Arnold Kling  

Inequality

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Inequality is the topic of both the latest Cato Unbound and the latest WSJ Celebrity Death Match.

In the Cato piece, David Schmidtz writes,


Here is a truism about the wealth of nations: Zero-sum games do not increase it. Historically, the welfare of the poor always—always—depends on putting people in a position where their best shot at prosperity is to find a way of making other people better off. The key to long-run welfare never has been and never will be a matter of making sure the game’s best players lose.

In the WSJ piece, Heather Boushey writes,

It is also true that the inflation-adjusted cost of consumer goods has dropped dramatically, especially when we quality-adjust them. Today, one can go to Wal-Mart and pay only $35 for a DVD player, and most families have one. However, the costs of getting a college education and health care have risen faster than inflation, putting them out of reach of many families. Less than half (46%) of low-wage workers had employer-provided health insurance from any employer, their own or a family members', compared with 82% of high-wage workers.

Russ Roberts replies,

The level of inequality is an emergent phenomenon rather than something controlled by politicians or a wealthy elite.

In America, the level of inequality is the result of differences in skills, differences in family structure over time, differences in immigration patterns, educational choices of young people, entrepreneurial opportunities and a thousand other factors caused by each of us going about our lives as workers, managers, family members and consumers. Attempts to alter the level of inequality as if it were the temperature in the house that can be adjusted by a thermostat are unlikely to result in the intended result of a more just society.

My view of inequality is that it is one of those issues that gets trotted out when everything in the economy seems to be going so well that we have nothing else to complain about. When you have serious bad news, such as high unemployment or a financial meltdown, the media forget about inequality.

The question I have for people on both sides of the debate is this: what would the data have to look like to get you to consider changing your position? That is, if you think inequality is a big deal, what would the data on relative consumption or wealth or income have to look like to make you think it is not a big deal? Conversely, if you think inequality is not a big deal, what would the data have to look like to make you think that it is a big deal?


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CATEGORIES: Income Distribution



COMMENTS (25 to date)
John Thacker writes:

Hmm, my gut instinct is to go with something to do with growth, and the related ability for "average" (read like something up to middle or upper-middle class) people to do as well or better than their parents.

I think inequality becomes more of a problem when there's a lack of growth, and when the mass of people are worse off than their parents/when they were growing up.

Matt McIntosh writes:

"Conversely, if you think inequality is not a big deal, what would the data have to look like to make you think that it is a big deal?"

The poorest in society would have to be getting materially worse off (or simply remaining stationary) in absolute terms. Needless to say this is not and has never been in evidence.

John Thacker writes:

Inequality in the US that comes from, say, people immigrating from even poorer countries and being better off here than they were (but possibly worse off than the poorest were here before) does not bother me, for example.

liberty writes:

Until I see convincing evidence that inequality of incomes has a negative effect on the economy, I don't see any reason that it should be considered a problem.

If absolute incomes of the poor are too low or getting lower, that is a problem - but it has nothing to do with inequality or relative position.

The only reason that relative poverty could matter is political, I think: but in this country the poor can vote, run for office, become rich and own firms, etc. There is no political dimension if mobility exists.

(and it does: http://www.myarsefrommyelbow.net/index.cgi?page=debates/journals/journal_UsingmobilitystatisticstodescribetheconditionoftheAmericandream_WedMar_362)

john writes:

I think the quesiton of absolute income is an important one. There are many stats that indicate the absolute wages of the bottom 50% have gone down.

There also a lot to indicate that the "stats" used to measure absolute income are faulty, and that the situation may be worse than indicated. Remember, garbage in, garbage out.

For example, while it is great that a DVD player is cheaper today, a house has become far more expensive. I ask you which is more important to the well being of a person, a house or a DVD player?

My father graduated college with a simple BS in chemestry in 1967, got a job at a chemical company and purchased a house within 3 years of that graduation. This was on the east coast. He was no more than 25 years old.

This is an impossible story today. These days college graduates are lucky to buy a condo before they are thirty and they are loaded down with loans. Typically they must persue some sort of graduate school in order to get a reasonable job.

So, when would I think lower standard of living is a problem? Well, I would first want to see a real statistic used to make a comparison, not the obviously faulty CPI which excludes the greatest single expense in the household budget.

Another factor to consider is the price of college and medical care, both of which have increased much faster than the (faulty) rate of inflation.

Which is more important college, housing and medical care, or DVD players?

liberty writes:

>For example, while it is great that a DVD player is cheaper today, a house has become far more expensive.

