Economics

Egypt is Burning. But America Has Rampant Inequality!

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Political turmoil outside American borders offers pundits yet another chance to bring up their favorite failure of these United States: We have a higher level of inequality than whatever poor nation is currently going up in flames. This week, the U.S. is apparently worse off than Egypt.

EVERYONE gets to wait 3 hours for gruel

Public intellectuals who beat the wealth disparity drum have an argument that goes something like this: Inequality is bad; there is correlation between bad things and inequality; ergo, the U.S.A. is trucking down the Pan-American Highway to banana republicdom if Congress doesn't repeal those pesky Bush tax cuts and go back to '60s cartel economics.

The University of Chicago's Gary Becker explains why this line of reasoning doesn't hold up:

Many people, especially academics and other intellectuals, find the phrase "good inequality" jarring because they can hardly think of any aspect of inequality as being "good." Yet a little thought makes clear that some types of economic inequality have great social value. For example, it would be hard to motivate the vast majority of individuals to exert much effort, including creative effort, if everyone had the same earnings, status, prestige, and other types of rewards. 

One really effective way to wind up with less inequality? Have less money. See this passage from Catherine Rampell's New York Times review of Branko Milanovic's The Haves and the Have Nots:

At a very basic, agrarian level of development, Milanovic explains, people's incomes are relatively equal; everyone is living at or close to subsistence level. But as more advanced technologies become available and enable workers to differentiate their skills, a gulf between rich and poor becomes possible. (HT: Mark Perry)

graph Rampell pulls from Milanovic's book shows that America's poorest 5 percent is richer, as a group, than about two-thirds of the world, and roughly equivalent with India's wealthiest 5 percent. 

Egalitarians all too often confuse correlation with causation. A recent paper, "Cascading Expenditures," posits a keeping-up-with-the-Joneses theory of inequality growth and credit bubbles that contains some truth nuggets. But last year's The Spirit Level was a book full of dodgy conclusions; for example, the Japanese live longer due to their flatter incomes, not flatter bellies. Upticks in bad things like bankruptcies, divorces, and commute times are not the fault of America's Gini coefficient.

Watch Ferraris For All author Daniel Ben-Ami discuss "who the hell's against economic progress" in an interview with Reason.tv

More from Reason on economic growth and its discontents here