Monday, June 26, 2006


Greg Mankiw provides a very nice response to a student asking him his thoughts on income inequality. The framework that he lays out is very "big picture" and would likely be agreeable to many (and probably most) economists. In many ways, the points he discusses form the economics "dream" scenario -- maximize efficiency and then (using the most efficient means) redistribute in order to achieve the desired equity. While economists roughly agree with this principle, attempting to move even a half-step toward implementing this type of solution causes an immediate rupture in the concensus.

First, economists (and the population in general) disagree strongly about where we should be. That is, we do not have a concensus view on what the distribution of income should look like. While this is typically viewed as a philosophical question, economists can help guide this discussion by providing the relevent descriptive statistics and, more importantly, by helping people understand the causes and consequences of inequality. E.g., is high inequality the result of "unnatural advantages" or "dumb luck" or does it reflect returns to desirable efforts? Do differences in relative status affect behavior? Does high inequality increase social tension and negative (and costly) expressions of that (like crime, rioting, or political unrest)? Does high inequality affect mobility?

Of course, even the simple task of describing the current distribution presents challenges because it is not clear what we should be measuring and targeting. We typically use the distribution of annual earnings as a crude proxy, but this may not measure what people really care about (which in the US traditionally is access to opportunity and mobility). (For more details, check out this document which I wrote awhile back, but did not post. It describes both the basic facts about inequality in the US and the difficulties associated with measuring it.)

Finally, even if we had clear ideas about about where we are currently and where we would like to be, there would be intense debate about how to bridge the gap. Particularly given political constraints, how to best achieve the desired amount of redistribution is frought with challenges -- especially given that a non-trivial fraction of the population might reject any system of ex-post transfers as immoral.

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