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Riffing on Wealth Inequality

David Schmidtz’s essay asking “when inequality matters,” along with Russ’s Econoblog debate on inequality, got me thinking….

Perhaps today’s most significant inequality is the one separating residents of industrial societies (for example, the United States and Japan) from residents of subsistence and oppressive nations (for example, Niger and North Korea) – an inequality fundamentally of freedoms that manifests itself starkly as an inequality of living standards.

But within any industrial society – especially a dynamic, entrepreneurial one – a good case can be made that the greatest inequality is that which separates one generation from the next. The “distribution” of material resources consistently favors younger generations. I’m materially better off than my parents, who are materially better off than were their parents, who were materially better off than were their parents. This pattern probably holds true for about the past 200 years.

(By the way, I put “distribution” in quotation marks because, as David Henderson once reminded me, income and wealth in market economies aren’t “distributed” in any meaningful sense of that term; income and wealth are created and initially owned by those who create it. Wealth isn’t created and then distributed. The pattern of wealth’s possession is determined by the process of its creation. Therefore, what we call “redistribution” of wealth is really distribution of goods confiscated mostly from their creators.)

Does this intergenerational inequality matter? Not to me. I neither fret about it nor believe it to be the consequence of any ethical breach or failure of the economy. I feel no guilt or shame for being wealthier than my parents, and I feel nothing but delight knowing that my son, over the course of his life, will almost surely be wealthier than I’ve been over the course of my life.

Americans born in 2000 generally will enjoy greater wealth over their lifetimes than will Americans born in 1960. The greater good fortune of this younger generation has nothing to do with greater merit of the younger generation. They’re simply luckier than their parents. So, does this luck differential justify “redistribution” from our kids to us?

Some such “redistribution” does take place today – largely in the form of Social Security transfers and as a consequence of government deficit spending.  But even with this “redistribution,” future generations will likely be wealthier than we are for no reason other than the fact that they’re younger than us and the economy in which they will spend their lives will feature a deeper division of labor and more technological knowledge than now exists.

Now I suspect that very few people get hot’n’bothered by the unequal “distribution” of wealth across generations. If my suspicion is correct, then it’s likely true that the reason many more people are bothered by unequal “distribution” across persons at each point in time is due not to philosophical considerations of the sort offered by John Rawls but, instead, because … because…. why, exactly? The answer (to me, at least) isn’t obvious.

One possible response is that we can’t see or interact with people in the future, so the envy and resentment that erupt when we see people wealthier than us aren’t triggered by the greater wealth of future generations. That greater wealth in the future is an abstraction, not a palpable reality.

But how much of current wealth differences are palpable realities? I seldom see billionaires – and when I do, it’s surprisingly difficult to notice that they are wealthier than me.

Of course, there are very poor people in the U.S. – homeless people, even people living in mobile homes or in government housing projects.  Such poor people routinely see middle-class Americans living in ranch or red-brick colonial homes, and driving shiny new Toyota Camrys.  But what’s to be done? Simply transferring money from rich to poor is unlikely to do much to improve the living standards of these poor people.  So maybe we should instead focus on “redistribution” not so much to raise the living standards of poor people but to lower the living standards of wealthy people – so that homeless folks, and people living in mobile homes and in housing projects, won’t see people a great deal richer than they are.  By how much should living standards of the rich be reduced?

Are there any principles that apply here?