability to limit competition was also tied to greater deference from subordinates and the capacity to use company funds for personal expenditures. The economist John Hicks once noted that the best of all monopoly profits is a quiet life. As monopolies have been eroded and secure positions have been threatened, firms have had to offer larger and larger financial sums to motivate their best individuals, who find it not only much easier to change jobs than before but even to change residency or citizenship. The more socially constrained the access to jobs and position, the less unequal the official monetary payments need to be. The more one insists on social equality — or at least its pretense — in the workplace, the more the elite will ask to be compensated in raw financial terms. Jobs which are more secure and grant tenure will tend to pay less — all else being equal — than those which are volatile and reward risk-taking.
There are some good unintended consequences of this positional struggle. Because positional and other fixed goods become harder to buy as people get wealthier, those who are particularly status-obsessed will have to work more to buy these goods, which ultimately benefits us all. Working longer hours to buy the choicest piece of real estate or to be the first to get the latest new toys serves as a voluntary progressive tax on income. Especially in the latter case: those who slaved away to buy flat screen TVs when they were rare and cost $10,000 made it easier for most of us to eventually own similar sets at a tenth the price.
Conversely, attempts to limit positional competition only push status seeking to different dimensions, which are often less accessible to all. Consider that in countries like the Soviet Union, where the role of money and markets was officially repressed, competition became fiercer for government connections and “socially approved” professions, like chess master or ballet dancer, since that was one way to obtain both fame and highly restricted material goods like special imports.
Perhaps the real issue that will be taken up by the other commenters will be to discuss why certain inequalities which are also unevenly distributed — such as looks, intelligence, ability, or personality — do not invite as much social envy or opprobrium as disparities in income or wealth resulting from hard work or shrewd dealing. These differences are probably as large or larger than the measured inequalities in dollar income, yet go unmeasured and often excite no commentary in discussions of inequality. Sometimes differences in income are simply byproducts of these differing endowments. But it is rare that policies are directly and specifically designed to tax those whom nature has favored unfairly rather than those who have chosen to convert their advantages into cold hard cash.
But given my limited space I am content to repeat my main point. Whatever one’s views on material inequality, it will certainly be the case that more we succeed in promoting wider access through growth, the more we will be focused on acquiring and differentiating ourselves on margins that are hard to change or difficult to equalize. Which will inevitably lead to more frustration as we mistake the material manifestation of those inequalities for the underlying differences themselves.