Some Soul-Searching On Inequality

Posted: December 7th, 2010 | Author: | Filed under: Economics | Tags: , , | 2 Comments »

In the early months of the financial crisis, I wrote up a post that attempted to look at the relationship between income inequality and economic catastrophes, arguing that as the U.S. economy has opened to the rest of the world, the correlation between economic growth and income growth has eroded. As a result, it’s now perfectly possible to see incomes fall even as the economy is growing. There are two problems with this: first, the kind of debt bubbles created by the gap between growth (ie consumption) and income, and secondly, the ease with which a person paying attention to that top-line growth can MISS the signs of an oncoming bubble burst if they aren’t paying attention to the income gap.

At the time, this was a bit of a crazy argument to be making, but since then I have seen versions of it pop up elsewhere. It was posed as a question–and left hanging–by Derek Thompson at the Atlantic. It was the underlying assumption of a series on the causes of inequality that Tim Noah wrote up for Slate. And it has been bandied about by senior economists at Harvard, Princeton, and U. Chicago.

Here’s what’s interesting about this trend. Most of the people making the argument against income inequality are folks who were in favor of greater redistribution before the crisis, folks who see a moral argument for greater equity irrespective of the economics, and for whom the economics is just a new arrow in the quiver.

But some–certainly I include myself in this category–did not make the moral case against income inequality in the boom years. In fact, we made a moral case for ignoring it, arguing that it was social inequality that really mattered. We argued, back when we were all Third Way liberals, that not having money was a problem because it kept you from keeping up with the Joneses, and eroded the sense of community, of shared culture, on which democracy depends. We reasoned that given the indirect significance of income to this civic problem, it was smarter to create cultural and social community by other means–universal health care and education say–than to try and tame the market to produce different income spreads. The books that most famously made this case–Halstead & Lind’s The Radical Center and Kaus’ The End of Equality–were the tomes most responsible for shaping my teenage political ideas. And while I still believe that these authors were right to argue that it is the civic sphere that ultimately matters, I am now realizing that they (and I) were fundamentally wrong about our ability to fix the social and civic without the monetary. [Worth watching: this video of Noah and Kaus debating the issue.]

Two very different texts have made this connection–between the moral and the monetary–clear to me. The first is The Spirit Level, a book that makes a powerful argument for income inequality as, in itself, a source of social degradation. I was reasonably impressed by it, but frustrated by the wooliness of the recommendations for solutions that the authors have in mind. One of the things that made the radical centrists so compelling was that their writing married theory to policy proposals. The new swing back to a more traditional social democracy doesn’t have that going for it. It should.

The second is a paper I was sent by a PhD student at Wharton, an old classmate of mine, who is conducting research on the relationship of income to happiness, or, in econo-speak, ‘subjective well being.’ The money quote:

Researchers have reconciled these discordant findings, together called the Easterlin Paradox, by positing that well-being is determined by relative, rather than absolute, income. By this view, individuals want only to keep up with the Joneses. If true, the Easterlin Paradox suggests that focusing on economic growth is futile; when everyone grows richer, no one becomes happier…A third concern is that, even if well-being rises with income for the very poor, individuals eventually reach a satiation point, above which further income has no effect on well-being (Layard 2005). Yet in this paper, we present evidence that well-being rises with absolute income, period. This evidence suggests that relative income, adaptation and satiation are of only secondary importance.

That is fascinating stuff, that maybe both social and economic inequality are less important than pure monetary status. I also had to get my head around the idea that accepting an argument that isn’t, fundamentally, about inequality doesn’t lead to a right-wing growth-for-growth sake policy program. Because the authors show in the paper–and confirmed to me over email afterwards–that:

life satisfaction rises linearly with the log of income. What this means is that increasing an individual’s income by 10% has the same impact on happiness, whether that individual makes $10k or $100k. So a country in which everyone makes 50k ought to be happier than one in which half of people make 10k and half make 90k. The idea is that you distribute 40k from the guy making 90k to the guy making 50k, then the first guy has a 44% percent hit, but the second guy has 400% gain,  so on balance the egalitarian society is happier.

Repeat that: The egalitarian society is happier. What’s fascinating about the paper is that it winds up making a case FOR egalitarianism, for equality WITHOUT making the case against inequality, social or economic. As someone trying to reconcile my views about the two forms of inequality, it’s compelling research.

All of which is to say that I’m in the process of radically rethinking and reevaluating the core of my political and economic philosophy and it’s a sobering experience. And that while I have no idea as yet where I’m going to end up, and while this post is completely inconclusive, it felt dishonest to keep blogging about economics without coming clean about my uncertainty. And that if you’re a liberal of any description, you should probably be reading all of the goodies linked above and having a rethink too.

2 Comments on “Some Soul-Searching On Inequality”

  1. 1 Some Soul-Searching on Inequality - Maha Atal - Foreign Exchange - Forbes said at 6:05 am on December 8th, 2010:

    […] got a post up on my other blog evaluating a number of arguments about inequality in the developed world that, […]

  2. 2 Gerald Fnord said at 12:07 am on April 13th, 2011:

    1.) That should be “guy making 10k,” I think.

    2.) How is the logarithmic-perception argument fundamentally different from considering the relative marginal utilities of the rich person’s millionth dollar and the poor person’s thousandth?

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