Income Inequality Doesn't Matter; the Poor Benefit Most from Removal of Economic Obstacles

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Byline: Dalibor Rohac, SPECIAL TO THE WASHINGTON TIMES

Liberal pundits are alarmed that income inequality in the United States is higher than in Pakistan or Ethiopia and - as a recent Organization for Economic Cooperation and Development study shows - higher than at any time since the Great Depression. But should this be a cause for concern?

If one cares about the welfare of the poorest and the most vulnerable, income inequality is not a useful measure. Measures of inequality tell us nothing about the living conditions of the poor, their health and their access to economic opportunity.

Income inequality can easily increase in societies in which everyone, including the very poorest individuals, is becoming better off. In the United States, as well as in Europe, indicators of income inequality have grown during the past 30 years. Yet this rise is just an artifact of the inappropriate use of income as a measure of welfare. In real terms, the poorest members of Western societies are better off than they were 30 years ago.

Much of that has to do with the rise of cheap imports from countries such as China and new forms of large-scale retailing, epitomized by Wal-Mart and Sears, which have given the low-income groups access to goods that previously were enjoyed only by the rich. In terms of the actual material conditions of living, developed countries appear to be more equal than ever before.

Data reveal that inequality in subjective life satisfaction is not on the rise, either. Bill Gates' net worth might be higher by a factor of 5 million compared to that of the average American family. However, in spite of his wealth, he certainly is not 5 million times happier than a typical American.

Most measures of inequality are based on the country level as the relevant unit of analysis. However, as Branko Milanovic, a World Bank inequality analyst, points out, that obscures the most significant differences in the standards of living. On a global level, income disparities between countries dwarf the disparities within countries.

Therefore, if one cares about the well-being of the least-well-off human beings, one should think primarily about lifting developing countries out of poverty rather than about reducing income disparities in wealthy countries.

Should we be bothered at all by income inequality at a national level? In their influential book The Spirit Level (Bloomsbury Press, 2009), British academics Richard Wilkinson and Kate Pickett tried to demonstrate the social costs of inequality. If the United Kingdom were to cut income inequality in half, the argument goes, murder rates would halve, mental illness would reduce by two-thirds, obesity would halve, imprisonment would reduce by 80 percent, teen births would reduce by 80 percent, and levels of trust would increase by 85 percent. …