In a post on income inequality last month, Will Wilkinson wrote:

Like a broken record, I repeat myself: A high level of income inequality means nothing in itself.
I really hope Wilkinson doesn't actually believe this, because it's simply false. But browsing through his posts on income inequality, I get the feeling he really does believe it. Wilkinson is extremely bright, and clearly capable of nuanced thinking. But when it comes to income inequality he seems to inhabit the world of simple, neat models that produce satisfyingly clean answers, or what I like to call the Principles of Economics World: apply textbook economic model to issue; get answer; repeat as necessary. There are several reasons why Wilkinson's assertion is false, but here's just one: The higher the level of income inequality, the greater the chances that the richest members of society alter the institutional structure to reinforce the pattern of growing income inequality at the expense of the rest of society. In other words, a high level of income inequality means, in itself, that the society is at a greater risk of government capture by the wealthy. This is only not true if the government is completely immune to being influenced by money. To my knowledge, no such government has ever existed, and I'm 100% positive that no such government has ever existed in the U.S. Wilkinson seems to be of the opinion that unless U.S. income inequality is benign unless it was produced by some inefficient or unfair mechanism. He also seems to think that absent evidence of an inefficient or unfair causal mechanism, no policies should dare attempt to reduce U.S. income inequality. This is also wrong, for the very same reason: if income inequality is high enough to permit government capture by the wealthy at the expense of the rest of society, the high level of income inequality is inefficient, regardless of the mechanism that produced the income inequality. I think it would be extremely naïve to suggest that no areas of government policy have been captured by the wealthiest Americans (see: Bush tax cuts, 2003). And if U.S. income inequality has reached the level where government capture of income tax policy by the wealthy is possible, then it's equally naïve to suggest that income inequality is benign unless definitely proven otherwise.

7 comments:

Gabriel said...

There is a venerable and, dare I say it, astute classical liberal tradition that makes moral-political judgments based not on properties of allocations (efficiency, "equity", etc.) but rather on the basis of the legitimacy or illegitimacy of interpersonal interactions.

As for your claim that income inequality leads to state capture, which has happened already, if it already did, why bother with inequality?

Also, you get state capture in much more homogenous and income-equal societies.

What preserved the American system and its performance was not its hitherto equality of income but rather its constitution.

It seems to me, and this is just an opinion, that fetishization of income inequality by people of the left is a much more complex phenomenon, rooter in their moral-political judgments and sustained retreat over the last few decades.

Lastly, stop belittling the principles of economics... A truism is, before anything else, true.

Anonymous said...

Surely we always end up living in a plutocracy....although (dare I write it) give me German style capitalism everytime.

Economics of Contempt said...

I agree that some people on the left have made a troubling fetish of income inequality, and I didn't mean to imply that I think income inequality is the be-all-and-end-all of politics. I don't. I was just pointing out that Wilkinson's claim is logically false.

Income inequality doesn't always lead to state capture, by any means. Nor is state capture purely a function of income inequality (which is why you can get state capture in income-equal societies). But the likelihood of state capture increases as income inequality increases, and at a high enough level of income inequality, I think significant state capture is almost unavoidable.

Now, I don't think U.S. income inequality is anywhere near the level where severely detrimental state capture is unavoidable. I do, however, think the current level of U.S. income inequality has partly (though not mostly) been caused by public policy choices.

Some people on the left think that any income inequality is evidence of nefarious actions. This is stupid, but Wilkinson (and many libertarians nowadays) seems to have swung to the opposite extreme, rejecting nefarious actions out of hand in favor of a pure SBTC (skill-biased technological change) argument. Both sides are living in fantasy lands, with reality somewhere in between.

Anonymous said...

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Clint said...

"The higher the level of income inequality, the greater the chances that the richest members of society alter the institutional structure to reinforce the pattern of growing income inequality at the expense of the rest of society."

This is exactly right. Not only that, but I think Wilkinson is wrong to say that previous and current income inequality was arrived at fairly.

The powerful institutions -- media, government, universities -- all have unequal access that privileges wealthy people.

Anonymous said...

Who was right about the housing bubble?

PENNY STOCK INVESTMENTS said...

The cause of much of the income inequality inflation.