In response to my implied criticism of Andrew Leigh for assuming that increases in inequality are bad and decreases good, but never specifying for what level of inequality would satisfy him, commenter Leopold responds:
one could turn the criticism around. Liberals believe in liberty – but how much liberty, exactly?
Leopold’s argument (I am paraphrasing here) is that preferences for greater equality or greater liberty are rules of thumb to be applied to specific circumstances, but there are cases where social democrats could accept less equality and liberals accept less liberty. We can’t always precisely calculate the final overall result of all these complex trade-offs to say what is the exactly right amount of equality or liberty. But this doesn’t invalidate the initial assumption that, all other things being equal, more equality or more liberty (depending on your philosophical position) is desirable.
I think Leopold’s point is reasonable. For example, I say that there should be less tax, and while I have clear pet hates among government spending programmes (eg FTB) that I think should be cut to reduce general tax rates, I never say exactly how much tax I think should be levied or what tax rates I would be happy with.
High-level political abstractions gives us intellectual tools that help organise our understanding of the world, but they don’t necessarily provide answers for specific problems. That requires far more detailed analysis.
But this reinforces my doubt about the value of composite indexes designed to aggregate different liberties or inequalities. There are some of these from a liberal perspective, such as the Heritage Foundation’s index of economic freedom and the rankings of freedom produced by Freedom House.
But these are rare compared to the enormous effort put into measuring overall income inequality. Andrew Leigh alone has about half a dozen academic articles published over the last three years that either measure high-level inequality or (if I recall them correctly) assume it is significant. I was thinking of him in particular when I made my original comment, because I think he is one of Australia’s best social scientists and certainly the best early career social scientist. Being highly productive he does more work on micro issues than most of his peers as well, but there is a lot of intellectual energy being devoted to studies that to me are of uncertain significance even from an egalitarian perspective. He agrees that :
I don’t have a strong sense of what the right level of inequality is. Indeed, I’m not even sure I have the right intellectual framework for answering the question.
This is due to the inherent massive complexity of income inequality. While it is affected by government policies at any given time, it is also the result of billions of individual decisions, actions and transactions taken over very long periods of time (as Andrew L’s work on intergenerational mobility shows). Very few of those decisions would have been taken with income equality in mind, and even those that were could not have more than a vague idea of the precise implications over the long term.
Indexes of liberty are very simple by comparison. Usually there is only one ultimate decision maker (the state), the consequences for liberty are expressly thought about, there are a relatively small number of considerations to be taken into account, and there are a relatively narrow range of likely consequences that can flow from the decision. Generally, we have enough information to classify countries according to whether or not they have satisfactory levels of economic and political freedom.
While I would prefer greater economic freedom in Australia and am concerned about attacks on political freedom via campaign finance laws, the overall situation is good enough to classify Australia as economically and politically free. I don’t think any social democrat could say whether or not Australia could be regarded as having a satisfactory level of income inequality.
So I don’t disagree with Leopold that our basic philosophical views can serve as useful guides to specific issues. But the more of these specific issues you try to build into one aggregate number, the harder it is to incorporate all the relevant trade-offs, and the less meaningful the final result becomes. The number abstracts too far from the underlying reality to be useful in judging whether or not apparent trends are good, bad, or neither.
Andrew Norton 
I’m not sure if your personal dislikes like the FTB necessarily have a lot to do with a liberal vs. other perspective. A lot of these are just corrupt lurks and perks, not transfers of wealth from the higher to the lower (FTB presumably causes the opposite a fair bit of the time). Perhaps FTB can be excused on the basis of conservative family values, but lots of others can’t. This is a confusion between high taxes, corruption and socialism. It isn’t just a liberal perspective to dislike corrupt quirks and perks so favoured by our politicians — it presumably should be a socialist one too, but it appears than many socialist confuse spending with socialism.
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Conrad – I wasn’t intending the FTB point to be anything more than an example of where I do specify what spending can be cut to lower taxes, despite being unable to say exactly what level of total taxation I think appropriate.
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1. I have yet to see one social democrat specify an appropriate level/ceiling of the government take for government redistribution programs. I’m really starting to think that they haven’t even given it much thought or they silent because most reasonable people would be repulsed by their suggestion. The other thing that has surprised me is that most aren’t able to distinguish between income or wealth inequality. How does one measure inequality when one person is earning $100K living in a rented home vs someone living on a retirement income of $50K per year yet having a home valued at $1m +? Who’s worse off?
