Income Inequality: What’s the Right Amount?
Summing Up Comments were large in number and broad of opinion reflecting on Professor Jim Heskett's question, Does income inequality promote or stunt economic growth? Is there a "right" right amount of income disparity?
Are Education and Mobility the Keys to Reaching the Right Amount of Inequality?
Questions about the right amount of inequality provoked thoughtful comment this month about the nature of the question, definitions, measures, and appropriate actions to ensure that we achieve it, whether inequality is measured in terms of opportunity or the actual accumulation of varying levels of income and wealth.
Inequality is inevitable and perhaps necessary in a free society, according to one line of thought. As Guy Higgins put it, "Inequality in the distribution of wealth is necessary for … progress… perhaps we should be focusing on trying to understand what the incentives should be that support a useful and perhaps better level of inequality." Referring in part to differences in per-capita income distribution among countries, Shadreck Saili said, "I have a strong feeling that productivity flourishes where income disparity exists to a greater extent." Susan Rushworth offered "food for thought" in citing research that led her to conclude that "the faster the economy grew (as measured by GDP), the greater the income gap."
Most expressed the view that increasing inequality, at least in the U.S. and U.K., has positioned those countries in excess of the "right amount." Among those supporting this view were Bob Dillon, who commented that "Greed seems to have overtaken some of us." Doug Gabbard, citing his research, said "… a year-over-year decrease in the Gini Coefficient (increasing equality) is strongly (and linearly) associated with an increase in household income." Steve Scheinkopf agreed, saying "I used to be an Ayn Rand capitalist, but compassion and a better spread of wealth actually works better in business and society."
The right amount of income inequality may be hard to determine, but respondents to this month's column offered up a number of measures, some more straightforward than others. Comments suggesting that right amount included: "the point (at) … which entrepreneurship is depressed …" (Yaron Kaufman); "when motives switch from serving to grabbing" (Gerald Nanninga); "the amount that allows the stakeholders to know 'we're all in this together, and apart from our natural not manmade limitations, we all have just and fair opportunities for similar achievement'" (Dennis Nelson); "the level that … does not allow segments of activity to capture regulators or regulations while also ensuring support for the disadvantaged and those in poverty" (Peter Bowie); one that promotes "… open competition. We reach a point of distorted inequalities when we begin to legislate in favor of consolidation." (Victor Paredes); "The points on the curve which would describe the decline of democracy." (T. Reilly).
There was support for the idea that mobility is one answer to inequality. Wayne Brewer, citing research that concludes that income mobility has not declined in the US, said "This metric of income inequality (ignoring mobility) causes meaningless chasing of rainbows… Folks move up through the quintiles of earning all the time … (therefore mitigating the issue for any one household)." While disputing Brewer's figures, Joe Seydl cited another more basic remedy for inequality. In his words, "The key to improving mobility is to improve educational experiences at the earliest age possible."
This debate gives us something to think about: Are education and mobility the keys to reaching the right amount of inequality? What do you think?
The most pervasive theme of 2011 may well have been that of "inequality." The global "occupy" movement provided a constant reminder of the need to at least revisit a timeless issue: the unequal concentration of income and wealth among a country's citizens.
Some view inequality as the natural result of freedom, a free market economy, and capitalism. It appears to work best when those with the wealth create jobs for others. This seems to have been the thinking behind Chile's successful economic revival, for example, where the concentration of wealth is very high.
Others view inequality as a potential drag on the economy, a deterrent to the development of a strong, large middle class, which in turn is considered essential to economic growth and development. This apparently was the thinking in Brazil, where the government has stepped in with the intent of providing an added boost to a remarkable period of economic development by reducing inequality through the distribution of money to one-fourth of that nation's population.
In Brazil, the government maintained a disciplined fiscal and monetary policy, resisting the temptations to which much of the rest of the developed world succumbed. At the same time, it created elements of Bolsa Familia, a "family grant," that provided substantial outright payments to low-income families as well as incentive payments to those willing to do such things as send their children to school and get them vaccinated. For whatever reason, the concentration of wealth is much lower in Brazil than in Chile. But these countries represent two of the few bright spots among the world's economies as well as two very different philosophies regarding economic equality and the role of government in promoting it.
It would be hard to find anyone arguing for the extremes of complete equality (everyone with the same income or wealth) or inequality (with all the income and wealth in the hands of one household), something captured by what is termed the Gini Coefficient which ranges from 0 to 100 for these two extremes. Some inequality may be necessary to incentives for work and investment. But some equality is necessary if markets are to be created that support the investment.
A recent study by Andrew Berg and Jonathan Ostry concluded that the distribution of income is a more important contributor to sustained economic growth than such things as openness to trade, a competitive exchange rate, level of foreign investment, or the quality and stability of a country's political institutions. At the risk of oversimplifying a complex analysis, these economists conclude that "Over longer horizons, reduced inequality and sustained growth may thus be two sides of the same coin." If we were to graph economic growth vs. the Gini Coefficient, it would probably show some kind of parabola in which the highest rate for sustained economic development exists at values somewhere between the extremes of 0 and 100. But just where is that?
The questions this raises include: Does inequality promote or stunt growth, and at what stage of development? Does the paper raise a red flag, say, for the U.S. where inequality of income has grown at an unprecedented pace in the past thirty years and now resembles that of some lesser-developed economies? Has the U.S. passed over the peak of the parabola of our hypothetical graph? What's the right amount of inequality? What do you think?
To read more:
Andrew G. Berg and Jonathan D. Ostry, "Inequality and Unsustainable Growth: Two Sides of the Same Coin?," IMF Discussion Note SDN/11/08, International Monetary Fund, International Monetary Fund