How Much Inequality Can We Handle?


How Much Inequality Can We Handle?

Post appears in full on Walker View Points

The United States has the highest level of income inequality in the developed world. Economists think our wealth inequality is even greater. It is inherently unfair, even immoral, for me and many others to live in opulence while millions of Americans struggle just to get enough to eat.

Morality aside, there is abundant evidence that the rise in economic inequality the U.S. has experienced in the last half century has led to health problems, environmental problems, rising crime and other negative consequences, all of which have exacted an enormous economic and humanitarian toll.

Some degree of inequality is inevitable, even desirable. The key questions today are how much inequality are we willing to tolerate and what can we do to reverse, or at least stem, the rise of inequality? History shows that extreme inequality invariably leads to political and social instability, the seeds of revolution.

The purpose of this post is to start a discussion of where we want our nation to be–just what level of inequality can we agree to as our ideal destination? Only when we have come to such a consensus, at least to a range, can we then debate policies best suited to get us there. Without that we are flailing in the wind.

As eminent health economist Victor Fuchs said, “For me the key word is balance, both in the goals that we set and in the institutions that we nourish in order to pursue these goals. I value freedom and justice and efficiency, and economics tells me that I may have to give up a little of one goal to insure the partial achievement of others.”

The “Gini coefficient,” often used to measure income inequality, can illustrate the deepening of inequality in the U.S. since 1965. This can be seen visually by looking at the “Lorenz curve.”

Below are four Lorenz curves, starting to the leftmost with a graph depicting Gini equal to zero, where everyone is equal. To the far right is the graph depicting a Gini of 1, where one person owns everything. In between are two “curves” visually depicting two different states of inequality. #2 is reflective of the US inequality of 1965 (about .37). #3 is reflective of the state of inequality in the US today (about .46).

 

Gini coefficient

THE NUMERATOR IS THE YELLOW AREA BETWEEN THE LORENZ CURVE OF THE DISTRIBUTION AND THE 45 DEGREE STRAIGHT LINE; THE DENOMINATOR IS THE AREA UNDER THE RED DISTRIBUTION LINE. IT WAS DEVELOPED BY THE ITALIAN STATISTICIAN CORRADO GINI AND PUBLISHED IN HIS 1912 PAPER “VARIABILITÀ E MUTABILITÀ” (“VARIABILITY AND MUTABILITY”). THE GINI INDEX IS THE GINI COEFFICIENT EXPRESSED AS A PERCENTAGE, AND IS EQUAL TO THE GINI COEFFICIENT MULTIPLIED BY 100. (THE GINI COEFFICIENT IS EQUAL TO HALF OF THE RELATIVE MEAN DIFFERENCE.)

I argue that the current Gini of the US is dangerously high, that a Gini coefficient like the US had in 1965 is far better–for everyone. Others will argue that our current level is not dangerously high and that we can comfortably allow more inequality. And others will argue 1965’s Gini coefficient was not sufficiently equal. But at least, now we have a basis for intelligent debate.

In 1965, the U.S. was moving toward greater economic equality. This was the era of Lyndon Johnson’s “Great Society,” during which Medicare and Medicaid were developed, civil rights were being championed, unions had rights to collective bargaining, and most Americans not only had jobs but saw their wages increasing. Yes, there were Rockefellers, Abercrombies, and Astors, but the top tax rate was 70%, and plenty of investing still was taking place. Most Americans were sharing in prosperity in a healthy growing economy.

Far from being bad for businesses and the wealthy, higher economic equality was good for everyone. Workers aren’t the only ones who benefit from higher wages - wealthy business owners benefit just as much when the local population has abundant disposable income to spend at their stores. It’s no coincidence that the most economically successful period of American history was also one of the most equal.

Perhaps most importantly, there was abundant opportunity for economic and social mobility. Young people could expect to earn more than their parents. No more. Studies by Chetty show that mobility as measured by a child earning more than his father has fallen from a 90% chance for children born in the 1940s to only 50% for children born in the 1980s. Our children’s future suddenly looks much more limited than that of our parents. For our sake and theirs, we need to ask ourselves the right questions before we can come up with the right answers.

Where is our ideal Gini for the future? And how do we get there?

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