So what about income inequality, anyway?

Last updated on: January 12, 2014 at 8:29 pm by Jane the Actuary

So what about income inequality, anyway? 2014-01-12T20:29:00-06:00 Jane the Actuary

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So I was writing yesterday about the War on Poverty, and at the same time posted comments along a similar vein at the Cass Sunstein blog, in a post called “New War on Poverty Needs Correct Facts” — to which a reader responded, “Poverty is a relative measure. We’re all of us wealthier than one hundred years or even fifty years ago. The key issue is whether it is acceptable and consistent with our founding principles that so much of our national wealth should be controlled by a tiny minority?”

I suspect that my readers generally don’t need to be persuaded on the following points, but I thought it’d be a useful exercise to write a response.

Some time ago, my boys read a book called The Book of Ember. The premise of the book was that, with an environmental collapse eminent, a city was established underground, lit by artificial lights, with enough food (in combination with greenhouses) and other goods stored to last its people for 200 years, but through a plot twist, many years after the planned 200, its inhabitants didn’t know that the time to leave had arrived, or even that there was a way to leave, and food, clothing, paper — everything is in short supply as the story opens.

Now, in that world, there truly was a fixed “pie” and anything disproportionate that one family, or one generation, took meant less for everyone else, potentially a woefully insufficient amount. But that’s not our world.

At the same time, imagine a variation of the Welfare State in which one is so cared for, in every contingency, that asset-building is not necessary. College is free — no need to save for it. Unemployment benefits are extensive and indefinite. Medical costs are fully paid for by the government. Social Security (and employer-provided pension) benefits are generous enough that, when different tax treatment is taken into account, there’s no drop in living standards upon retirement. Oh, and let’s also stipulate that mass transit is so well-developed that cars are unneeded, and, due to the lack of favored tax treatment for housing, it’s nothing more than a personal choice whether to rent or buy.

In such a scenario, wealth inequalities just wouldn’t matter. For the average middle-class family, it would purely be a personal decision whether to save for the future — and the “saving” might be more short-term, saving for a big vacation.

In our world, in principle, we could play Robin Hood and take wealth away from the wealthy — but we don’t have a practice of taxing wealth, just income and property. And heavier income taxes on the wealthy won’t actually, in and of themselves, do anything about income inequality unless we adjust our metrics to determine after-tax levels of equality.

And is income inequality the “key issue” as the commenter quoted above claims? No, at best its tertiary. First comes the question of whether the living conditions of the poor are severely substandard. Second is whether lower-income people are able to support themselves independently, rather than being dependent on the government. (And I mean that both in the sense of mindset and ability, given a certain set of economic conditions.) Then — maybe — we can look at inequality, but not as a situation requiring direct intervention, but as a symptom of a larger issue.

On the other hand, the narrower issue of inflated CEO pay does irritate me. I don’t have any trouble with someone founding a company and earning big bucks because the company does well. But when a CEO, who is after all an employee, not an owner, of the company, is paid tens of millions of dollars or more, it comes out of the pockets of the shareholders, since those millions are money which is not paid out as dividends or invested back into the company.

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