Income inequality: more reasons not to care


Over the last few years, people have been getting very het up about socio-economic inequality. You've got the academics looking at the causes and effects; the newspaper articles detailing its contours; and even the everyday discourse whose central feature seems to be Russian/Arab super-wealthy oligarchs. The most popular narrative, among those characters you might see writing in The Guardian, the New York Times, and Vox —what you might call 'the smart centre-left'—focuses on neoliberal policy reforms. These shifts, seen across the Western and developing world since the late 1970s, have removed constraints that prevented the rich from accelerating away from the poor.

Market forces lead to a widening gap twixt rich and poor now just as they did when let rip in earlier eras (inequality now is more like the 1870s than the 1970s). There are other accounts, of course, as well as subtlety and complexity. Some think that states have more or less deliberately handed out wealth to elites—and this is partly true in middle- and low-income countries, though surely not the West. Some note that most of the widening has come through land, itself made scarce 'artificially' by policy.

This centre-left narrative holds that inequality is bad for a number of reasons. The Spirit Level argued that it led to a number of bad societal outcomes. Their data selection and methodology are extremely questionable—looking mainly at cross-country regressions and doing little to actually test whether changes in inequality itself led to worse outcomes. Others argue that it leads to inefficiency and holds back meritocracy because the rich can invest in their children. This comes up against the fact that such investments do not tend to bear much fruit.

The best argument is that people in practice have a preference against inequality in groups they are in, including society as a whole, and like any other preference this should count in what we judge desirable. The problem with this is that people tend to have wildly inaccurate judgements of what inequality actually is in their society, and their judgements don't move in line with actual changes.

One argument might be that inequality undermines the political system, since the wealthy can buy elections and impose policies that favour them at the expense of society generally. This thesis has trouble dealing with the empirical evidence, which suggests that money has very little influence in Western democracy. Indeed, economists are apt to ask 'Why is there so little money in politics?' (pdf)

Another argument might be that inequality might undercut morality or community. This certainly seems intuitively plausible. Yet even this further argument is thrown into question by a 2012 paper I just stumbled upon. Giacomo Corneo and Frank Neher look at survey data from all 34 OECD countries over 30 years and find no effect of inequality on honesty, altruism or civic-ness, very little effect on obedience or tolerance, and a positive effect on work ethic. (pdf)

So why care about inequality at all?