Second thoughts on income inequality

I can’t remember a time over the last forty years as a policy analyst that we’ve been exhorted to act on income inequality to the degree we are now.

But I can think of at least ten complications in trying to do so. More, these come immediately to mind, i.e., the concerns are much discussed in areas with which I am familiar and certainly not hidden out of sight in the grey literature. To be clear from the outset, each complication below is patently contestable, no single one is dispositive, a good many are correlated while the key numbers keep changing. Yet together the difficulties remind us….. Well, let me save the positive upshot for afterwards. To begin and in no order of priority:

First, if you’re worried about wealth inequality, why then aren’t you pointing out more often that consumption has been much less skewed than income in the US? Many households have long had refrigerators, ovens, cell-phones and the TV, whatever differences in income.

Second, even as the top fraction of 1 percent has vastly more income than the lowest 20 percent, that still must mean, numerically, far more happy poor people than the happy ultra-rich. Yes, of course percentages matter, but the sheer number of people who are by and large happy must also matter in any felicity calculus for public policy.

Third, it is certainly true income inequality has increased in the US, but such has happened elsewhere over roughly the same period, albeit not to the extent in the US. Fourth, why are we so sure inequality would have been less had we done otherwise? To stick with counterfactuals, if John Kerry had been elected instead of George W. Bush, do you really believe inequality would have been less?

Fifth, contrast the 1960s’ injunction to drop out of the middle-class rat race to the more recent preoccupation on income inequality (the 99% versus the 1%), as if now it’s really all about moneyed interests. (For that matter, today’s shrinking of the middle class diminishes the deadweight of bourgeois values from a 60s’ perspective, doesn’t it?)

Sixth, if we were to redistribute income, what does this mean for redistributing income generation? In the international community, it is often said that, say, cattle-holdings in Africa have been highly skewed and unequal, as if that is an argument for a more equal distribution of livestock. But to imagine that is to imagine a quite other production system (indeed, systems) in place. So too in the US. If, as critics point out, we are in a massive experiment with the radical skewing of incomes, so too would substantial de-skewing be experimental, right?

Seventh, discussions about income inequality frequently pivot on a syllogism: There is not enough money for the poor, there is more than enough money for the rich, therefore more people could be comfortably off if incomes were more equalized. But what if there is too much money in the world as it is, unequal or not? As seen in that 2008 financial crisis, credit default swaps along with sovereign and corporate debt alone exceeded by many multiples the total estimated annual global GDP, an imbalance of bad money blasting away the good.

Eighth, we have all seen those graphics showing how the cost of one military super-plane cashes out into so many more classrooms or social services. But the opportunity cost of that mega-plane is not set by forgone social and health services. The money saved by not building that plane would—again, counterfactually would, not could or might—be set by post-tax wages and income no longer forgone, not by a better-funded discretionary budget.

Ninth, an even more anomalous feature of income inequality discussions has been their narrow view on what a more equal distribution of income would achieve. We hear about better health and dental care among the poor, were incomes less skewed. What we don’t hear enough are arguments that more income for the poor means that they too can buy more media, take more trips, get an iPad, eat at better restaurants and have better vacations—precisely things the modern puritans deny the poor when it comes government income transfers.

Which leads to a tenth reservation about inequality discussions today: the all-too narrow focus on broad government income transfers as the primary redistributive mechanism. Private remittances, to pick just one alternative, are more important than government aid to many poor countries. Why aren’t we then focusing more on increasing wage remittances as a way of addressing inequality? Or from the other direction: Since US incomes are that unequal and healthcare that inefficiently priced, then surely these inequalities and inefficiencies are a source of positive slack and reserves for future revenues and funding of better programs and economic growth?

Let’s stop there. Am I asking you to admit defeat when it comes to addressing inequality? Hardly. Complexity of the income inequality issue does not mean its intractability; it means more opportunities to recast and rethink inequality. One illustration will have to suffice.

In May 1968 more than a thousand academic economists—Paul Samuelson, John Kenneth Galbraith, James Tobin, to name a few—endorsed a “national system of income guarantees and supplements” for the US. Milton Friedman, as well, supported an equivalent negative income tax. But how would we today respond to this assertion: “As long ago as 1968 over a thousand economists endorsed a national system of basic income guarantees—so it behooves us now to consider that an option as well to address growing poverty and income inequality in the US.”

Objections rush forward: So much has changed since then! Congress is more polarized, the American public more fissiparous; we know more now, these days we have to be far more realistic; and the like. Or: We sort of ended up with a patchwork of income guarantees, anyway. We may have been positioned to realize a (better) national income guarantee initiative during the War on Poverty, but surely not now, right?

Such feints may be hold as far as they go, but they do not go far enough. Why? Precisely because of the ten complications just listed.

For these difficulties and like complications imply that, rather than not being positioned now to produce a national income guarantee, we may actually be in that position—it’s just that we don’t know it. Further, we don’t know it because we are more and more at or beyond the cognitive limits on thinking about complex matters, like income inequality.

Which would mean: Even if we are positioned to implement a national income guarantee, we can no longer know it to be so other than through the surprise that comes with having taken action to that end. The just-so story, “It’d take a miracle for anything like this to work here!,” becomes instead the surprise, “Who would have thought we were actually able to do this now!”

The latter response we associate with A.O. Hirschman’s Hiding Hand principle: Only by not knowing in advance how very difficult some things are to achieve do we achieve them or something even better. Yes, of course, there are no guarantees; yes, of course, there are many recorded instances when the Hiding Hand has not worked. But either way, the central point for policy and management remains: Inequality is not just difficult; inequality is and has always been the result of difficulties.

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