does income inequality really matter?

If you spend much time following the news these days–and especially the 2008 presidential campaign–you will have noticed the ebb of a backlash against income inequality. Data are showing that economic gains are largely accruing to only those at the top of the income distribution. (There are all sorts of good papers on income inequality. For the best, I’d recommend Dew-Becker; Yellen; and Pikkety/Saez).

A good number of left-leaning Americans are pallid with fear about this trend. To them it represents a break-down of our social contract and a failure to meet our obligations to the worse off. But do we actually have reason to care about inequality in and of itself? Harry Frankfurt, a professor of philosopy emeritus at Princeton, makes the argument that it’s not inequality that matters but how much the poor actually have. Similarly, Mickey Kaus argues that it’s not money inequality that matters but rather the shift in social mores that, at present, dictate that individuals with more income are higher on the social ladder; that they’re more important (he also makes the Frankfurt argument). In its shortest form, it’s not income inequality that matters but what income inequality represents: a material lack of the worse off or undesirable social values.

Others, such as Robert Frank and Erzo Luttmer, argue that inequalities–differences in relative well-being–have a measurable impact on happiness, as individuals report it in survey data. If income inequality actually makes people less happy then we should care about inequality in and of itself.

A new paper from Karen Dynan, of the Fed, and Enrichetta Ravina, of NYU, shows that although inequalities do negatively impact happiness they only do so above a certain threshold. They write:

The implication is that the happiness of people in groups with below-average earnings is little affected by how much their earnings differe from the average, while the happiness of people in groups with above-average earnings is considerably affected by how much their earnings outperform the average.

If you care about income inequality because of sentiments for the worse-off members of society (who really cares if a millionaire is less happy than a billionaire due to the disparities in their earnings?) then there seems to be little reason for caring about income inequality in and of itself. The arguments made by Frankfurt and Kaus are, in my opinion, still the most compelling when it comes to how we should think about inequality.

Citation for Dynan/Ravina paper: 

Dynan, Karen and Enrichetta Ravina, “Increasing Income Inequality, External Habits, and Self-Reported Happiness,” American Economic Review, Vol. 97, No. 2, May



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