INCOMES AND INEQUALITY: WHAT THE NUMBERS DON'T TELL US
January 25, 2007
The growing inequality in wealth and income has led many people to question whether the contemporary American economy is rigged in favor of the rich. While there is little doubt that the gap between the wealthy and everybody else has widened in recent years, the situation is not as unfair as some of the numbers seem to imply, says Tyler Cowen, a professor of economics at George Mason University.
Much of the measured growth in income inequality has resulted from natural demographic trends:
- In general, there is more income inequality among older populations than among younger populations, if only because older people have had more time to experience rising or falling fortunes.
- Furthermore, more-educated groups show greater income inequality than less-educated groups.
- Uneducated people are more likely to be clustered in a tight range of relatively low incomes.
- Since the United States is growing older and also more educated, income inequality will naturally rise.
In other words, rising income inequality is not just a result of unfairness or bad public policy, says Cowen.
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, says Cowen:
- 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.
What matters most is how well people are doing in absolute terms. We should continue to improve opportunities for lower-income people, but inequality as a major and chronic American problem has been overstated, says Cowen.
Source: Tyler Cowen, "Incomes and Inequality: What the Numbers Don't Tell Us," New York Times, January 25, 2007.
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