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Sunday, August 19, 2007

Does Inequality Cause "Tangible Harm"?

The Economist's blog Free Exchange argues that increases in income inequality have not caused a corresponding increases in unhappiness and asks that egalitarians defend the proposition that inequality is harmful. Chris Dillow answers the challenge:

The tangible harm of inequality, by Chris Dillow: The Economist's blog asks egalitarians to point to some "tangible harm" from income inequality.

In some senses, the question is silly. To see why, imagine a slave society in which the slaves are reasonably content. It would be hard to point to a tangible harm, but something would be wrong.

This just shows that the "tangible harm" criterion is psychologically, economically and philosophically naive. Psychologically so, beecause people adapt to their circumstances, so "losers" don't feel too bad. Economically, because a gain foregone should count as much as a tangible cost; in a slave society no-one can see that freedom creates prosperity better than slavery, but this fact should surely count in our judgment. And philosophically, because inequality matters for more than consequentialist reasons. Justice matters too.
Anyhow, let's address the question. Aside from the ill-health which the Economist mentions - as if death were not tangible enough - I'd cite five other possible harms:

1. Crime. Basic economics says the relatively poor commit more crime than the relatively rich. This is because their opportunities to make money honestly are more limited, and the cost of being imprisonment - foregone earnings - is lower. Empirical work corroborates this. Is it really a coincidence that unequal countries (south America) have more crime than egalitarian ones (Japan, Korea, Scandinavia).

2. Lower social mobility. Societies with higher income inequality have lower social mobility. Politics in the US and the national media in the UK are now largely hereditary occupations. Many of you might think this unhealthy.

3. Slower growth. There are some reasons to think inequality can retard growth, say, by reducing social capital and therefore investment, or by creating credit constraints that prevent potential entrepreneurs.

4. Bad customer service and job dissatisfaction. The inequalities that matter are not merely of income, but of power. Some people have it, some don't. And in companies, these inequalities breed slovenliness and inefficiency. Cloke and Goldsmith put it thus:

Through years of experience, employees learn that it is safer to suppress their innate capacity to solve problems and wait instead for commands from above. They lose their initiative and ability to see how things can be improved. They learn not to care and to accept things as they are. They justify making mistakes and are allowed to be irresponsible and pass the blame to others for their mistakes. They become mindlessly obedient, fatalistic, intransigent and hostile.

5. Inner-city blight. Another consequence of inequalities in power is that poor areas become bad areas, with urban decay, poor schools and crime, because the poor lack the power to get the state to provide proper policing and schools.
So, there are almost certainly tangible harms from inequality. The more awkward question for egalitarians is: would there be more harm done by reducing inequality?

There is also Robert Frank's argument about positional goods:

The conventional wisdom has long been that a growing gap between the rich and the middle class is a bad thing. But that view is now under challenge. Some revisionists, respected economists among them, argue that inequality doesn't really matter so long as no one ends up with less in absolute terms. Using income levels to measure the well-being of individual families, these inequality optimists argue that since the rich now have much more money than before and the middle class doesn't have less, society as a whole must be better off.

Yet "having more income" and "being better off" do not have exactly the same meaning. I will argue that changes in spending patterns prompted by recent changes in the distributions of income and wealth have imposed not only important psychological costs on middle-income families but also a variety of more tangible economic costs. . . .

I'll also note that since the survey data measuring happiness is potentially problematic, the initial premise about happiness and income inequality cn be challenged. One source on this is the paper "Some Uses of Happiness Data in Economicsw" (open link)," by Rafael Di Tella and Robert MacCulloch appearing in the Winter 2006 volume of The Journal of Economic Perspectives. Though they don't competely rule out happiness data as useful, they are cautious:

Happiness data are being used to tackle important questions in economics. Part of this approach is quite natural, as many questions in economics are fundamentally about happiness. But the approach departs from a long tradition in economics that shies away from using what people say about their feelings. Instead, economists have built their trade by analyzing what people do and, from these observations and some theoretical assumptions about the structure of welfare, deducing the implied changes in happiness. Economists who believe that welfare can be measured to some extent by happiness surveys have an easier time. They simply compare measures of welfare, and what causes changes in welfare, under different scenarios. Of course, results based on happiness surveys should be treated critically and cautiously. ...

    Posted by on Sunday, August 19, 2007 at 11:34 AM in Economics, Income Distribution | Permalink  TrackBack (0)  Comments (74)


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