Thursday, March 09, 2006

On Income Inequality

UPDATE: See also this post by Donald Boudreaux and this EconBlog debate.

Over at EconLog, Arnold Kling observes and asks:

My view of [income] inequality is that it is one of those issues that gets trotted out when everything in the economy seems to be going so well that we have nothing else to complain about. When you have serious bad news, such as high unemployment or a financial meltdown, the media forget about inequality.

The question I have for people on both sides of the debate is this: what would the data have to look like to get you to consider changing your position? That is, if you think inequality is a big deal, what would the data on relative consumption or wealth or income have to look like to make you think it is not a big deal? Conversely, if you think inequality is not a big deal, what would the data have to look like to make you think that it is a big deal?

I think inequality is not a big deal. Here's my comment:
It would take three things to convince me that inequality is a big deal: (1) low inter-generational mobility up and down the distribution of household incomes (e.g., a majority of the households in the bottom quintile are still in the bottom quintile 25 years later); (2) little or no inter-generational increase in real income for those in the bottom quintile or two, as against relatively large increases for the other quintiles; (3) evidence that persons in the lower quintiles are unable to exploit their abilities because of legal barriers (e.g., Jim Crow laws). Absent the third condition, I would conclude that the first two conditions are evidence of endogenous hereditary/cultural biases that thwart advancement.
Related posts:

Why Class Warfare Is Bad for Everyone
Fighting Myths with Facts
Debunking More Myths of Income Inequality