Wednesday, December 15, 2010

When doesn't inequality matter?

... when it doesn't lead to financial meltdowns, according to Tyler Cowen.

Cowen - who blogs at Marginal Revolution - has written a provocative article for The American Interest called 'The Inequality that Matters'. A title which, of course, implies that some inequality doesn't matter.

I have no problem with Cowen's analysis of the risks of financialization, which allows a small minority to become super-rich by making leveraged bets whose downside is covered by... well, the rest of us. This is the 'inequality that matters'. I am puzzled by his resigned conclusion that there is not much we can do about it - after all, if governments could save the world financial system from meltdown through unorthodox measures this suggests there might be some levers of power the state still retains. But the way this analysis links inequality to economic failure is compelling.

I'm less convinced by the rest of the article, which argues that we should be relaxed about the other dimensions of inequality. Cowen seems to think that rising inequality is - outside the financial sector - basically the result of globalization and new technologies allowing the talented greater scope to exploit their abilities to make money. And the talented can be anybody. And middle and lower income Americans don't mind if people have worked hard to earn their money. And anyway, it's only really the top 1% that are getting so much richer, for the other 99% everything is pretty much stable. To illustrate the point, Tyler Cowen is getting along fine, despite the fact that he doesn't have as much money as Bill Gates.

I think there is an important point in there, but a lot of complacency too. The important point is that people don't develop political views about the justness of income distribution by calculating Gini coefficients and looking at national or international income distribution data. The result is that people actually don't know quite how much they are being fleeced, and therefore can't be counted on to react with outrage if Gini coefficients get higher. This is true - there is a good deal of evidence that people are likely to think that they are in the middle of the income distribution even if they are not, and to underestimate the incomes of people in the top portion of the distribution. To that extent, understanding political reactions to inequality requires us to understand how people experience it, in their various locations, social cultural circles and occupations.

The rest of the argument is less insightful. How much of the accumulation of vast wealth at the top is due to talent having its day? Well, social mobility is in decline in the US, for a start, so the people making out like bandits are increasingly likely to be heirs to other successful people (Bill Gates is a good example of this). So if 'talent' gets inherited, that seems less reason to accept it as a justification of great wealth.

The other point Cowen seems to miss (despite presenting some numbers precisely on this point) is that if the rich are getting a bigger share of the pie, then everyone else must be getting a smaller share. And this does matter, if people are working hard to grow their slice of the pie and finding that most of this growth goes to a small group of already satiated people. Now, of course Americans are richer than a century ago, and even the poor are well off compared to their ancestors, but still: how happy can people really be about the fruits of their effort being denied to them?

Maybe Cowen is right, and Americans really don't care. But if he is right,  you've got to wonder why the angry party seems to be doing so well.