Is income inequality harmful?, The Good Society, March 2015: A generation ago, perhaps even just a few years ago, worry about high or rising income inequality stemmed mainly from a belief that it is unfair. In recent years the source of apprehension has shifted. The dominant concern now is that inequality may have harmful effects on a range of outcomes we value, from education to health to economic growth to happiness to democracy and more. Does it?
My answer is organized as follows:
How should we assess income inequality’s effects?
- Residential mixing
- Economic growth
- Economic stability
- Household income growth: the poor
- Household income growth: the middle class
- Household balance sheets
- Equality of opportunity
- Is income inequality harmful?
- What should we do?
One hypothesis of interest for some of these outcomes is that a higher level of income inequality increases inequality in the outcome. For instance, we might expect greater income inequality to contribute to greater inequality between the rich and the poor in life expectancy or happiness.
A second hypothesis is that a higher level of income inequality worsens the aggregate level of an outcome. For example, greater income inequality might reduce the average life expectancy or average happiness in a country.
Third, for some outcomes the hypothesis is that a higher level of income inequality worsens change in the aggregate level of an outcome. Greater income inequality might, for instance, reduce a country’s economic growth (change in per capita GDP) or median household income growth.
How Should We Assess Income Inequality's Effects?
The most informative test, which I’ll use here, is to see whether changes in income inequality in the world’s rich countries correlate with changes in the various outcomes. It’s important to understand why this analytical approach is useful, so bear with me for a moment while I elaborate. ...
After many, many paragraphs of analysis of the points listed above (including figures illustrating important points), he concludes:
Should we worry about high and rising income inequality in the United States? My answer is yes, for three reasons.
First, we have good evidence that income inequality tends to reduce middle-class income growth, increase disparities in education, health, family structure, and happiness, and heighten residential segregation. Not everyone will find these consequences objectionable, but I do.
Second, although we don’t have strong evidence that the rise in income inequality over the past generation has increased inequality of political influence, there’s good reason to fear that it has. That would be an intrinsically bad thing; it’s antithetical to what most of us understand to be the core of democracy — government by and for all of the people, not just some of the people. In addition, if rising income inequality does increase the political influence of the rich, that could potentially have harmful spillover effects on a variety of outcomes in the future.
Third, the level of income inequality that currently obtains in the United States is unfair. Given that luck plays a huge role in determining the income people end up with, much of the disparity in incomes is, arguably, undeserved. Most of us accept some amount of income inequality as consistent with a reasonable degree of freedom and needed to sustain a dynamic, healthy economy. But the degree of inequality in the contemporary US surely is past that point.
That said, reducing income inequality isn’t likely to be easy or quick. And income inequality’s apparently small or nonexistent impact on many of the outcomes examined here suggests that it shouldn’t necessarily be at the forefront of policy goals. For many of these outcomes, from education to health to economic growth and more, a direct approach, rather than an indirect one that works via reduced income inequality, is likely to be the most successful path.