2. A recent study by the Dallas Fed, which is an intitution that seems to focus in such studies, has found that the level of inequality measured by consumption between the various income grouping in the US is actually tighter than what was previously perceived..
3.Inequality studies are usually poverty studies. If we did an international comparison I thing we would find that Australians poor are the richest poor people in the world both in terms of material wealth and quality of life.
4.Social Democrats always like to bring up the US as the inequality bogeyman. For instance Krugman and his followers are often doing so to present US capitalism in a negative light. However they all seem to avoid the enormous elephant sitting in the cupboard when it comes to income growth of the bottom quintile. There are 11 million illegal immigrants in the US placing material pressure the wages of the less skilled. This always seems to be conveniently forgotten.
Which brings me to the final point. Inequality studies are basically useless and almost always used mendaciously when a country is experiencing high levels of economic growth.
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JC
Many of the points you make are reasonable, but it is a mistake to think that “social democrats” don’t understand them.
If you Google imputed rent, income distribution you get 112,000 hits and if you add Australia you still get over 28,000.
One of the most recent Australian studies can be found by following links at http://www.apo.org.au/linkboard/results.chtml?filename_num=42816
While I know the authors, I don’t know whether they would necessarily describe themselves as social democrats, but I think you would.
I agree that by international standards the Australian poor are remarkably well-off, but they are probably not the richest in the world – but most of the places where the poor are better-off spend more on social welfare than Australia.
You also correctly point out that consumption inequality is lower than income inequality, but the evidence is fairly strong that consumption inequality in the US is also increasing if not so fast as income disparities – see http://www.nber.org/papers/w10338
There are studies that show not much change but these have also been criticised – seehttp://64.233.183.104/search?q=cache:_5dPzi6it1oJ:faculty.chicagogsb.edu/steven.davis/research/Comments_on_the_Welfare_Consequences_of_the_Increase_in_Inequality_in_the_US_by_Krueger_and_Perri_(July2003).pdf+consumption+inequality,+United+states&hl=en&ct=clnk&cd=37&gl=uk
I also disagree that “Inequality studies are basically useless and almost always used mendaciously when a country is experiencing high levels of economic growth”.
If you take the case of China, as everyone knows it has had very high rates of economic growth since 1979, but the Chinese authorities are very worried by widening income disparities and have made it one of their top policy priorities in the last few years, as a Google search would easily show. See, for example, http://www.businessweek.com/globalbiz/content/feb2007/gb20070216_056285.htm?campaign_id=asia_Feb23&link_position=link31
and
http://www.hartford-hwp.com/archives/55/366.html
The reason they are worried is that the income gains for some of the lower income groups have actually reversed themselves in different periods – there was a big increase in the incomes of the rural poor between 1979 and 1985, but in the first part of the 1990s they went backwards in real terms, and after a period of growth there was also a reversal in some of the years since 2000.
This just emphasises the point that people can be concerned about inequality because it is possible that rising average incomes are not shared by the whole population.
Now the evidence for Australia is that rising average incomes have been far more widely shared than in the US, for example – but the reason for this is that Australian governments have put much more emphasis on social welfare spending.
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(via Mankiw)
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The idea that some how inequality itself is a problem is absurd. Why should we worry about inequality, of any kind, much at all?
You could increase equality by making everyone equally poor. Life is not a race against fellow human beings, and we should discourage people from treating it as such. What matters most is how well people are doing in absolute terms, not relative terms. We should continue to improve opportunities for the poor, but inequality as a problem has been overstated.
If there were some policy that would make the rich poorer without affecting the income of anyone else, that would reduce inequality, but would you want the Government to flip this switch?
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Now the evidence for Australia is that rising average incomes have been far more widely shared than in the US, for example – but the reason for this is that Australian governments have put much more emphasis on social welfare spending.
Not really that true when it comes to the US. As I said the US has an enormous probelm with 11 million illegals putting pressure on wages in low skilled jobs.
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JC, surely all those illegal workers are significantly boosting the U.S. economy. After all, it didn’t have to put anything towards raising and educating all those workers.
If the overall effect on the economy is positive, then why can’t policies be put in place to ensure those in low-skilled jobs benefit from this?
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N
I am not that certain you can say that all those illegals are boosting the US economy in the right way. Eg. The fruit and veg business in south cal could easily be moved to places like Columbia that has a huge natural advantage.]
The numbers are so big that it could actually distort the US capital structure.
However the most important thing to realize is that the low level wages in rhe US have experienced a downward motion.
