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What Kinds of Inequality Should We Worry About?

For Project Syndicate What kinds of inequality and how much we should worry about it depends on the counterfactual:

How much should we worry about inequality--on the global level, on the societal level, on the personal level? Answering that question requires that we first answer another question: "Compared to what?" What is the counterfactual, what is the alternative situation against which we are going to judge the degree of inequality that we see? Florida is a much more materially unequal society than Cuba. But the right way to look at the situation--if Florida and Cuba are our alternatives--is not to say that Florida has too much inequality, but that Cuba has much much too much poverty.

On the global level, it is hard for me to make the argument that inequality as one of the world's major political-economic problems. It is hard for me at least to envision changes in economic policies or in political arrangements over the past fifty years which would have transferred any significant portion of the wealth of today's rich nations of the global North to today's poor nations of the global South. I can easily envision changes that would have impoverished nations now in the rich North: Communist victories in the post-World War II elections in Italy and France would have done the job for those countries. I can easily envision changes that would have enriched nations now in the poorer South: the promotion of Deng Xiaoping to the post of China's paramount leader in 1956 rather than 1976 would certainly have done the job for China. But alternatives that would have made the South richer at the price of reducing the wealth of the North? I find those much harder to imagine, without a wholesale revolution in human psychology

On the personal level, it is also hard for me at least to make the argument that a great deal of political-economic worry should be spent on the problem that some people are richer than others. Some have worked harder; some have applied their intelligence more skillfully; some have been better people; some have been worse people; many more have just been lucky enough to be in the right place at the right time. But are there alternative political-economic arrangements that could make individuals' relative wealth closely correspond to their relative moral or other merit? I don't see what they might be. The addressable problems are those of poverty and social insurance, of safety net, not of inequality.

But on the level of individual societies, on the level of nations, I believe that inequality does loom as a serious political-economic problem. In the United States, the average earnings premium received by those with four-year college degrees over those with no college has gone from 30% to 90% over the past three decades. This is a matter of supply and demand: the skill requirements of the American economy have outstripped the educational system's ability to educate and train, skills acquired through formal education have become more relatively scarce as a factor of production, the education earnings premium has risen, and the income and wealth distribution has pulled apart. Ceci Rouse and Orley Ashenfelter of Princeton University report that they find no signs that those who receive little education do so because education does not pay off for them: if anything, the returns to an extra year of schooling appear greater for those who get little education than for those who get a lot. Odds are that a greater effort to raise the average level of education in America would have both made the country richer and produced a much more even distribution of income and wealth by making educated workers more abundant and less-skilled workers harder to find and thus worth more on the market.

Again in the United States, corporate CEOs and their peers and near-peers make ten times as much today relative to the patterns of a generation ago. They do not do this because a CEO's work effort level and negotiation and management skills are in relative terms ten times as valuable to a corporation today as they were to a corporation of a generation ago. They have risen because of a reduction in the ability of other corporate stakeholders to constrain the freedom of top managers and high financiers to direct the value added in their direction.

Similar patterns are found in other countries across the globe. Within each country, odds are that the increase in inequality that we have seen in the past generation is predominantly a result of failures of social investment and changes in regulations and expectations, and has not been accompanied by any acceleration in the overall rate of economic growth. For the most part, it looks like these changes in economy and society have not resulted in more wealth but in an upward redistribution of wealth: a successful right-wing class war. The easiest counterfactuals to imagine are those in which greater public investments in education and greater moral, legal, and cultural constraints on the freedom of action of those at the top produce an equal or greater amount of total wealth and income with a lower degree of inequality.

This kind of inequality should be a source of concern. Bill Gates, Paul Allen, Steve Ballmer, and the other hundred-millionaires of Microsoft are brilliant, hard-working, entrepreneurial, and justly wealthy. But only the first 5% of their wealth can have any justification as part of an economic reward system to enourage entrepreneurship and enterprise. And the last 95% of their wealth? It would create much more happiness and opportunity if divided evenly among the citizens of the United States or the world than if they were to consume any portion of it.

Moreover, an unequal society cannot help but be an unjust society. The very first thing that any society's wealthy try to buy with their wealth is a head start for their children. And the wealthier they are, the bigger the head start. Any society that justifies itself on a hope of equality of opportunity cannot help but be undermined by too great a degree of inequality of result.

In the United States, the problem of inequality has two dimensions: insufficient effort to educate, and insufficient control by other stakeholders' of the ability of the top 50,000 or so earners' discretion. In other countries the problem of inequality has these two but also other dimensions as well. In all it is something we should worry about, because we can see in our minds' eyes alternatives that would make for better, healthier, happier, and equally well-off societies.