Confusion about Income Inequality
By David Henderson
My view: it’s good in some ways and not in others. What I liked was his paragraph about minimum wages, Costco, etc.
But I think he was off on income inequality. GI writes:
Economists can offer explanations for why inequality has risen and what might reverse it, but they cannot advance positive reasons for what the right level of inequality is; this is [a] function of social preferences outside the realm of empirical or even theoretical economics. (At least, they can’t make the case on microeconomic grounds. There are macroeconomic reasons to fret over higher inequality because shifting income from the high consuming poor to the high saving rich reduces aggregate demand.) Fundamentally, economists are troubled by inequality for the same reason non-economists are: it doesn’t seem right.
Notice that GI thinks that higher inequality means “shifting income from the high consuming poor to the high saving rich.” He confuses income with wealth. Although there is a high correlation between income and wealth, we can’t say someone is rich or poor based on income alone.
But put that aside. Let’s say we could say that someone with high income is rich and someone with low income is poor. How does an increase in inequality mean that income was shifted from poor to rich? It doesn’t. An increase in inequality tells us nothing about income shifts. You could have everyone’s income growing and yet inequality increasing, as, in fact, has happened over the last 30 years. So there’s no “income shift” at all.
This is further evidence for my view, that I laid out briefly on NPR yesterday, that we shouldn’t worry about income inequality, but, instead, should worry about everyone being better off.
And, of course, that means that GI should not have said “economists are troubled by inequality.” He could have said “some economists.” He might even have said “most economists.” But “economists” seems to imply “economists in general.” That’s simply not true. Interestingly, also, most non-economists don’t seem that troubled by increases in inequality.