This is going to be the first in a series of posts looking into the problem of income inequality, which is obviously extremely prominent in public discourse at the moment.
The problem has several parts:
First, we must establish the existence and degree of income inequality. This can, at times, get technical because, to take one common measure, whether the median income has grown since 1979 depends on whose income you are considering (individuals, households, households adjusted for changes in family size, or tax units), whether the measure considers pre- or post-tax income, whether benefits are included, and other technical adjustments such as proper use of a “deflator” to account for changes in real prices over the interim. Likewise, which metric is chosen — income, consumption, or wealth — can further effect the results. In short, different assumptions can yield vastly different answers to questions of inequality.
Second, it is important to understand why income inequality might be important. The phenomenon’s effects are obviously germaine to any debate on the issue since, if inequality didn’t matter, there would be little relevance in further investigation outside the joy of a pure intelectual exercise. To these ends economists and political scientists have offered a variety of persuasive arguments for rebalancing income — concerns about distribution of political power, for instance.
Third, we must understand what factors determine income inequality. Here we must get past mistaken notions of a “fixed pie” of economic wealth being hogged by corporations and wealthy individuals. While there are a variety of plausible explanations for increasing inequality — greater returns to advanced technical skills and education, for example — I think it is safe to say that even most left-leaning economists do not take seriously the notion of a small group of robber barrions extracting rents from the proletariat as any sort of reasonable explanation. The exception, perhaps, is the extreme rent-seeking that occurred in the financial industry in recent years. Nevertheless, despite relatively isolated cases of extraction by a few financial investors, broad-based movements such as Occupy Wall Street indict more generally corporations and corporate executives. True, these individuals have enjoyed extraordinary gains in recent years, but by and large they did not come at our expense.
Lastly, it is important to discuss policy recommendations to stem inequality. Tax reform is one obvious and common policy suggestion as are changes to corporate governance structures or more general social improvements such as better education.
I am writing this series of posts both to educate myself and my readers. I have a great number of varying sources concerning the topic and I thought it was time to bring them together in a systematic review and study of the literature.