Are We Talking About Inequality or Poverty?

Clive Crook wrote an interesting piece: All This Inequality Talk Does Nothing for the Poor - Bloomberg

... Inequality is rising, and that's a bad thing. What's worse is that the issue is getting mixed up with what should be a more pressing debate over economic opportunity, which would be better kept separate. This is both a distraction and a danger.

The U.S. system, according to many critics, is fundamentally flawed, its failings all of a piece. The rich have rigged the system so that the fruits of the nation's labor accrue largely to them. Nobody else can get ahead. The incomes of the middle class stagnate as labor productivity keeps rising. And if you're born poor, you stay poor. The plutocrats are killing the American Dream.

This encompassing theory of national decay is wrong. As Scott Winship of the Brookings Institution has pointed out, many of the simple facts that are claimed to support it aren't so simple on closer inspection. For one thing, comparing incomes over time for this purpose isn't easy. (What's meant by "income"? Are we discussing households, individuals, tax units, full-time workers?) You might keep this in mind: Until the recession, according to the Congressional Budget Office, U.S. median household incomes kept rising in inflation-adjusted terms, decade by decade.

That's a notable achievement for a country so long at the front of the pack (and therefore without opportunities for catch-up growth) during a time when the supply of foreign labor (hence, pressure on rich-country wages) was growing faster than ever.

Despite what you read, until 2007, most U.S. families were getting ahead. By global standards, their economic system, far from being fundamentally broken, has delivered mass affluence. ...

... Inequality has worsened in the U.S., and that's a problem. But the idea that plutocrats are enriching themselves at the expense of others needs to be unpacked. In some cases, it's true. Some executives have found ways to pay themselves more than they're worth to their companies: They're profiting at shareholders' expense. In other cases, though, technology and globalized markets have boosted the incomes of superstar entertainers, athletes and business leaders. That's different. If those innovations hadn't happened, incomes would be more equal -- but the middle class wouldn't be better off.

One basic point is often forgotten: The size of the pie isn't fixed. It's right to ask whether the distribution of incomes is fair and to lean against worsening inequality -- say, by fixing corporate governance so the market for top-executive pay works as it should or by taxing the rich more heavily. But it's wrong to see the gains at the top as proof of the system's ingrained wickedness, or to forget that clumsy intervention might affect everybody else's incomes.

The numbers on generational mobility are complicated, too, but one fact is undisputed: A child of a poor family in the U.S. is more likely to stay poor as an adult than his counterparts are in many comparable advanced economies. ...

... Miles Corak of the University of Ottawa and other economists argue that high inequality causes low mobility. The question isn't settled. I find it easy to believe that the recent surge in the incomes of the super-rich -- the main driver of U.S. inequality -- will make it easier for the very richest children to stay very rich, but I find it hard to believe it will help the poorest to stay poor. They're separate issues with separate causes calling for different policy responses, not different symptoms of the same underlying disease. ...

Cook has keyed in on a key concern of mine. Many people who are concerned about the poor keep harping on inequality. I am convinced that many who do this instinctively view the economy as a zero-sum game; namely someone else's win is someone else's loss. Flowing logically from this is the belief that the wealth at the top has come directly at the expense of those at the bottom. Solution: A reduction in the wealth of those at the top will mean a corresponding increase in wealth for those at the bottom. This is bad reasoning.

It is possible to significantly reduce the wealth of those at the top and see no significant change in the plight of those at the bottom. The plight of those at the bottom could even get even worse. Conversely, improving the plight of those at the bottom is possible while inequality increases.

The issue for the poor is opportunity and mobility. Why are we not doing better on these issues? That is a complex question. The issue for inequality is to ask what contribution to the common good we are rewarding through our socio-economic system. And let me be clear. Inequality is just and good. Exceptional performers should be rewarded handsomely, and those capable of productively employing vast quantities of assets contribute to the common good. But is that what actually has been happening with the wealth accumulation at the top in recent decades?

When I try to decouple these two issues in conversations, I find suspicion is frequently raised that I am justifying the rich or that I'm indifferent to inequality. In reality, I'm concerned about the poor, and moralistic posturing about inequality doesn't address their problems. Incredulously, I'm asked if I believe the rich shouldn't be required to pay more to help support the social safety net. To which I respond, maybe so. But will you be satisfied if we achieve an adequately funded social safety net, and inequality continues to widen? If not, your concern isn't about poverty but an ill-defined need to see less divergence. That is not a poverty issue. We need to untangle what we are talking about.

I know it makes our world simpler and more satisfying when we can find scapegoats on which to project our frustrations (i.e., the top 1% is the root of all evil), but such projections do little to solve problems and can even do serious harm.

Comments

[JHM]

I totally agree, thanks for bringing this up. I do think think a lot of people try to simplify economics to fit in with their political philosophy.

I know I have to consciously make sure to ask whether I am for or against something because it confirms my political beliefs or if it is actually born out by careful thought and the data.