Widening Inequality

by Russ Roberts on September 6, 2004

in Standard of Living

In Don’s recent post on the opinions of Nobel prize-winning economists, he notes the frequent mention of income inequality and the distribution of income as an area of life where markets fail and government intervention is necessary. Robert Solow of MIT mentions, for example, “widening inequality” in the advanced economies.

No one mentions the possibility of private, voluntary efforts such as charity or the reality of privately-funded education vouchers that change the distribution of income. These efforts are all the more remarkable given that the current level of government aid to the poor has crowded out almost all of the private effort so that current levels of giving are not representative of what would exist if government got out of the business of trying to “fix” inequality.

Also missing from the discussion is any historical perspective.

Robert Fogel, who won the Nobel Prize in 1993, was not one of the Nobelists quoted in the article.

I’m reading his The Escape from Hunger and Premature Death, 1700-2100. Fogel notes:

The twentieth century contrasts sharply with the record of the two preceding centuries. In every measure we have bearing on the standard of living, such as real income, homelessness, life expectancy and height, the gains of the lower class have been far greater than those experienced by the population as a whole, whose overall standard of living has also improved.

Every measure. One dramatic example that Fogel provides is the change in life expectancy among the lower classes of Britain. In 1875, life expectancy among the lower class was 41 years. A member of the upper class at birth could expect to live to 58. Today, the relevant numbers are 74 and 78, an incredible improvement in both groups, but a much bigger gain for the poor. (These numbers include reductions in infant mortality.)

Fogel points out that some of the improvements in life expectancy come from public health investments in improved quality of water and sewage treatment, particularly in urban areas. But much of the change in well-being in the 20th century comes from technological change and productivity that increased the standard of living of the poor (and the rest of the population). Fogel focuses on the incredible increase in the availability of food and better nutrition generally in producing taller, healthier and longer-living people.

He also notes that income inequality has risen steadily since 1973 around the world. This is presumably the source of the concern about “widening inequality.” Fogel doesn’t mention the reason for this, but I have always presumed that the fundamental reason for this worldwide change is the steady increase in the divorce rate that began around that time in the United States and elsewhere. What this has meant is a large increase in female-headed households who were unprepared to be the breadwinner for their families. If you look at the poverty rate in the United States, it falls steadily from 1959 to 1973 then stops falling abruptly and starts to rise. Much of this change, I suspect, can be explained by the demographic changes due to divorce rather than the worsening condition of poor people in the United States.

I would love to see a study that looked at how much of the world-wide increase in economic inequality is due to demographic factors as opposed to the more popular view (alas, even among some Nobel laureates it appears) that it is due to increased concentration of economic and political power in the hands of the wealthy.

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