By what standard do you decide that a house is more expensive? You still need a CPI to know. And do you measure median cost of a house against median income, or median house cost by itself? What if housing prices have gone up *because* everything else has gone down (eg now I can choose to buy a more expensive house because I spend so little of my income on a car, dishwasher, groceries, etc).

Median incomes have gone up and standard of living way up. Just compare the percentage of people that could afford a three bedroom house in the suburbs, two cars, basic appliances, college education for two children and retire on their own 401k plan - from 1970 to today.

>My father graduated college with a simple BS in chemestry in 1967, got a job at a chemical company and purchased a house within 3 years of that graduation.

I took out a mortage on a three bedroom house with my *student loan money*. I don't know where you live but in NM you can get a nice three bedroom house on 10 acres for 80k or about $400/mnth.

http://realtor.com/Prop/1054058205

>Which is more important college, housing and medical care, or DVD players?

Why do more people go to college today, if what you say is true?

Which is more important good medical care, more opportunity to go to school, good general standard of living with cable tv and two cars; or living in a fantasy world about the beauty of the 1970s?

Rick Gaber writes:
"Today, one can go to Wal-Mart and pay only $35 for a DVD player, and most families have one. However, the costs of getting a college education and health care have risen faster than inflation, putting them out of reach of many families." -- Heather Boushey

The economics of both health care and college educations have been distorted to the extreme by GOVERNMENT controls, competition and intervention.

"From the fact that people are very different it follows that, if we treat them equally, the result must be inequality in their actual position, and that the only way to place them in an equal position would be to treat them differently. Equality before the law and material equality are therefore not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time." -- F. A. Hayek

"If welfare and equality are to be primary aims of law, some people must necessarily possess a greater power of coercion in order to force redistribution of material goods. Political power alone should be equal among human beings; yet, striving for other kinds of equality absolutely requires political inequality." -- Tibor R. Machan in Private Rights and Public Illusions

"There is all the difference in the world between treating people equally and attempting to make them equal." -- F.A. Hayek

"...the question becomes, are you going to have everyone play by the same rules, or are you going to try to rectify the shortcomings, errors and failures of the entire cosmos? Because those things are wholly incompatible. If you're going to have people play by the same rules, that can be enforced with a minimum amount of interference with people's freedom. But if you're going to try to make the entire cosmos right and just, somebody has got to have an awful lot of power to impose what they think is right on an awful lot of other people. What we've seen, particularly in the 20th century, is that putting that much power in anyone's hands is enormously dangerous." -- Thomas Sowell, in an interview in Salon 11-10-99

john writes:

By what standard do you decide that a house is more expensive? You still need a CPI to know.

Housing prices have gone up much more that CPI since 1970, and that is using a CPI that is faulty on the low side since it does not include housing prices. Do you dispute that?

Which is more important good medical care, more opportunity to go to school, good general standard of living with cable tv and two cars; or living in a fantasy world about the beauty of the 1970s?

More people go to college because it is necessary to make enough money to live. There are few jobs left that one can raise a family on that do not require a college education.

As for two cars and cable TV, again you push the consumer goods. There are not the important elements of life - housing, education, medical care - those are the essential ingredients for building a family.

Taking the quality of health care into account certainly complicates the equation, but the increase in health care costs has been staggering since the 1970's.

Finally, the quality of college educations has probably gone down, while the price has increased.

So, really the economy is not working well for certain group of people. Now, you may not care about that, but if I was from that group of people I would vote in ways that would attempt to reverse that process.

I would excursus my right to take money from others until I felt my standard of living was reasonable and in accordance with what we know is possible because it occurred in the past.

That is the political reality that everyone needs to face up to.

john writes:

This comment indicates that economist Robert J. Samuelson thinks there is a problem with inequality and a growing underclass. Didn't his dad win a Nobel prize?

I do not like advocating a fence. It looks and feels bad. It's easily stigmatized as racist. It would antagonize Mexico. The imagery is appalling, but it beats the alternative: a growing underclass and social tensions. Moreover, a genuine fence would probably work. The construction of about 10 miles of steel and concrete barriers up to 15 feet high in San Diego has reduced illegal crossings in that sector by about 95 percent since 1992, reports Rep. Duncan Hunter (R-Calif.), a supporter of a U.S.-Mexico fence. Sure, there will be tunnels and ladders. But getting in will be harder. Policing will be easier.
john writes:

Link to above quote is here.