But yes, it is a testament to the flexibility of the US economy that it could actually grow so many jobs and accommodate all these people.
However it could also be retarding the US capital formation patterns towards a more developed economy and therefore also slowing down the process of moving to even higher wage levels.
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I put this up at club troppo.
A couple of economists at the Dallas Fed took a different approach in determining inequality. They took the approach of measuring consumption patterns rather than income and found the US is far less unequal than what the income side of these studies suggest.
I
t’s true that the share of national income going to the richest 20 percent of households rose from 43.6 percent in 1975 to 49.6 percent in 2006, the most recent year for which the Bureau of Labor Statistics has complete data. Meanwhile, families in the lowest fifth saw their piece of the pie fall from 4.3 percent to 3.3 percent.
Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.
The top fifth of American households earned an average of $149,963 a year in 2006. As shown in the first accompanying chart, they spent $69,863 on food, clothing, shelter, utilities, transportation, health care and other categories of consumption. The rest of their income went largely to taxes and savings.
…………………… So, bearing this in mind, if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.
The biggest concern about the bottom rung is to determine if their level consumption is impaired compared to the upper levels of the economic ladder. If that’s the case consumption figures are showing they aren’t as badly off as the income stats present.
So the real issue should not be income inequality. These studies ought to be premised on consumption. It’s not how much you have, it’s how much are you consuming compared to others that really counts…. and if that level of consumption is an acceptable standard.
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Why would Colombia have an advantage growing fruits and vegies that are bred for temperate/Mediterranean climate zones (i.e., most of them)?
And I’d argue any modern capitalist economy should benefit from an influx of cheap labour.
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If inequality of consumption is a more useful measure than inequality of income. Then inequality Of happiness must be even more useful.
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And I’d argue any modern capitalist economy should benefit from an influx of cheap labour.
A sudden influx if cheap labor has the effect of pushing down real wages. it may also effect the capital to labor ratio.
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Yes, it will push down real wages, but with the right transfer schemes in place, it shouldn’t make anybody worse off – that’s my point. There’s no practical reason that anything that benefits the economy as a whole shouldn’t allow everybody to benefit (or at least not be disadvantaged). Whether it can be done by any means other than income redistribution I’m not sure.
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“Yes, it will push down real wages, but with the right transfer schemes in place, it shouldn’t make anybody worse off – that’s my point. ”
NPOV, in Australia we do have a fairly comprehensive set of income transfers to top-up low levels of earnings whether from part-time work or sometimes full-time work. But if you want people to be no worse off if their wages go down, that implies that you favour a scheme that adjusts income dollar for dollar (either up or down). Where does that leave work incentives?
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I think your paraphrase is better put than my original phrasing, Andrew!
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I agree constructing indices is difficult, as is determining an acceptable ‘absolute’ level of equality. Personally, I have to admit I tend to fall back on comparing us with other countries with similar cultural backgrounds (UK, USA, Canada, Ireland, New Zealand) and my feeling (based on various measures) is that, compared with other countries with a similar cultural/social bedrock to us, we are doing pretty well, mainly because of the good policies we have followed for the last 25 years. As to whether or not we should have more or less equality – depends on the costs and benefits of any particular measure as far as I’m concerned.
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Well it’s not a problem that Australia is suffering from at the moment anyway, as I understand it. But if a change in immigration policy were to attract a large number of low-skilled workers willing to work at much lower wages than existing native workers, then I think there is a role for the state to play in ensuring that lower-paid native workers are not left worse off – after all, they’re working just as productively as before. Logically, the money to compensate them (or to pay for their training into better paid jobs) should come from those that are benefitting the most from the cheap labour – which is probably the consumers purchasing the end products at lower prices: i.e. pretty much all of us.
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I’d agree with you Leopold, I think Australia is travelling pretty well compared with a lot of other comparable countries (not that I have the benefit of first hand experience in most cases, more’s the pity). And even if we have more “inequality” than at some halcyon point in the past, I reckon that’s compensated by increased freedom to choose in many spheres of life (including how much income you earn).
Now I’m the first to admit that I am speaking from a well-educated, well-remunerated middle-class standpoint, but I really don’t believe that today’s working class really have that much worse a life now than the working class in the good old days. And on measures of real income and some measures of relative income, the non-working class are largely better off as well.
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And I definitely agree with Andrew when he concludes that
“The number abstracts too far from the underlying reality to be useful in judging whether or not apparent trends are good, bad, or neither.”
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