More Problems with Measured Inequality

I am grateful that Lane Kenworthy has addressed the issues I brought up in my original post because I think they are quite different than the normal discussions of inequality.  He concedes my points, but doesn’t think they are relevant to the last century or at least the last thirty years.

But if he starts to go down that path, he will see that most of our current measures do not take these issues into account at all.

Kenworthy argues that gross measured income inequality is roughly the same as it was 100 years ago.  Yet he also concedes that “inequality of material well-being is surely lower today.”  How can my point therefore be irrelevant?  The gross measured inequalities are utterly misleading.  A world in which food of many kinds is vastly cheaper, better prepared, and less likely to contain harmful bacteria; in which clothing of a high quality is widely available cheaply; and in which people have access to basic medical care such as antibiotics, pain-killers, and basic surgery often unavailable to their ancestors, in addition to electronics like phones, washing machines, radio and television is one in which the true gap between rich and the poor is almost certainly lower (cf. the work of Stanley Lebergott).  Moreover, a simple perusal of the life expectancy statistics will show that lifespans and infant mortality have improved for all groups in the last century but that they have improved more for the worst off than the richest (cf. Robert Fogel).  Can there be any doubt that the ratio of a poor person’s expected lifespan to that of a rich one’s in the United States (all other things held constant) is higher today than it was 30-50 years ago? This is a major reduction in inequality not captured by any income measures whatsoever.

Even standard measures of consumption inequality overestimate inequality gaps because they don’t correct for quality and the utility of the goods that are consumed. [A good may fall so much in price that it is a trivial share of the budget but it is a large share in utility terms.]  That this is true can be noted from the fact that even the so-called absolute measures of poverty do not take fixed, quality-adjusted consumption bundles into account.

Moreover, it requires at the minimum correcting for different prices faced by different classes of people.  The likelihood that this issue is important can be seen by the work of Robert Gordon and others who have documented that when a different cost of living index is calculated for the rich and the poor, the inequality measures of the last few decades seriously flatten out.  Moreover, all of these crude calculations don’t take the very differential regional cost differences into account, nor the cost differences even within the same city or state.  Nor do they combine the information from the consumption measures which indicate that a large fraction of the poor consume far more than their income (even when official transfers are taken into account).  Which is another way of saying that the real income measures for the left tail are simply wrong.  I am confident that more detailed analysis on these lines would flatten measures even further, especially considering the point (noted by Elizabeth Anderson) that we all have diminishing marginal utility of income.

I would also argue against the inference that Anderson and others draw from Robert Frank that reducing positional races necessarily has no cost.  This ignores the incentive effects to work.  There are positive externalities to the rest of the population of the rich wishing to obtain more positional goods.  If everyone with $10 million decided that they had enough and simply stopped working, those of us with much lesser wealth would be worse off.  Of course, there are ways in which positional races can be harmful to all as well, but now that is an empirical question as to how gross remedies like taxation affect the incentives to work and to distort the system (like lobbying for favors).

Finally, I think that the concern with gross measures of inequality is itself positional and partially motivated by the relative performance of the United States when compared to other nations.  If Europe were not perceived as less unequal in incomes and more generous in welfare than the United States, would we observe the same pressures to reduce income inequality as we do?  Especially given the absolute progress that has been made in improving the lot of the poor.

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.