WHY INEQUALITY MATTERS. My friend Will Wilkinson is puzzled over the excess concern liberal economists express over inequality. He gets why they'd care about each individual's well-being, but not why they'd worry about the gap between Tom and Bobby, assuming both of them have enough. I'm no liberal economist, but I sometimes play one on the blogs, so let me take a crack at it.
What concerns liberal economists is the relative apportionment of income. Inequality is something of a proxy for this. Take the so-called Krugman calculation which, in the early '90s, showed that 70 percent of the post-1973 rise in incomes had gone to the wealthiest 1 percent. As he put it, "when incomes at the top of the scale are rising faster than the average, incomes farther down must correspondingly grow less rapidly than the average. In an arithmetic sense, we can say that most of the growth in productivity was "siphoned off" to high-income brackets, leaving little room for income growth lower down. "
What we're worried about is what's called the "inequality wedge." The gap in incomes is so vast and the pool of money at the top so great that growth, which once would have rushed all the way down the income ladder (rising tides, all boats), isn't making it down the distribution, instead clogging up at the top percent or two (rising tide, only yachts). To tick off just a few of the data points, poverty has increased during every years of the post-2000 expansion -- the first time that's ever happened. Wages, which used to grow with productivity, have basically stagnated since the '70s, barely keeping up with inflation. A couple months ago, we learned that tax receipts were far higher than expected, but growth was exactly in line with estimates -- turned out that the expansion had gone overwhelmingly to the very rich, who pay more in income taxes. Meanwhile, the greatest gains by far have accrued at the very tippy-top of the rich -- not the highest 10 percent, but the highest one percent.
So there's's the concern � that, through mechanisms we're not entirely sure of, the very richest are siphoning off the economic growth before it flows through the middle and lower classes. The worry is about the distribution of growth, but the suspicion is that the distribution is being warped by the sheer level of inequality. Were the rich accelerating into the stratosphere while the lower quintiles enjoyed robust gains, I'd say "God bless" and go back to making fun of George W. Bush. But that's not been the case, and inequality is, if not the only explanation, the most obvious effect.
Update: To make the conclusion a bit clearer, liberal economists believe growth should be better shared, that the bottom quintiles are not getting enough due, possibly, to the inequality wedge. They don't share the assumption that Tom and Bobby have enough, and they particularly dispute that, if they did, it would signal the end of the conversation.