Is Inequality Really Worsening?

Rising inequality is a fixture of left-wing polemics. Sanders harps on it. Lamenting a widening gap between the richest and the rest. A lot of numbers are invoked — the top X%’s wealth share has grown from Y% to Z% over such-and-such a time span. As if such numbers are simple facts.

They never are. A recent in-depth lead article in The Economist explored all the assumptions and difficulties behind any such calculations. It casts much doubt on the “rising inequality” narrative, at least within rich countries.

Globally, inequality has indisputably been falling. That’s because economic growth rates in developing countries have greatly exceeded those in mature economies, narrowing that gap.

We keep hearing about “exporting jobs.” When we then import the goods produced from, say, China, cheaper than we can make them ourselves, that savings actually makes Americans collectively better off, even while some Americans who lose jobs are worse off. That job shift is a wealth transfer from richer nations to poorer ones — again, decreasing global inequality. Indeed, the numbers of people in extreme poverty have plummeted. Which progressives should welcome, no?

The Economist addresses four pillars of the “rising inequality” narrative: top earners snare a greater share of income; middle class incomes have stagnated; this is because labor’s share of rising productivity has fallen relative to capital’s; thus wealth has been concentrating at the top.

In each respect, you get very different results depending on how the numbers are parsed. It’s complicated: you must take into account not just raw income data but also taxes and government transfer programs, and fringe benefits, especially increasingly valuable medical benefits. And demographic factors — “household income” is often the focus, yet households grow smaller as marriage rates fall, with more single parenthood, thus income is divided among more “households.”

Results also greatly depend on how you adjust for past inflation. It’s widely acknowledged that government inflation numbers are too high, failing to properly account for, among other things, technological changes. For example, they actually disregard the valuable benefits from smartphones. When you chart pay levels over time using overstated inflation estimates, you can show pay falling even while the quality of life people get from it is rising.

The Economist also notes that while “returns to capital” (that is, to owners of corporate shares) have grown, a lot of that actually flows to the middle class because an increasing chunk of the stock market is owned by pension funds. Furthermore, as far as wealth is concerned, the effect of shareholding is actually eclipsed by the long-term rise in the value of home ownership, again mostly benefiting the middle class. This is another (usually overlooked) counter to the idea of rising wealth concentration at the top.

But on the other hand — showing how complex all this is — at the bottom of the income scale, educational inequality looms large. Kids born poor tend to stay poor because of lousy education. That’s largely because of where they live. Rising home values tend to lock them out of better locales. Moreover, higher house prices go with areas where good jobs concentrate. Everything is interconnected.

Meantime, when we say the top 10% or 1% of Americans’ wealth share has risen, we imagine we’re talking about the same people in Year X as in Year Y. Life doesn’t work that way. Those in the top groups in 2020 often differ from those who comprised those groups in 1990 or 2000. At the beginning, your income and wealth may be low because you’re a student or just starting out. The picture changes greatly in your peak earning years. So people move in and out among income groups at different stages of life. Students will of course appear very unequal vis-a-vis middle agers. Differences like that are a huge part of “inequality.”

So where does all this leave us? “Inequality” is almost surely not growing in the way many scream about. That doesn’t mean all is fine. A dynamic complex economy — and society— like ours will always have inequities of one sort or another, and we must constantly seek to diagnose and combat them.

I’ve mentioned one big example, educational inequity. Another factor is our allowing some businesses to be protected against competition. But we have to be clear on what the problems really are, and what they are not.

One thing that’s not a problem is people being rich. They’re not the cause of others being poor. Our focus should be not bashing the rich but lifting up the poor, giving more people opportunities to earn enough to live decently. And worldwide, thanks to globalization, capitalism, and free trade, that’s been happening a lot. A real social justice revolution.