James writes:

To answer Arnold's question, there is absolutely nothing in the inequality data itself that would cause me to change my position. (I'm presently unconcerned about inequality.) I'd have to see data showing that the wealthy were getting wealthy by robbing the poor either directly or indirectly.

For those who are troubled by the inequality data, how big would the inequality between the number of *people* in the different quintiles have to be to convince you that inequality statistics are produced by people whose first priority is not data accuracy?

Re: prices and inflation, I have no problem believing that the prices of things the government subsidizes like education and health care have risen faster than the things the government doesn't subsidize. Subsidies have a way driving prices up like that. That's why I hope the government never undertakes some program to deal with inequality by subsidizing the people in the bottom of the income distribution. Being poor is expensive enough already.

Bill writes:

James,

Those wealthy folks that lobby the governent for rents are essentially robbing all taxpayers (both rich and poor) and in the process are getting wealthier. A good example is the mortgage interest deduction. Poor folks don't benefit from it, but richer folks do.

The CPI is crap. The fact that the Fed makes interest rate decisions (at least partly) based on it is dangerous. We need a cost-of-living index to determine "real" inflation. Reporting the CPI is misleading at best.

Bill Stepp writes:

As The Economist pointed out last week, the share of income going to owners has grown proportionately more than that earned by workers because globalization has increased profits faster than domestic economic reforms have enlarged the share of the growing pie going to workers. Outsourcing, which took off a decade ago, is one example of this.
It's only a matter of time before the pendulum swings the other way, if it isn't already.

Scott writes:

Lower case "j" john,
You said:
"My father graduated college with a simple BS in chemestry in 1967, got a job at a chemical company and purchased a house within 3 years of that graduation. This was on the east coast. He was no more than 25 years old.
This is an impossible story today. These days college graduates are lucky to buy a condo before they are thirty and they are loaded down with loans. Typically they must persue some sort of graduate school in order to get a reasonable job."

It is not an impossible story. I graduated with in 2002 with a BS in econ and three years later bought a five bedroom house for $660,000 in Northern VA. I was 25. Now I bought this home with my wife, she was 2 years out of school with a BS in Nursing, but seperately either one of us could have bought about half as much house. If I were single, however, I would have made different choices, so would my wife. And if your father were 25 in 2005 he would have a million more options for using his income as well. I don't think you should confuse economic analysis with nostolgia and romance for the past. If so, top this, my ancestor 800 years ago was able to afford a yurt on the steppes of Asia and had three wives and two children. He was no more than 16 years.

My point is that what your dad did was the best choice for him at the time, and what the wifey and I did was the best choice for us at the time, if it is rare, it just means that there are a lot of other things people can spend their time and money on.

You also said:
"I would excursus my right to take money from others until I felt my standard of living was reasonable and in accordance with what we know is possible because it occurred in the past."

This sentence makes me hope you are never able to afford to be my neighbor. I might come home with a new gadget that you don't have and you'll decide its time to "excursus" your right to take my money. Then there will be a showdown.
I am sorry to tell you don't have the right to take money from other people until you feel resonable. The fact that this kind of thing happens through the political process doesn't make it a right. It is an aberration. It is a vile, detestable mutation and corruption of founding vision of these United States. The fact that you now see it as your god-given right to take other peoples wealth as your own on a whim is even more grotesque. Just so you know people who take other peoples things by force or fraud are properly categorized as criminals.

To Arnold's original post, there is no threshold which would make me say inequality is a problem. Russ Roberts nails it as an emergent phenonenon. If these are the outcomes that emerge spontaneously, so be it. Now if the inequality emerges because john or someone like-minded starts taking everybody's stuff on a whim and get rich from it because they claim they can never be satisfied like somekind of brutal lord of war tinpot dictator, then inequality is a big problem.

Tom Anger writes:

It would take three things to convince me that inequality is a big deal: (1) low inter-generational mobility up and down the distribution of household incomes (e.g., a majority of the households in the bottom quintile are still in the bottom quintile 25 years later); (2) little or no inter-generational increase in real income for those in the bottom quintile or two, as against relatively large increases for the other quintiles; (3) evidence that persons in the lower quintiles are unable to exploit their abilities because of legal barriers (e.g., Jim Crow laws). Absent the third condition, I would conclude that the first two conditions are evidence of endogenous hereditary/cultural biases that thwart advancement.

jn writes:

I believe the remakrs about college costs may even be wrong on nominal grounds. There was a study which showed that the average cost of college -- taking into account financial aid -- was about the same in 2002? as a few years earlier (hence cheaper in real dollars).

