---

BY SOREN LARSON

In print | Published November 12, 2009

Feeling left out of Class Awareness Month, or CAM, I decided to do my own calculations of income inequality in America; it’s worse than I expected. In 2007, the Gini coefficient, which is used to measure equality — with 0 representing perfect equality — was 0.475. To get some perspective, this means America is slightly more unequal than the Democratic Republic of Congo.

I suppose I’m being disingenuous. My calculations of inequality are actually from AFL-CIO data on the 100 top paid CEOs in America, though the Gini coefficient for the entire U.S. actually stood at 0.463 in 2007. It appears that inequality, as measured by the Gini index, is more iniquitous among rich CEOs than it is among all Americans.

Boo hoo.

No one cares that, in 2009, Ralph Lauren made over ten times more than Michael Dell. But what about everybody else? Do we even care?

But these aren’t questions CAM is asking. Last week, organizers scrawled “CAPITALISM IS COLONIAL” on the path to McCabe. And last Tuesday, CAM invited community organizer Tyrone Boucher to lead a student discussion on “resisting capitalism” and fighting “wealth inequality.” One Swarthmore student admitted he was embarrassed to be an economics major.

If CAM organizers are to make such chalkings and invite “anti-capitalists” to campus, then they had better have some good alternatives to capitalism in mind and have more to offer than ruminations from the theoretical socialist wonderland.

Such discussions aren’t enlightening; they’re distracting.

Instead of lamenting about studying economics, we should ask the following questions: Should we worry primarily about inequality, or is inequality a symptom of more important problems? Will reducing inequality make society better off? These are questions I’ll try to answer.

Suppose we’re interested in defeating inequality because we believe it’s intrinsically bad. In this case, we should consider some causes of wealth inequality. Let’s also (momentarily) assume our metrics of inequality hold.

It turns out that progressive social policy and technological innovation are partly responsible for increased inequality. For example, one consequence of removing institutionalized discrimination during the Civil Rights Movement was the liberalization of immigration policy. This radically increased the number of less-skilled workers in the labor market, which increased competition for low-paying jobs. Harvard economist George Borjas estimates that the immigration influx between 1980 and 2000 reduced high school dropouts’ wages by 8.9 percent and college graduates’ wages by 4.9 percent. Ostensibly, immigration reform made us worse off!

Additionally, society’s changing attitudes about women in the workforce also increased inequality among households. Brookings Institution economist Gary Burtless calculates that, because highly skilled women typically marry highly skilled men, the increasing prevalence of dual-income households has increased inequality by 13 percent.
Given this evidence, if we believe wealth inequality is essentially wrong, and progressive social policy is a sufficient cause of inequality, do we then deduce that progressive policy of the Civil Rights Movement was fundamentally bad as well?

Perhaps you are not persuaded by this evidence and believe that evil conglomerates propagate inequality. After all, Nobel Laureate Paul Krugman makes this point in his book, “The Conscience of a Liberal.” Krugman writes: “Movement conservatism is financed by a handful of extremely wealthy individuals and a number of major corporations, all of whom stand to gain from increased inequality.” Progressive policy may have contributed to inequality, but self-interested and well-connected corporations are the main instigators of inequality.

But if there were anything that the election of Barack Obama showed, it would be that wealth is not correlated with voting. According to Pew 2008 exit polling data, 52 percent of Americans making $200,000 or more voted for Obama, despite Obama’s pledges to “spread the wealth around” and media campaigns that painted him as a “socialist.” If rich people voted according to liberals’ cynical view of American society, then the wealthy would have wholeheartedly rejected Obama at the ballot box. But — gasp! — they didn’t.

So who cares about inequality anyway?

Europeans definitely do. European taxation is more progressive and its governments are more involved in redistribution than the United States. In 1996, while the ratio of transfers (welfare, etc.) to GDP in the U.S. was 14 percent, in Europe the ratio was 22 percent. But more government transfers must be financed by higher taxes (hard to believe, isn’t it?), which decreases investment and growth. Clearly, some influential constituents must benefit from transfers to rationalize sacrificing growth, which makes everyone worse off. So who are these constituents?
Alesina et al. (2001) attempt to answer this question. In Europe, preferences for inequality are as expected: all poor people and liberal rich people are very concerned about inequality.

But in the United States, researchers find that the only people who are negatively affected by inequality are rich leftists! Poor people in America, it seems, aren’t so concerned about income inequality (even at the 20 percent level!) because people believe they might become wealthier in the future, and higher taxation to finance welfare programs diminishes their positive outlook. It seems that poor people in Europe worry more about inequality than the American poor because, perhaps as a result of more progressive taxation and heftier regulation, social mobility isn’t as prevalent in Europe as it is in the U.S.

And, according to a 2007 Treasury Department report, poor Americans have good reason to be optimistic about social mobility. Between 1996 and 2005, about half of those in the bottom quintile of the income distribution in 1996 moved to a higher group by 2005. Only 17 percent of Americans fell.

CAM organizers hurt their cause when they chalked, “NOTHING TRICKLES DOWN!” Because, really, who cares? Nearly all of us know (or pray nightly for) the truth of the old adage, “Money doesn’t buy happiness.” Really — lots of psychology research supports this. Lottery winners aren’t happier. Psychology texts routinely cite the fact that the income people say will make them happiest is actually a moving target, or about forty percent higher than current income. If government doubles a poor household’s income from $30,000 to $60,000, then they’ll feel they need $84,000 to be happy.

And to top it off, some counterintuitive microeconomic theory published in the prestigious American Economic Review by Hopkins and Kornienko (2004) suggests that increasing equality may actually make poor people worse off!
Classic microeconomic theory suggests people only derive utility from net consumption, but as early as 1899 economists began to consider how consumers could also get utility from conspicuously consuming more than others. Relative consumption increases utility more than absolute consumption.

Intuitively, we know conspicuous consumption is wasteful and makes society worse off. But when we decrease inequality, the new “middle” class must conspicuously consume more to maintain utility from consumption while the rich can conspicuously consume less. So the rich are better off at the expense of everyone else.

This is reasonable because wealth redistribution thins the ranks of the wealthy, so the affluent have less competition to motivate their conspicuous consumption. Although the rich may still conspicuously consume pricy Maseratis, the newly equal middle class devotes proportionately more income to conspicuous consumption in order to differentiate itself in a society where everyone is the same. So the middle class is worse off than before.

And since redistribution cannot take all people out of poverty, some people remain poor. Sadly, the notion that “misery loves company” suggests that with fewer poor people, the poor who remain are worse off than before.
While the authors don’t favor regressive taxation, they seek to challenge today’s popular belief that an additional dollar is worth less to a rich CEO than to a union worker because a rich CEO already has millions more dollars — he doesn’t need that extra dollar.

So if we don’t really care about inequality, what do we care about?

Structurally intransigent social problems. If social mobility doesn’t exist for some Americans (as is well documented) because our educational system is dysfunctional, labor laws leave migrant workers vulnerable to abuse, crime afflicts neighborhoods, and workers are constantly preoccupied by economic insecurity, then these are the problems that require solutions. But denouncing inequality distracts us from the real issues. These are the problems on which CAM needs to focus.

Soren is a junior. You can contact him at slarson1@swarthmore.edu.

---

« RETURN TO OPINIONS

« PREV ARTICLE | NEXT ARTICLE »