Two Notes on Income Inequality

by Don Boudreaux on January 13, 2014

in Inequality

Here’s part of John Goodman’s sensible defense of income inequality; specifically here, Goodman challenges those people who argue that income inequality itself is a concern that potentially should be (attempted to be) reduced through government policies even if the inequality means that the absolute level of incomes of the lowest-income people are higher than they would be with less income inequality:

After John Templeton renounced his citizenship and moved to Nassau (where there is no income tax), the federal government imposed penalties — to discourage other wealthy people from doing the same thing. That was because the government wants to tax them. But when a wealthy person expatriates, the distribution of income and wealth becomes more equal. Should we reverse course and encourage the John Templetons of this world to get out of town. If equality is a serious goal, we should at least relax the penalties.

At the other end of the income ladder, consider poor immigrants. Every time one comes to our shore, the distribution of income becomes more unequal. But the same could be said if the immigrant is rich. Any immigrant who isn’t earning close to the average income is going to make the distribution less equal as a result of his immigration. If equality is a serious goal, we definitely need a different immigration policy.

….

Commenting on this EconLog post by David Henderson, ThomasH writes:

I do not understand why justified pride in how much better off the poor in the US are today (partly because of re-distributive policies) compared to average income 50 years ago or compared to the poor of other countries should in any way should diminish concern about a trend in pretax income and benefits and in wealth to become less equally distributed.

To which David appropriately and sensibly responds in a follow-up comment,

Because what I care about, in the economic realm, is people being better off than they were.

I have never understood non-envious people’s concern with income inequality per se.  I understand this concern if one believes, correctly or not, that the amount of wealth in society is more or less fixed.  But for anyone who understands that the amount of wealth in a market economy isn’t fixed, and who isn’t envious – or who, more realistically, understands that envy is an anti-social emotion that civilized people do their best to rid themselves of (or at least to hide from polite company) – there should be no concern with income differences per se.

Income differences in a market economy reflect a multitude of factors.  Most of these factors are benign (say, Jones choosing to quit a job that pays less $$ income but affords him more leisure, while Smith chooses to take a job that pays large amounts of $$ but comes with long hours and lots of stress).  Others of these factors, whether benign or not, merely reflect underlying interpersonal differences that, were these differences not ‘recorded’ as income differences, would be recorded as differences in some other, non-monetary currencies.

It’s naive in the extreme to suppose that if money is forcibly redistributed from people more intelligent, more able, and more ambitious and then given to people less intelligent, less able, and less ambitious, that some real equality would be secured.  Only someone unfamiliar with history or excessively benighted about human nature would fail to see that the more-intelligent, able, and ambitious people would inevitably find some other, non-monetary dimensions on which to excel relative to their less-intelligent, able, and ambitious fellow citizens.  And only such benighted observers would refuse to see that these other, non-monetary dimensions of human interaction and competition might well be far more dangerous to society at large, and especially to society’s ‘poor,’ than are the human interactions and competitive rivalries that occur through commercial exchange and private-property markets.

But more to ThomasH’s point.  Suppose that a machine is developed that, while it neither raises nor lowers the productivity of the bottom 90 percent (income-wise) of the workforce, triples the productivity of the top 10 percent of the workforce.  The economy becomes more productive, and competition will cause the fruits of this enhanced productivity to be shared with nearly everyone in the economy.  The typical now-more-productive top-10 percent worker will, it is true, gain more than does the typical bottom-90 percent worker, but both workers are wealthier in absolute terms.  The burden of persuasion, it seems to me, lies heavily on those who (like ThomasH) wonder why analysts such as David Henderson find nothing to worry about in the resulting greater income inequality.  Nothing in economic theory or history suggests that developments such as this hypothetical machine are unusual or generally harmful.  (Well, Keynesian theory might regard such a machine to be harmful.)

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