And if part of the importance of good colleges is access to distinguished research faculty, then modern US colleges are an even better deal because the US is in a more dominant world position with respect to research than a couple of decades ago.

Chris Bolts writes:
Conversely, if you think inequality is not a big deal, what would the data have to look like to make you think that it is a big deal?

In order for me to change my opinion on this issue, I would have to see more companies become irresponsible to its shareholders and employees by making stupid investing decisions, increasingly cook their books, and satisfy their own ends. I would also have to see that people who are genuinely trying to make it are being held by forces that are well outside of their control, i.e. the aforementioned or policies implemented by government that truly only benefit those in the upper echelon of our society.

This said, I have absolutely no problem with inequality. I don't mind Bill Gates being a billionaire, nor do I mind that my folks are living paycheck to paycheck. For me, a lot of personal decisions had gone into both Bill Gates' motives as to why he wanted to be a billionaire (although I think that that was happenstance and not planned) and why my folks wanted to be poor. People are rich and wealthy in different ways: while Bill Gates may be rich monetarily, I don't think he is as religiously and spiritually rich as my parents, who chose their religion over personal satisfaction. That' why I tend to ignore inequality statistics because they almost always do not capture the true welfare of the people that they are intended to measure.

For example, while it is great that a DVD player is cheaper today, a house has become far more expensive.

Here's a better way to look at this situation. Consider how many regulations govern a DVD product compared to house. Also, consider the costs of labor, risk factors, and costs materials that go into both. A DVD player is mostly man-made materials which can be made relatively cheaply. A house, however, requires several natural materials that are extremely volatile in price, not to mention the amount of time and manpower that has to go into building it. Also, there might be as many as 1000 regulations that govern the structure of a home where there are probably a few hundred that govern the building of DVD player.

There are not the important elements of life - housing, education, medical care - those are the essential ingredients for building a family.

An argument can be made that neither of those things are essential ingredients for building a family. After all, there are many homeless, uneducated, and unhealthy individuals who raise families and don't face the myriads of problems that afflict affluent, educated and healthy individuals. It's all relative, I guess.

Mcwop writes:
Those wealthy folks that lobby the governent for rents are essentially robbing all taxpayers (both rich and poor) and in the process are getting wealthier. A good example is the mortgage interest deduction. Poor folks don't benefit from it, but richer folks do.

Not the best example. Itemized deductions phaseout for most of the rich (plus there is the AMT). Second, is that many non-rich benefit from the interest deduction, but nevertheless, I really can't think of how you get rich off of itemized deuctions.

Bill Gates is rich not becuase of rents. He happened to be in a market that grew to a very large size. The power of compounding.

MjrMjr writes:

It seems that any time an article/report comes out that hints that things might not be getting a *lot* better for *everyone* and really, *really* fast, economists on the right are quick to condemn it or tell us why whatever was being commented on is actually good or discredit in some other way. I'm puzzled why some folks have a hard time acknowledging that there can be winners and losers in USA 2006.

That said, I do think that inequality is worsening and could become a problem over time. Arnold's last question is very good one, I think. It made me re-examine my own views on the topic a bit, always a good thing, imo. What would it take to convince me that inequality was not a big deal? Stats showing that over time(I'm not picky on the year, we can start in 1970, 1980, 1965, whenever) the number of hours a median wage earner had to work to buy housing, education, transportation, and health care has gone down.

nn writes:

Well mjrmjr,

Are you going to allow for rising quality of housing, education, medicine, or are you going to define adequate as the "reasonable" standard of decency prevalent at any point in time? If the former, most economists can show you that the cost has unequivocally gone done in 90 percent of the cases. But if the latter, it's tough to show gains if the decent minimum is being redefined upwards all the time.

Take housing: houses are bigger, better equipped, and usually safer than they were in 1960. (You only need to see how little someone is willing to pay for many of the smaller, older ranch houses in most cities). The one thing that goes up is location. Positional good prices can be made WORSE by rapid economic growth. So if you want a house that's much better than what the median owner had in 1965 for a relative pittance, that's a slam dunk. The catch is that it cannot be in a popular big city. You may have to settle for an unpopular suburb or one without good public schools. Position (and public schools by definition) are not supplied by the market nor economic growth.

liberty writes:

>You may have to settle for an unpopular suburb or one without good public schools. Position (and public schools by definition) are not supplied by the market nor economic growth.

