Monday, December 10, 2007

On Pink Elephants and Income Inequality

The way conservatives think about the growing income inequality in the United States is what might happen when a family picture you took in your living-room appears to have a pink elephant sitting right between Uncle Albert and Cousin Selma, on that new green couch. Your first reaction might be to deny that the elephant is there at all, and that's pretty much how conservative pundits reacted to the first news of widening income equality. But that didn't work, because with all the amendments and adjustments, the data still obstinately showed that inequality is rising.

So the pink elephant sits there, in the middle of your family picture. What to do next? Perhaps its presence could be made into something irrelevant. After all, you fit all your relatives in the picture, even with the elephant. And that seems to also have been the second stage of the conservative reactions to more inequality: It does not really matter, because today's poor are not as poorly off as the poor were, say, a hundred years ago. The poor can now afford television sets and second-hand cars and even iPods. Besides, the poor in the United States are much, much wealthier than the truly poor of this world. And as Rush Limbaugh once pointed out, the American poor are certainly not going hungry but are more likely to suffer from obesity.

The problem with this approach is that although the poor may be able to afford fast food they are much less likely to be able to afford health insurance or safe housing or college education for their children. This, in turn, makes it harder for those same children to one day climb up the societal income ladders, and the ability to climb these ladders, in terms of social mobility, is one of the basic justifications conservatives use to explain why income inequality doesn't matter that much: Today's poor are quite likely to be tomorrow's rich. Except that this no longer seems to be as true in the United States as in, say, Europe.

A slightly different way to tackle the irrelevancy of growing income differentials is to point out that the poor are mostly quite happy. The so-called happiness gap between the rich and the poor is much less than the gap in their relevant incomes. The conservative take on this is that money doesn't really matter. As Tyler Cowen stated in his New York Times op-ed piece earlier this year: "Happiness, possibly the most relevant variable for a study of inequality, is also the hardest to measure. Nonetheless, inequality of happiness is usually less marked than inequality of income, at least in wealthy societies. A man earning $500,000 a year is not usually 10 times as happy as a man earning $50,000 a year. The $50,000 earner still enjoys most of the conveniences of the modern world. Even if more money makes people happier, it appears to do so at a declining rate, which places a natural check on the inequality of happiness."

The conclusion we are perhaps to draw from this is that the rich are not to be envied for their greater affluence. But an equally likely conclusion would be that progressive taxation doesn't hurt the rich that much. They are almost as happy with a lot less money and that tax revenue could be used to finance more college scholarships for the poor.

If none of these strategies work in getting the pink elephant out of the family picture, why not resort to the Rovian strategy of arguing that a weakness is a great strength? Doesn't the pink in the elephant really bring up the green of the couch? This is also the final round of conservative debates about the rise in income inequality: It is a good thing.

Not only are income differentials necessary as a motivator for individuals to work harder, but now they are justified by something that no thinking American could oppose: greater returns to education. Employers want workers who are computer-literate and technology-smart, and they are willing to pay a premium for such workers. The less educated work is now done more cheaply abroad, so Americans who want to climb the income ladder better get educated fast.

George Will made this point early in September on the program "This Week", but the most detailed argument for it is an article "The Upside of Income Inequality" in the American's May/June issue by Gary S. Becker and Kevin M. Murphy. Becker and Murphy attribute the increasing earnings gap to education and then conclude: "For many, the solution to an increase in inequality is to make the tax structure more progressive -- raise taxes on high-income households and reduce taxes on low-income households. While this may sound sensible, it is not. Would these same individuals advocate a tax on going to college and a subsidy for dropping out of high school in response to the increased importance of education?"

The only problem with this avoidance mechanism is that the recent growth of income inequality cannot be explained away with the education argument. As Paul Krugman noted:

"Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only 34 percent, or about 1 percent per year. So being in the top 10 percent of the income distribution, like being a college graduate, wasn't a ticket to big income gains.

But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent. No, that's not a misprint.

Thus, it isn't the educated in general who are enjoying greater income growth, but a much smaller group at the very top of the income hierarchy. So much for the upside to income inequality.

What about its downside? That could be likened to finding that the pink elephant in your photograph cannot be ignored but is also growing to alarming proportions, ultimately pushing the family members out of the picture altogether. This is because increasing income differences don't only hurt those at the bottom of the income ladders but the general society. Countries with very unequal incomes have more crime, less social cohesion and greater difficulty in arriving at political agreements. Democracy itself may be endangered by too much inequality.

All this means that conservatives should stop making excuses for the elephant of rising income inequality without addressing its obvious drawbacks.