Does inequality matter?(Column)

The economic gap between rich and poor has grown dramatically in the United States over the past generation and is now considerably wider than in any other affluent nation. This increase in economic inequality has no recent precedent, at least in America. The distribution of family income was remarkably stable from 1947 to 1980. We do not have good data on family incomes before 1947, but the wage gap between skilled and unskilled workers narrowed dramatically between 1910 and 1947, which probably means that family incomes also became more equal. The last protracted increase in economic inequality occurred between 1870 and 1910.

The gap between the rich and the rest of America has widened steadily since 1979. The Census Bureau, which is America's principal source of data on household incomes, does not collect good data from the rich, but the Congressional Budget Office (CBO) has recently combined census data with tax records to track income trends near the top of the distribution. Figure i shows that the share of after-tax income going to the top i percent of American households almost doubled between 1979 and 1997. The top i percent included all households with after-tax incomes above $246,000 in 1997. The estimated purchasing power of the top 1 percent rose by 157 percent between 1979 and 1997, while the median household's purchasing power rose only 10 percent. (1) The gap between the poorest fifth of American households and the median household also widened between 1979 and 1997, but the trend was far less dramatic.

To liberals who feel that economic inequality is unjust or socially destructive, its growth is evidence that America has been headed in the wrong direction. To conservatives who feel either that riches are the best way of rewarding those who contribute the most to prosperity or that a generous welfare state encourages idleness and folly among the poor, the growth of inequality seems either innocuous or desirable. The debate over inequality involves both moral and empirical claims, but because the empirical claims are hard to assess, both sides tend to emphasize moral arguments. But treating inequality as a moral issue does not make the empirical questions go away, because the most common moral arguments for and against inequality rest on claims about its consequences. If these claims cannot be supported with evidence, skeptics will find the moral arguments unconvincing. If the claims about consequences are actually wrong, the moral arguments are also wrong.

The connection between moral obligations and empirical evidence is most obvious in the case of utilitarian morality, which requires everyone to follow rules consistent with the greatest good of the greatest number. Utilitarian morality tells us, for example, that we should not litter even when there is no chance of being punished, because the cost to others usually exceeds the benefit to ourselves. But a moral obligation to follow rules that promote the greatest good of the greatest number does not tell us which specific rules for distributing goods and services produce that result.

If humanity lived entirely on manna that dropped from heaven, and if each additional pound of manna yielded a progressively smaller increase in the recipient's well-being, rulemakers committed to the greatest good of the greatest number would seek to distribute manna equally, at least when recipients had equal needs. But economic goods and services do not drop from heaven. People have to produce these goods and services in order to sell them to one another. How much people produce depends partly on how generously their efforts are rewarded. Rulemakers therefore have to make tradeoffs between the needs of consumers, which are relatively equal, and the motives of producers, who usually produce more when extra effort leads to higher rewards.

The most widely discussed alternative to the utilitarian theory of justice is the theory proposed by John Rawls. (2) Rawls claimed that when uncertainty is great and downside risks are high, people are -- or should be -- absolutely risk averse. This assumption led Rawls to believe that if people did not know what position they would occupy in a society they would want to organize the society so as to maximize the well-being of the society's least advantaged members. If this claim is correct, utilitarian logic also implies that society should maximize the well-being of the least advantaged. Even if most people are not as risk averse as Rawls claimed, they may be sufficiently risk averse to feel that maximizing the position of the least advantaged should be given very high priority in a just society.

But most thoughtful liberals, including Rawls, also recognize that rewarding people for producing more goods and services will often improve the absolute well-being of the least advantaged. Identifying the best strategy for improving the position of the least advantaged therefore requires complex empirical calculations that turn out to be rather similar to the calculations required to achieve the greatest good of the greatest number. The rest of this article assesses various empirical claims about how economic inequality affects both the mean level of well-being and the position of the least advantaged.