Reducing Poverty, Not Inequality

Feldstein, Martin S., The Public Interest

According to official statistics, the distribution of income has become increasingly unequal during the past two decades. A common reaction in the popular press, in political debate, and in academic discussions is to regard the increased inequality as a problem that demands new redistributive policies. I disagree. I believe that inequality as such is not a problem and that it would be wrong to design policies to reduce it. What policy should address is not inequality but poverty.

The difference is not just semantics. It is about how we should think about the rise in incomes at the upper end of the income distribution. Imagine the following: Later today, a small magic bird appears and gives each Public Interest subscriber $1,000. We would all think that this is a good thing. And yet, since Public Interest subscribers undoubtedly have above average incomes, that would also increase inequality in the nation. I think it would be wrong to consider those $1,000 windfalls morally suspect.

Pareto principle vs. Gini coefficient

When professional economists think about economic policies, they generally start with the principle that a change is good if it makes someone better off without making anyone else worse off. That idea, first suggested by the Italian economist Vilfredo Pareto, is referred to as the Pareto principle. I find it hard to see how one could disagree with such a principle, which is why it is the widely accepted foundation for the evaluation of economic policies.

Not all policies can be evaluated in reference to the Pareto principle. There are policies that make some people better off while making others worse off. The desirability of such a policy depends on how much the gainers gain, how much the losers lose, and the initial income and circumstances of the individuals involved. But that difficult evaluation is not my concern here. I am interested only in evaluating changes that increase the incomes of high-income individuals without decreasing the incomes of others. Such a change clearly satisfies the common-sense Pareto principle: It is good because it makes some people better off without making anyone else worse off. I think such a change should be regarded as good even though it increases inequality.

Not everyone will agree with me. Some see inequality as so intolerable that they regard increasing the income of the wealthy as a "bad thing," even if that increased income does not come at anyone else's expense. Such an individual, whom I would describe as a "spiteful egalitarian," might try to reconcile this with the Pareto principle by saying, "It makes me worse off to see the rich getting richer. So if a rich man gets $1,000, he is better off and I am worse off. I don't have fewer …

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Publication information: Article title: Reducing Poverty, Not Inequality. Contributors: Feldstein, Martin S. - Author. Magazine title: The Public Interest. Publication date: Fall 1999. Page number: 33. © 1999 The National Affairs, Inc. COPYRIGHT 1999 Gale Group.

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