Well said, and that was my point - you can get a nice 3 bedroom for less than 80k within short commute of ABQ, NM. The jobs don't pay as well here as in some cities, but you can easily get a 30k job at Walmart or a very well paid plumbing job or run a small business for plumbing, well repair, housecleaning, etc. And your money will take you much farther than in the 1960s - you can buy a couple used trucks for your business and home, the house, luxuries like cable tv, appliances, etc. all with that first job. Then over your lifetime you can move up in life, buy a bigger house and save and invest.

A decent little townhouse (these all within 10-20 mins drive of central ABQ) can be bought with a mortgage of $150 a month - or for 200ish a real little house. Then moving up, you can begin to get a real cute nice little house for 350/mnth and finally a bigger house w/fireplaces, still for under $500 a month.

All you have to do is live in a normal city instead of LA or NY.

john writes:

>You may have to settle for an unpopular suburb or one without good public schools. Position (and public schools by definition) are not supplied by the market nor economic growth.

But you are not comparing apples to apples then.

Just so you know people who take other peoples things by force or fraud are properly categorized as criminals.

No, it is called democracy and taxation. Now, in your little fantasy world it may be criminal, but here in reality it is called wealth transfer and if you don't pay your taxes it is you who will go to jail, not the person taking the money.

I suggest you consider reality when making economic policy.

liberty writes:

>I suggest you consider reality when making economic policy.

If you are the one making policy, you can make a policy that ends redistribution, and then it will be reality.

MjrMjr writes:

liberty:
What you describe sounds like a different universe. But your links check out. I'm sure you speak the truth. In Arnold Kling and Bryan Caplan's neck of the woods $500/mo gets you a single *rented* bedroom in a shared house. Oh, and utilities will probably cost extra. I guess living in this area and having only lived on the coasts in my life I can lose perspective. You say "instead of LA or NY", but, really, there's many more cities we'd have to add to the list to make that accurate and at that point I imagine we'd be covering a not insignificant % of the US populace.

nn:
I almost said something in my post about accounting for quality differences. I probably should have. They are important to note as you point out. The other side of the coin, however, is that quality improvements mean don't mean much if you can't afford the items in question. If I were a parent with a college aged child I'm sure it would please me to hear that my local state university now has computer labs, internet, sports facilities, and (fill in the blank) that it didn't have 20 years ago but if the tuition bill has risen much faster than inflation and is now beyond my means then what good do all these improvements do me? Now we can talk about tradeoffs and what parents ought to cut back, etc, that's all well and good. I'm simply answering the question posed by Arnold Kling:What would it take to make me think inequality is not a big deal? Answer:That the number of hrs the median wage earner must work to afford housing, transportation, education, and health care has decreased.

RE:Housing, I think a big cause of the problem in an area like this(DC) is residential zoning laws. Housing supply is artififically restricted by NIMBYs. Caplan wrote a good post a while back called something like "Right to Build" that addressed it.

liberty writes:

>there's many more cities we'd have to add to the list to make that accurate and at that point I imagine we'd be covering a not insignificant % of the US populace.

True, but mostly in the city itself, or if a large city in the closer suburbs. If one is willing to live near a smaller city then housing is cheap. A few years ago my husband and I decided to move out of the city (NYC where I grew up) and I have spent a lot of time looking in a lot of areas via realtor.com. Here is the point:

If you are rich, you can afford a high housing price and many do and help to shoot up the housing prices in "desirable" areas (that are also affected by eg zoning and regulatory laws as you mention).

If you are poor then you probably don't have a job on wall street and can find similar work outside of those high-rent areas. You can then find housing very cheap. Its not ust NM, its Kansas City, Morgantown West Virginia (where you can work or even commute to DC, though its far), NC - Charlotte or Raleigh, Knoxville TN, etc etc.

Those are just some of the ones I know - but you could pretty much put any small city into realtor.com and find some similar homes. They aren't dream homes, but they are so cheap that any salary can get you off the street and give you something to own. You can fix it up and move up to a better home later, even making a few bucks on the deal if you're a wise investor or put work into it.

Anyone working at Walmart could probably start at a higher end home - something in the $500-600/mnth range, which in some of those areas would be a real nice house. For example Kansas is literally giving away acres for free right now and housing is very cheap. There are plenty of Walmarts, so if you're just looking for a decent life for your family, you could do pretty well to move there.

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