Arnold Kling  

Inequality

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At Cato Unbound, Alan Reynolds and his critics debate inequality statistics. So far, Reynolds and Gary Burtless have weighed in. For those interested in the topic, Brad DeLong has a reading list.

I have an uneasy feeling that the people who are arguing over whether inequality is increasing are asking the wrong question. I think that the economic issue is where are rates of return increasing and where are they decreasing.

For example, is the rate of return to rent-seeking increasing? Is that rate of return to corporate politics and back-stabbing increasing? Or is the rate of return to executive experience and sound judgment increasing?

Is the rate of return to risk-taking increasing? For that matter, has risk-taking increased, with a result that there are more winners and more losers?

Has the return to education increased, or has the return to ability increased?

How much does inequality reflect lifestyle choice? People in rural areas tend to have lower incomes, but they have less expensive lifestyles. Is that a choice or are they victims?

I have argued that a lot of people who might be, say investment bankers, choose other occupations. Is that another case of lifestyle choice?

Further down the road lie questions about what sorts of policy issues are raised by these as-yet-unanswered empirical issues.

UPDATE: An anonymous blogger at The Economist, with a post that I am reliably told took six hours to write, concludes,


What I do care about, once basic needs are taken care of, is how easy it is to change one's position on the ladder. Or rather, since earning money is never exactly easy, whether place in the income distribution is conferred by who one's parents were, or by one's own efforts. The evidence in America is that where you start out has a lot to do with where you end up. This bothers me a great deal. But there's less evidence that the problem of income immobility is growing.

...Unfortunately, altering the socio-political structures that reinforce accident of birth is so difficult that almost everyone prefers to focus on the (comparatively) trivially easy task of moving cash from one person to another.


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CATEGORIES: Income Distribution



TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/646
The author at The Free Thinker in a related article titled Cognitive Skills and Inequality writes:
    Arnold Kling thinks trends in inequality are less important than trends in rates of return:I have an uneasy feeling that the people who are arguing over whether inequality is increasing are asking the wrong question. I think that the economic [Tracked on February 11, 2007 10:38 PM]
COMMENTS (11 to date)
Barkley Rosser writes:

Regarding this last comment, many people in the US are not aware of the fact, but one of the major changes in recent years in the US regarding income distribution is that social mobility has substantially declined. Indeed, there are now quite a few western European countries, where mobility is now greater than it is in the US, although few are aware of this.

Buzzcut writes:

Did you read "The Bell Curve"? Highly meritocratic societies do not have good mobility, because IQ is highly heritable.

In the US, things are even more complicated by the disintegration of the family. It seems like IQ is interacting with cultural issues like out of wedlock childbirth, drug use, etc. to create a permanent underclass.

In both cases (IQ and culture) neither can be changed by government policy.

Randy writes:

Rate of return is an interesting take. I prefer justice myself. It seems to me that, generally speaking, the winners are winning, the losers are losing, and most of us are doing what's expected of us well enough to live decent lives. I can imagine a better world, but I don't expect one, nor do I see much reason to spend much effort trying to build one.

Bill writes:

I don't get this inequality stuff. Once a person has nutritious food, clean water, decent shelter, and basic health care, all else is just fluff. (Not that I don't like fluff.)

Basically, all who lean socialist these days are very shallow people. I could understand their point of view if folks were really hurting, but what they are really complaining about these days is that not everyone has a brand-new luxury car. I can't respect anyone whose political views respect envy, which seems to me to be at the core of the left.

Bill writes:

Randy,

Do you even know any poor people? I know and have known many. (I grew up in a welfare community. The population of my former elementary school is "99% disadvantaged" according to the State of California.) In my experience, most "losers" in America choose to be losers. Very few poor people I've know were poor do to uncontrollable circumstances. I can't in any way feel sorry for them (except for those few); they have chosen their lives. (BTW, many of these people are quite happy, some much happier than some richer folks I know. Maybe materialism is nothing but vanity?)

It never ceases to amaze me at the ignorance of most people that discuss "poverty". Take the time to get to know some poor folks; they're more than just statistics and political footballs.

Snark writes:

I’m currently stone-cold sober and have 20-20 vision, but feel like I donned a pair of bifocals and drank a 5th of Everclear while reading through this last comment. Did anyone else end up with a hangover, or should I just take a couple of Tylenol and shut up?

Mike writes:

From reading the literature I am convinced that I have no clue whether inequality is increasing. Just as there is no benevolent social planner out there, I do not see a benevolent, omniscient, unbiased researcher telling the story of inequality.

In any case, I think the relevant political-economic question is whether privilege is increasingly being bestowed on the few at the expense of the many. Your questions are all subsets of this larger issue. As many more eloquent people have pointed out - lots of inequality will always be with us. The question is whether institutions in society are set up to exacerbate what inequality would have naturally prevailed in a world without privilege. I have no hard evidence, but my belief is that the answer is certainly yes that these institutions are pervasive. The question for me is whether they are becoming more pervasive and whether there are instruments, or rather emergent phenomena out there that may mitigate these troublesome trends.

Mensarefugee writes:

Great Comments Bill!

Bill writes:

Thanks, Mensarefugee!

Snark, your name says it all.

Randy writes:

Bill,

Yes, I've known poor people. Been there, done that, still have a couple of the t-shirts. In my opinion, for most anyway, it isn't that hard to join the ranks of the middle class. In a nutshell, its a simple matter of study, work, and avoiding stupid behaviors. And what I saw in my time among the poor was that those around me had chosen to avoid one or all of these principles (personally, I had chosen to avoid all three). Yes, there is also bad luck, and that's why we have welfare programs. But social responsibility depends on the existance of personal responsibility. I'm all for "la vie boheme". I think everyone should spend a couple of years trying out alternatives. But in the end, we all have to make a choice - play the game by the rules, or accept the consequences.

Fundamentalist writes:

In addition to studying the poor, we need to study the rich, as Dr. Thomas Stanley has done in many books, including The Millionaire Next Door. According to Stanley, about 85% of million/billionaires made their money growing a business with hard work and frugality. About 12% worked their way up the corporate ladder, and only about 3% inherited their wealth. Most proposals to reduce inequality would punish the 85% for being frugal, hard working and smart.

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