What Does Income Inequality Tell Us?

Lane Kenworthy gets to the heart of the matter. He states that even after we correct for discrimination, basic health and welfare needs, et cetera, if inequality continues to rise, it should be cause for redistribution. He says, “luck’s influence means that redistribution is a justifiable remedy.” I disagree. Moreover, I believe that we do not and almost never have enough evidence (certainly not at the national level) to make judgments about whether luck was the primary cause of a given inequality. What philosophical principle tells us that it’s okay for the top ten percent to make five times more than the poorest ten percent (as an example) while earning 100 times the bottom ten percent is not? And how much do you need to know about what generated that disparity to decide?

There is no way to infer useful information about the nature of just or unjust compensation from the raw factoid of an aggregate income distribution for a nation, state, or even small community. That some income inequalities may be associated with grave injustices does not tell us which measured inequalities are relevant.

Consider the recent housing crisis. Say that two families start out in the early 90s with similar incomes and jobs. But family A saves and invests prudently and conservatively, limiting family spending, sometimes in unfashionable ways (e.g. children are subject to the mockery of school fashionistas or colleagues deride parents for not eating out enough), and chooses to rent accommodations till 2009 when the crisis makes it possible to buy a home cheaply and with low interest. They now have reasonably high net worth and are quite well off.

Family B does not save much, borrows and spends on disposable consumer goods, and buys a house in 2005 with no money down and a subprime variable rate. The market crashes. They have difficulty making the monthly payments which have been adjusted upwards and they cannot refinance. In 2009 our measures tell us that family A is worth 10 times more than family B and the latter is in danger of losing their house to foreclosure. The raw fact of income or (in this case) wealth inequality will tell us nothing of how A and B got to the current situation nor guide us in deciding whether it is ethical to tax A to fund housing assistance for B.

And what about the non-financial inequalities I asked about? Consider that a boy from the ghetto who is bright enough to be singled out for a scholarship to MIT or Stanford may have no monetary assets at age 21 but might be — in a lifetime sense — effectively “wealthier” than his out-of-work uncle who is bad with numbers, likes to drink and gamble, but just won $1,000,000 in a lottery. Should someone talented and athletic enough to be drafted into the NBA or NFL be taxed for their good fortune even before they’ve earned a dime?

Or what if two equally talented people with equal opportunities take very different paths in life? Person A takes a satisfactory but low paying job with a lot of intellectual opportunity and a good support network. He is happy and healthy, but is living on a lower middle class income. Person B does not merely work hard, he takes financial risks, and even ruins his health by neglecting to eat and sleep properly and does not cultivate healthy social relationships with friends or peers. However, B manages to “hit the jackpot” and successfully turns a few thousand dollars into several million. I still do not understand the philosophical claims that would justify taking from B to give to A. Why should people who are equally endowed by nature and luck be treated differently because some chose to increase their financial wealth while others chose to focus on their social or spiritual lives? And this of course leaves out the inconvenient fact that we never have this much information about the people at the high end of the distribution relative to those at the lower end. It is equally hard to separate the deserving from the undeserving rich as it is to separate the deserving from the undeserving poor.

There are many, many nations where the bosses of top companies do not earn as large a premium relative to their workers as do CEOs in the United States. But that is more than compensated by secure positions, relatively large, often untaxed perks, and political and social clout that a U.S. billionaire might envy. Would we consider it to be an improvement if CEO salaries were capped in exchange for a greater “private-public” partnership in which officials of top companies joined with selected government regulators to engage in protectionist industrial policy that limited competition and promoted job “stability”?

Absent very specific contextual information, why should one ever care about raw income inequality? How do you know that measures to address inequality don’t create more injustice? What philosophical principles help me decide why monetary inequality is more deserving of attention than ability, beauty, social connections, or blind luck?

And who will take the blame if redistribution is mistakenly applied so it leads to a harmful loss of productivity and reduces economic growth (which hurts the poorest most)? The onus of showing the redistribution is harmless should be on those who choose to make the transfer.

Also from this issue

Lead Essay

  • In his lead essay, Will Wilkinson observes what he believes is a poor chain of reasoning: Income inequality is rising; it is also a measure of injustice. To fix this injustice, we should redistribute incomes. Wilkinson attacks this reasoning on several fronts: Income inequality is less important than consumption inequality, and consumption inequality is probably lessening. But if income inequality is a problem, it is so only as a symptom of a different problem: substandard schools, perhaps, or our high incarceration rate, or CEOs who conspire to overpay one another. Rather than redistributing income, we should identify the underlying problem and fix it directly. This may well lessen income inequality, and it will also fix an undoubtedly serious problem somewhere else in our society.

Response Essays

  • Lane Kenworthy argues that income inequality is indeed important, and that we should not be misled by the relatively reassuring data on consumption. Unconsumed income also adds to the quality of life enjoyed by the rich, even if that increase is still hard to measure. A more egalitarian society need not entail a radical social leveling, but it should entail better public services for the poor and the middle class.

  • John Nye adds several considerations to the mix: First, positional goods may make us feel more unequal — there are only so many “top ten” schools for our kids, only so many “best” views or neighborhoods. Yet, with rising incomes, more of us feel that we should be able to afford them, even as they slip further from our grasp. As we become more equal, we feel less equal. Second, one other effect of relative equality has been to erode the security formerly enjoyed at the very top of the economic pyramid. This security itself was a form of compensation, and executive salaries may be rising in recent years in part because executive security has fallen. And third, much of human inequality is not directly measurable in money at all. Differences in appearance, intelligence, ability, and the like are all real and may translate into economic inequality as well. Consideration of these elements is curiously absent from many discussions on inequality.

  • Elizabeth Anderson agrees with Wilkinson that the root causes of inequality are more troubling than inequality taken alone. But economic inequality is still a problem for two reasons: First, economic inequality of the sort we have today is not making the poor better off in absolute terms, but rather it is making them worse off. And second, economic inequality translates directly into inequality of political power, which in turn reinforces economic inequality. This is an unacceptable state of affairs.