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The Irrelevance of Income Inequality

The Cafe’s co-host, Russ Roberts, did a superb job discussing the many problems and pitfalls in analyzing data on income distribution.

Re-reading his posts got me thinking more deeply than I normally do about the issue of income distribution. Below are some of my ruminations.

But first a prefatory note: Never in my life have I worried in the least about a market-economy’s income "distribution." Perhaps this confession reveals my character to be flawed or my intellect to be feeble. Regardless – I tell you the truth. My reaction when I encounter intellectual discussions of the "distribution" of income is very much like my reaction when I read of sixteenth-century disputes about whether a wafer of bread turns into the actual body of Christ during a Catholic mass or simply comes to represent the body of Christ.

Read any history of Reformation Europe and you’ll see that lots of people – prominent people, smart people, educated people, people of means and influence – pondered and sweated and roared over this issue. People were burned at the stake for taking the wrong position on it. And yet, and yet…. so what??? What a pointless debate! What a nothing, empty issue!  All time and energy spent on this question is time and energy utterly, sadly wasted.

And so it is with the interminable discussions and concern about income inequality.

Putting aside all of Russ’s superb points, let’s pretend that the New York Times is correct that income inequality in America is increasing. So what?

Here are my top five reasons for ignoring this development. (These are forthcoming also, in the next day or so, in my Pittsburgh Tribune-Review column.)

First, income inequality says nothing about absolute levels of income. If the real incomes of society’s poorest people are rising by X%, what does it matter if the real incomes of society’s wealthiest people are rising by X+1%?.

Second, discussions of income inequality promote – psychologically if not logically – the mistaken notion that the amount of total income is fixed. This fact is one reason I use scare-quotes when I write about income "distribution": income in market economies isn’t a pie that is first produced and then distributed. Instead, income is earned simultaneously with its production. And in general, the more someone produces, the greater is the wealth not only of society but also of the individual who produced this greater output. Why worry if this increased production increases measured income inequality?

Third, obsessing on income inequality fosters envy – one of our ugliest and most-destructive emotions.

Fourth, concern with income inequality denigrates non-monetary sources of human happiness and flourishing. For example, in 1992 I turned down a job offer with a law firm in Washington, D.C. I accepted instead a teaching job at Clemson University – paying a much lower salary than the law firm offered to pay. Because my decision was voluntary, you can be sure that I found the lower-salaried teaching job more attractive than the high-paying law job. The greater leisure, the greater freedom to work on subjects of my own choosing, and the very deep enjoyment I get from teaching college students all combined to outweigh the value of the higher income.

Judging from what my law-school classmates currently earn at their law jobs, I estimate that my income today is a mere 40 percent of what it would be had I instead pursued a career in law. But I assure you that I’m much happier today in my teaching career than I would be as a high-paid and stressed-out practicing attorney.

The lesson, of course, is that money is not life’s be-all and end-all. (This, incidentally, is a lesson economists know better than non-economists.)

People frequently choose to forego higher monetary benefits in favor of greater non-monetary rewards. How much of the difference in incomes earned in America is due to such choices? I don’t know. Probably no one knows or even can know. But you can be sure that part of this difference reflects some people’s choices to forego higher dollar incomes in return for benefits such as more leisure, more on-the-job safety, and more-agreeable work conditions.

Fifth, in America’s market economy the "distribution" of income is merely a summary statistic of one among gazillions of unintended consequences springing from a hugely complex and on-going decision-making process involving hundreds of millions of consumers and producers. Income isn’t "distributed," or even earned, according to some grand plan. Therefore, income "distribution" is not a policy variable subject to easy manipulation by politicians and social planners.