Notes From Babel

Tyler Cowen on Income Inequality

with 3 comments

A couple months ago, I blogged about the so-called “problem” of income inequality, arguing that the problem simply does not exist as it did historically.  No matter what our income level, there is an exceedingly small portion of Americans who cannot obtain access to good cheap food, clean accommodations, affordable travel, basic medical care, and even access to the internet.

Well, Tyler Cowen’s recent piece in The American Interest spells all this out in much greater detail here.  It’s really a great piece that I encourage you to read.  Here are the passages that resonated most with me:

In terms of immediate political stability, there is less to the income inequality issue than meets the eye. Most analyses of income inequality neglect two major points. First, the inequality of personal well-being is sharply down over the past hundred years and perhaps over the past twenty years as well. Bill Gates is much, much richer than I am, yet it is not obvious that he is much happier if, indeed, he is happier at all. I have access to penicillin, air travel, good cheap food, the Internet and virtually all of the technical innovations that Gates does. Like the vast majority of Americans, I have access to some important new pharmaceuticals, such as statins to protect against heart disease. To be sure, Gates receives the very best care from the world’s top doctors, but our health outcomes are in the same ballpark. I don’t have a private jet or take luxury vacations, and—I think it is fair to say—my house is much smaller than his. I can’t meet with the world’s elite on demand. Still, by broad historical standards, what I share with Bill Gates is far more significant than what I don’t share with him.

Compare these circumstances to those of 1911, a century ago. Even in the wealthier countries, the average person had little formal education, worked six days a week or more, often at hard physical labor, never took vacations, and could not access most of the world’s culture. The living standards of Carnegie and Rockefeller towered above those of typical Americans, not just in terms of money but also in terms of comfort. Most people today may not articulate this truth to themselves in so many words, but they sense it keenly enough. So when average people read about or see income inequality, they don’t feel the moral outrage that radiates from the more passionate egalitarian quarters of society. Instead, they think their lives are pretty good and that they either earned through hard work or lucked into a healthy share of the American dream. (The persistently unemployed, of course, are a different matter, and I will return to them later.) It is pretty easy to convince a lot of Americans that unemployment and poverty are social problems because discrete examples of both are visible on the evening news, or maybe even in or at the periphery of one’s own life. It’s much harder to get those same people worked up about generalized measures of inequality.

. . . .

A neglected observation, too, is that envy is usually local. At least in the United States, most economic resentment is not directed toward billionaires or high-roller financiers—not even corrupt ones. It’s directed at the guy down the hall who got a bigger raise. It’s directed at the husband of your wife’s sister, because the brand of beer he stocks costs $3 a case more than yours, and so on. That’s another reason why a lot of people aren’t so bothered by income or wealth inequality at the macro level. Most of us don’t compare ourselves to billionaires. Gore Vidal put it honestly: “Whenever a friend succeeds, a little something in me dies.”

. . . .

And so we come again to the gains of the top earners, clearly the big story told by the data. It’s worth noting that over this same period of time, inequality of work hours increased too. The top earners worked a lot more and most other Americans worked somewhat less. That’s another reason why high earners don’t occasion more resentment: Many people understand how hard they have to work to get there. It also seems that most of the income gains of the top earners were related to performance pay—bonuses, in other words—and not wildly out-of-whack yearly salaries.5

It is also the case that any society with a lot of “threshold earners” is likely to experience growing income inequality. A threshold earner is someone who seeks to earn a certain amount of money and no more. If wages go up, that person will respond by seeking less work or by working less hard or less often. That person simply wants to “get by” in terms of absolute earning power in order to experience other gains in the form of leisure—whether spending time with friends and family, walking in the woods and so on. Luck aside, that person’s income will never rise much above the threshold.

It’s not obvious what causes the percentage of threshold earners to rise or fall, but it seems reasonable to suppose that the more single-occupancy households there are, the more threshold earners there will be, since a major incentive for earning money is to use it to take care of other people with whom one lives. For a variety of reasons, single-occupancy households in the United States are at an all-time high. There are also a growing number of late odyssey years graduate students who try to cover their own expenses but otherwise devote their time to study. If the percentage of threshold earners rises for whatever reasons, however, the aggregate gap between them and the more financially ambitious will widen. There is nothing morally or practically wrong with an increase in inequality from a source such as that.

The funny thing is this: For years, many cultural critics in and of the United States have been telling us that Americans should behave more like threshold earners. We should be less harried, more interested in nurturing friendships, and more interested in the non-commercial sphere of life. That may well be good advice. Many studies suggest that above a certain level more money brings only marginal increments of happiness. What isn’t so widely advertised is that those same critics have basically been telling us, without realizing it, that we should be acting in such a manner as to increase measured income inequality. Not only is high inequality an inevitable concomitant of human diversity, but growing income inequality may be, too, if lots of us take the kind of advice that will make us happier.

From there, Cowen goes on to give a very nice, dumbed-down explanation of how the finance imposes an opportunity cost on our economy by attracting the smartest and hardest working individuals, how the financiers pose a perpetual risk to our economy, and why we are probably just going to have to live with that as the price of participating in the affluent society.   It’s a longer article, but I highly recommend sitting down with it when you have the time.

[Victor Davis Hanson makes another observation related to the problem of “poverty” in California:

In two supermarkets 50 miles apart, I was the only one in line who did not pay with a social-service plastic card (gone are the days when “food stamps” were embarrassing bulky coupons). But I did not see any relationship between the use of the card and poverty as we once knew it: The electrical appurtenances owned by the user and the car into which the groceries were loaded were indistinguishable from those of the upper middle class.

By that I mean that most consumers drove late-model Camrys, Accords, or Tauruses, had iPhones, Bluetooths, or BlackBerries, and bought everything in the store with public-assistance credit. This seemed a world apart from the trailers I had just ridden by the day before. I don’t editorialize here on the logic or morality of any of this, but I note only that there are vast numbers of people who apparently are not working, are on public food assistance, and enjoy the technological veneer of the middle class. California has a consumer market surely, but often no apparent source of income. Does the $40 million a day supplement to unemployment benefits from Washington explain some of this?

The rest of his piece on California’s decline is also highly recommended reading, here.]

Advertisements

Written by Tim Kowal

December 15, 2010 at 10:39 pm

3 Responses

Subscribe to comments with RSS.

  1. “cheap food, clean accommodations, affordable travel, basic medical care, and even access to the internet.”

    The medical care thing… not so much. Medicade is restricted to the very poor, a friend of mine earns $217 per week gross (without taxes) which is too much to qualify for medicade.. and even if you do qualify there is a lot of red tape.

    Someone working for $8-12 hour at a less than 35 hour a week job (most jobs are not full time for those who work hourly so companies don’t have to pay benefits) will also not qualify… and most of these people are forced to work two part time jobs (comprising together prob at least 50 hours) a week just to get the things you seem to think are so easy for all to access. Yes.. people don’t loose arms in factories which is all well and good thanks to the government… but many are truly struggling.

    Judging by your photo in a suit, I’d say you don’t really know what your talking about.

    floodingupeconomics

    December 15, 2010 at 11:20 pm

  2. In my defense, it’s not a very good suit. I could also post a photo in which I appear decidedly more slovenly.

    Your friend is below the poverty line, so if he’s not entitled to Medicaid, it must be for some other reason.

    Tim Kowal

    December 15, 2010 at 11:49 pm

  3. […] Notes From Babel, I found an interesting essay by Tyler Cowen at The American Interest. It’s a response to the […]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s